The Case for Free Markets

I've reproduced immediately below the brief Letter to the Editor published in yesterday's Wall Street Journal by Donald Boudreaux, a member of the Free State Foundation's prestigious Board of Academic Advisors. While brief, as usual Professor Boudreaux's piece cuts to the heart of the matter in a clear and cogent fashion.

This should be the first - and last - reading in every Econ 101 course.   

In support of some market interventions endorsed by the populists who today dominate the GOP, Glenn Hubbard counsels traditional conservatives to agree “with populist conservatives that markets don’t always work perfectly” (“The Economic Populists Have a Point,” op-ed, July 19).

I challenge Prof. Hubbard to identify a single serious conservative or libertarian scholar whose case for free markets rests on the belief that markets “always work perfectly.” Such a creature is imaginary. Not Adam Smith; not F.A. Hayek; not Milton Friedman; not Vernon Smith; not Deirdre McCloskey; not your frequent contributor, Phil Gramm; not anyone of any stature who supports free markets has ever grounded that support on the assumption of perfect markets.

The case for free markets—and against nearly all interventions desired by today’s populists—is that markets are less imperfect than governments. Most market imperfections are profit opportunities that in time attract entrepreneurs to experiment with ways to improve matters. Some experiments work, many fail. Unlike government officials, private market actors spend their own money and have no power to coerce.

Markets identify and correct mistakes more quickly than do governments, are less prone to be captured by interest groups and are more driven to strike trade-offs in mutually advantageous ways rather than in ways that compel some individuals to pay for the gains of others.

Prof. Donald J. Boudreaux

Mercatus Center, George Mason U.

Fairfax, Va.

Now Available: Videos of FSF Conference Keynotes from Jeffrey Rosen, Christine S. Wilson, and Robin Colwell

The Free State Foundation held its Twelfth Annual Telecom Policy Conference last Tuesday at the National Press Club in Washington, DC. Perhaps you were unable to attend "Broadband Beyond 2020: Competition, Freedom, and Privacy," either in person or via Facebook live stream. Or maybe you were one of the many in the audience and would like to take a second look. In either case, we have good news: the morning keynote addresses are now available on our YouTube page.

After a Welcome and Introduction by Free State Foundation President Randolph J. May, Jeffrey Rosen, Deputy Attorney General of the United States, kicked things off with remarks that touched on technological innovation, antitrust, and Section 230 of the Communications Decency Act of 1996. Alden Abbott, General Counsel of the Federal Trade Commission, afterwards provided his Reactions.

Next up was FTC Commissioner Christine S. Wilson, who gave a speech entitled "Free Markets, Regulation, and Legislation: A Place for Everything, and Everything in Its Place." Commissioner Wilson discussed the benefits of free markets, competition, and deregulation; the "toxic outcomes" that can result from heavy-handed regulatory regimes; and the need for federal privacy and data security legislation. Two Members of FSF's Board of Academic Advisors – Theodore Bolema, Executive Director of the Institute for the Study of Economic Growth in the Department of Economics at Wichita State University, and Tim Brennan, Professor of Public Policy and Economics at the University of Maryland – followed up with their Reactions to her remarks.

Robin Colwell, Special Assistant to the President for Economic Policy, gave the final keynote before the lunch break. Ms. Colwell discussed the critical role that broadband plays in the economy and Americans' lives; pending legislation; efforts to address the digital divide; and 5G. Michelle Connolly, Professor of the Practice of Economics, Duke University, and Member of FSF's Board of Academic Advisors, then offered her Reactions.

FTC Commissioner Wilson's FSF Conference Keynote on Free Markets, (De)Regulation, and Privacy Legislation

Commissioner Christine S. Wilson of the U.S. Federal Trade Commission gave an important keynote address at the Free State Foundation's Twelfth Annual Telecom Policy Conference. "Broadband Beyond 2020: Competition, Freedom, and Privacy" was held on Tuesday, March 10 at the National Press Club in Washington, DC. As in previous years, a stellar lineup of presenters offered valuable insight and food for thought on a wide range of topics. Commissioner Wilson's speech was no exception.

In an address entitled "Free Markets, Regulation, and Legislation: A Place for Everything, and Everything in Its Place," the Commissioner proclaimed her strong support for free markets, competition, and deregulation; explained how government intrusion leads to "toxic outcomes" for consumers; touted the benefits of the FCC's Restoring Internet Freedom Order; and laid out both high-level principles and specific objectives that federal privacy legislation should achieve.

Using the Interstate Commerce Commission and the Civil Aeronautics Board as historical examples, Commissioner Wilson described how consumers suffer when government prioritizes other "public interest" objectives over competition. A better approach, she argued, is limited intervention.

In that vein, she expressed her strong support for the President's deregulatory agenda. In particular, his Executive Order requiring that, for every new regulation created, two must be eliminated. She highlighted the FTC's efforts to date to eliminate unnecessary rules and expressed her belief that there is more work to be done.

The Commissioner also praised the FCC's Restoring Internet Freedom Order and, more broadly, touted the benefits of competition laws over proscriptive rules, asserting that "[t]he replacement of the FCC's extensive regulatory framework with the FTC's broad and flexible Section 5 principles will protect consumers while also facilitating investment and innovation."

On the topic of consumer privacy, Commissioner Wilson identified specific market failures (i.e., asymmetric information and "privacy resignation") that, in her opinion, justify federal privacy and data security legislation. Such a bill, she argued, should (1) incorporate a harm-focused, risk-based approach; (2) hold entities that handle data accountable; (3) empower informed consumer decision making through transparency; and (4) take competition into account.

In addition to these "high-level principles," she recommended that federal privacy legislation accomplish the following specific objectives: designate the FTC as the enforcing agency; provide for civil monetary penalties; apply to non-profits and common carriers; include "targeted and narrow" rulemaking authority; preempt state laws; and NOT create a private right of action.

Commissioner Wilson's prepared remarks are available on the FTC's website here.

Senator Cruz Asks FTC To Not Regulate the Sharing Economy

On Friday, July 17^th, Senator Ted Cruz sent a letter to FTC Chairwoman Edith Ramirez asking the Commission to reject requests from Members of Congress and incumbent businesses to apply regulations to the sharing economy. Senator Cruz stated that burdensome regulations would restrict competition in the sharing economy which “offers consumers enormous freedom and economic potential.” He also declared the following: “In a number of instances, and in a number of states, pre-existing regulatory regimes have been extended to new entrants in ways that may ultimately deprive consumers of significant cost savings and convenience that would otherwise accompany an expanded sharing economy.”

Free State Foundation Scholars submitted comments to the FTC before its June 9^th workshop regarding the sharing economy. (See this Perspectives from FSF Scholars on the 8 takeaways from the workshop.) We commend Senator Cruz for encouraging the FTC to promote permissionless innovation, marketplace freedom, and consumer choice within the sharing economy.

Flight-Sharing is the Latest Market on the Wrong End of Government Regulation

Flight-sharing is one of the latest services to emerge within the new “sharing economy.” Flytenow, a flight-sharing company, connects passengers with pilots who have empty seats on private flights for a fraction of the flights’ costs. Like Airbnb and Uber, which connect travelers with shelters and passengers with drivers, respectively, Flytenow can provide valuable services at the touch of a smartphone.

Sharing services, like these, provide additional consumer choice by disrupting traditional business models, and the emergence and popularity of such services has signaled to entrepreneurs that additional innovations are in demand. The new sharing economy services lead to increases in productivity for the overall economy and cost savings for consumers. For example, according to an Airbnb report on its impact in NYC, the company’s low prices have led to guests staying longer than they would have in a hotel. The average NYC Airbnb guest stays 6.4 nights, while the average NYC hotel guest stays 3.9 nights. These longer stays within the five boroughs have led to an additional $632 million in economic activity in one year in NYC alone.

Airbnb and Uber have come under regulatory scrutiny from many state and local governments (see here). Now, Flytenow is currently being regulated at the Federal level. According the Wall Street Journal, Flytenow is challenging the Federal Aviation Administration (FAA) in Federal court over the agency’s effective ban on its flight-sharing services.

Flytenow argues that it is not breaking any Federal laws or regulations because the FAA has always allowed private pilots to advertise flights and attract passengers as a means to cut down on expenses. But instead of using bulletin boards or newspapers, which apparently was legal in the past, users of Flytenow are advertising through the Internet. The FAA says that flight-sharing companies, such as Flytenow and Airpoolers, are subject to the regulatory standards that apply to commercial flights.

But Flytenow specifically sets forth the FAA regulation on its website: “Federal Aviation Administration regulations prohibit a pilot from accepting compensation from passengers. We help you split the costs, but you are not allowed to compensate the pilot further than that.” Flytenow argues that this cost-splitting operation makes flight-sharing services completely legal under Federal law.

It is understandable for regulators and government agencies to be cautious with regard to emerging technologies in order to protect consumers from certain identifiable risks.  But preemptive regulations often end up harming consumers by eliminating valuable services. As discussed in a Perspectives from FSF Scholars entitled “The Sharing Economy: A Positive Shared Vision for the Future:”

If purveyors of sharing applications engage in harmful, unhealthy, or unsafe activities, competition is probably the most important regulatory mechanism to address any real problems. In competitive markets, poor consumer satisfaction generally means that a company will lose market share, or even fall out of the market. If a company is not operating safely or if it is putting its users in unhealthy conditions, a competitive market allows for unsatisfied consumers to choose alternatives.

It should not be unreasonable to think that flight-sharing services could operate in a similar manner to ride-sharing and shelter-sharing services. Hosts, drivers, and pilots should be able to price their services based on supply and demand. In the “The Sharing Economy: A Positive Shared Vision for the Future,” Free State Foundation President Randolph May and I suggested the following:

If the laws or regulations applicable to the existing incumbent businesses no longer make sense today, they should be changed. It always harms consumers when public policymakers attempt to “level the playing field” by subjecting entities to regulatory restrictions that are not needed. The proper way to respond to “level the playing field” claims is to remove unnecessary regulations wherever they apply, not to expand them to new entities.

It is important for regulators to consider the costs and benefits of sharing services before restricting or outright prohibiting them. Preemptive regulations often lead to less consumer welfare than light-touch regulatory regimes that promote market-driven solutions that satisfy consumer demand while still providing redress for identifiable consumer hams. 

Labor Day 2013: Lincoln, Labor, and Liberty

I've just finished reading Rich Lowry's new book, Lincoln Unbound, and as someone who has read a lot of books on Lincoln, I happily commend it to you. 

The book's rather long subtitle is "How an Ambitious Young Railsplitter Saved the American Dream – and How We Can Do It Again." As the dust jacket puts it: 

Lincoln lived the American Dream and succeeded in opening a way to it for others. He saw in the nation's founding documents the unchanging foundation of an endlessly dynamic society. He embraced the market and the amazing transportation and communications revolutions beginning to take hold.

 

At the end of his enjoyable book, Mr. Lowry takes what he understands to be Lincoln's philosophical dispositions and policy perspectives and suggests how they might be applied to address today's problems. This is an interesting, thought-provoking exercise, but you'll have to get the book to see whether or not you agree. 

For today, I just want to comment on how Lincoln's thoughts concerning what he called "free labor" relate closely – indeed, are integral – to a proper understanding of our free enterprise system and property rights and to what the Declaration of Independence refers to as the "unalienable Rights" to life, liberty, and the pursuit of happiness. While Lincoln could not have anticipated Labor Day as it has evolved today, I want to suggest that his own understanding of "labor" ought to have a special resonance as we think about the meaning of this Labor Day. 

As Lincoln's thinking evolved, and especially by the time of the Lincoln - Douglas debates, Lincoln increasingly based his argument against the abomination of slavery on his understanding of the meaning of the natural rights secured, in his view, by the Declaration of Independence. But long before rising to national prominence for his stand against human bondage, Lincoln had espoused, over and over again, his belief that an individual should reap the reward of his own labor. 

As Mr. Lowry points out, in 1847 Lincoln wrote that "each individual is naturally entitled to do as he pleases with himself and the fruit of his labor." Or, as he put it in a more colloquial Lincolnism: "I always thought the man that made the corn should eat the corn." 

Lincoln's views concerning free labor – and the Declaration's affirmation of the natural right to life, liberty, and the pursuit of happiness – were grounded in the Founders' understanding and acceptance of John Locke's work, with which they were intimately familiar and often relied upon. In his famous Second Treatise of Government, Locke put it this way: 

[E]very man has a property in his own person: this no body has any right to but himself. The labour of his body, and the work of his hands, we may say, are properly his. Whatsoever then he removes out of the state that nature hath provided, and left it in, he hath mixed his labour with, and joined to it something that is his own, and thereby makes it his property.

Note the explicit way that Locke linked an individual's own labor to his property interest.

Following Locke, James Madison, the principal drafter of our Constitution, declared that individuals possess property rights "in their actual possessions, in the labor that acquires their daily subsistence, and in the hallowed remnant of time which ought to relieve their Fatigues and soothe their cares."

In his opposition to slavery, but also in a more universal sense, Lincoln repeatedly articulated the Lockean view that all individuals, of whatever race or creed, possess a natural right to enjoy the fruits of their own labor, to make those fruits their own property.

Moreover, Lincoln understood that the intertwining of free labor and property rights was essential to securing and maintaining the liberty espoused by the Declaration of Independence and guaranteed by the Constitution – and that free labor, individual initiative, and property rights are essential elements of the American free enterprise system.

Finally, in extolling the virtue of labor and property, Lincoln frequently admonished those who would set one man or class against another. As he put it in 1864 in his reply to the New York Workingmen's Democratic Republican Association:

Property is the fruit of labor...property is desirable...is a positive good in the world. That some should be rich shows that others may become rich, and hence is just encouragement to industry and enterprise. Let not him who is houseless pull down the house of another; but let him labor diligently and build one for himself….

As early as 1847 Lincoln had expressed the same thought this way:

[I]t has so happened in all ages of the world, that some have laboured, and others have without labour, enjoyed  a large proportion of the fruits. This is wrong and should not continue. To [secure] each labourer the whole product of his labour, or as nearly as possible, is a most worthy object of any good government.

To my mind, it is always timely to consider Lincoln. And as Labor Day approaches, it is especially timely – and useful – to consider Lincoln's views on free labor, and to contemplate the inextricably intertwined nature of labor, property rights, individual freedom, and the American free enterprise system which Lincoln championed.

Whether you are working this Labor Day, or merely contemplating Lincoln's thoughts on labor, my best wishes for an enjoyable Labor Day weekend.

Memorial Day 2012

Regular readers know that, since the Free State Foundation's founding in 2006, I have written a Memorial Day message each year. While the sentiments expressed in each, understandably, have remained largely in the same vein, this particular message is more personal than the previous ones. 

My father, Aaron May, a World War II Army veteran, passed away last October. He served as a warrant officer with the 68^th Armored Infantry Battalion of the 14^th Armored Division of the Seventh Army as it fought its way up through France, and then across into Germany. Dad was with his unit when it liberated the concentration camp at Dachau. He never forgot the sight of the liberated campmates. 

Like many WWII vets, for decades after the war, my father never talked much about his Army life. But as the fiftieth anniversary commemorations approached in the late 80s and early 90s, Dad's reticence faded. He began to talk to me about his war experiences and to speak to school groups as well. He especially wanted to tell students, those old enough to hear, about what he saw at Dachau. 

As part of an oral history project operated by the University of North Carolina at Wilmington, Dad did a long video interview in 2001, recalling his wartime experience. He was just shy of 85 at the time. 

In 1995, Dad gave me his dog-eared Basic Field Manual Soldier's Handbook and his yellowed copy of his unit's history. There is much detail about particular battles in the latter. At the time, he said simply: "I thought you might want to keep these after I'm gone." 

My father was in charge of a transportation unit of 79 men that was responsible for trucking supplies and food from behind the lines up to the front. Often, he said, the trucks would come back from the front with the wounded – and the dead. On the side of each of the unit's trucks was painted: "Norma I," "Norma II," "Norma III," "Norma IV," and so forth. Yes, Norma was my mother. She and Dad got married – she was 19 at the time – a few months before he shipped out for Europe. 

But here is something important you should know about the trucks named "Norma." Dad showed me a faded photo and pointed to the soldier standing next to him, fellow warrant officer Norman Wemple. Almost inaudibly, Dad said: "He got blown up by a direct hit in March 1945 while driving Norma II. Norman was one of my best buddies." 

It was only after a long, long pause that Dad told me that he and Norman had switched places that day in the trucks' usual line order as they drove to the front. Otherwise, almost certainly it would have been my father, instead of Norman, who died that day in a truck with "Norma" painted on the side. 

So, Dad came home, having served his country, alive and without wounds. His story is personal to me, of course, and of no great moment to you. But I know, in a larger sense, in the sense that matters, it is not an exceptional story at all. I tell it partly for myself, I'm sure, on this first Memorial Day he is not here. But I tell it, mostly, I hope, to call to mind the sacrifices of all of America's veterans, from all our nation's wars. 

So very many soldiers, sailors, airmen, and Marines – so many it is awful to contemplate -- have given their limbs, and, of course, like Warrant Officer Norman Wemple, their lives. 

Thirty-five American soldiers gave their lives just last month in Afghanistan. 

It is possible you may not agree with the stated purpose or goals of each of the wars in which these veterans fought. This should not matter now – on Memorial Day. We honor the soldiers, sailors, airmen, and Marines because of their dedication and sacrifice to the American cause. 

I understand there may be different views. But I happen to believe that, in the main, our veterans fought to preserve the freedom we cherish here in America. 

At the Free State Foundation, our mission is to promote understanding of free market, limited government, and rule of law principles. I am grateful we live in a country that honors the memory of those who have fought – and died – to preserve our freedom to carry out that mission. 

So, I extend my very best wishes to you and your families for a memorable, in the sense of remembering, Memorial Day. 

PS – Previous Memorial Day messages are here: 2007; 2008; 2009; 2010; and 2011.