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What is an efficient “Free Market”?

The “Free Market” meme is very popular. The usual definition is a market without government intervention, and somehow efficient.

From where does this notion come?

One gift to European-derived societies, earned in the “Dark Ages”, is the notion that society and government are separate, and that society can exist without government (where we associate “government” with the larger nation-state). Our notions of “free market” probably date back to that period.

Try and imagine how that might have worked ….

A buyer and seller meet in the woods (free of any sort of regulation). The buyer does not like the seller’s price, kills the seller, and takes the goods.

Oops … that did not work.

Maybe the seller was only wounded. Next time the buyer and seller meet, the seller brings guards. The buyer does not like the seller’s price, so the seller has his guards kill the buyer and take his money.

Maybe the buyer was only wounded. Next time the buyer and seller meet, they both bring guards. The money and goods are more than the guards pay, so the guards rob them both.

Hmm … seems that the transaction costs are getting a little high. For an efficient market, you need civil behavior on the part of both buyer and seller. Interesting word: “civil”. Implies both good behavior and organized society. Maybe the answer to this question is built into our language, and the concepts in our language are derived from lessons in our common history.

Lets see if we can come up with a more efficient arrangement. Instead of buyers and sellers each hiring guards, charge a small fee and hire a common set of guards for the entire market place. The market place needs an agreed set of rules that buyers and sellers follow, and that the guards enforce.

Of course, if the marketplace fees and regulation become too burdensome, you could always try meeting in the woods … but that does not always end well.

Free markets imply civil behavior. Civil implies society. Society implies rules governing behavior. In other words, an efficient market requires buyers, sellers, and government on the scale of the marketplace.

How did the current popular notion of a free market without government get started, when the lessons are embedded in our history and built into our language?

When you read the books, and strip away all the abstractions, the build up to our current economic mess is not very different from sellers robbing buyers in the woods. Even better … the sellers want to go on doing business in the same manner.

We need to be clear on what makes up an efficient free market.