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What is a Free Market?

Feb 2 2002

Question: what is meant by the phrase "free market"?

It's a question I ask myself increasingly as I think about economics. I'm sure there are a few precise definitions floating around out there, and I just haven't studied the literature enough to find the axiomatic description.

But politically, it mostly seems to be brought up in the context of discussions of regulation, of discussions about what businesses are and are not allowed to do. Sometimes, to wax mildly game theoretical, it seems that this free market would basically be characterized by complete freedom of businesses to define the rules of a game played with customers.

This approach isn't inherently problematic; as long as customers have a choice whether to play the game or not, and the ability to play with good information. In such a case, it's easy for me to beleive such a market/game would operate to optimally.

It seems to me, however, there's a problem inherent in assuming such a thing would ever come about. It's never really stated in the arguments, but it's obvious that there's a meta-game going on out there as far as markets go. People have long realized that if they're the only game in town; they're at an advantage. That's what a monopoly is all about. And people have long realized that if they hold more information than the other player, they're at an advantage in any strategic game. Thus it would seem that any profit-motivated entity is going to eventually stumble on restricting choice and witholding information as strategies, turning the optimal allocation of a free market into a skewed game. At which point one could question whether or not it is the same thing as the ideal free market generally envisioned when talking about freedom of businesses to define the rules of their interaction with consumers.

Most people (and even some economists) have the sense that there cannot be any such thing as an ideal free market, much in the same way there is no such thing as a perpetual motion machine. The second law of thermodynamics prevents perfect energy conversion; there is also imperfect transfer of information. I imagine that someday, a real economist might expand this concept of imperfect transfer to include the inevitable temptation to actively restrict the flow of information, or provide disinformation, and to make oneself "the only game in town". Or perhaps they have, and it simply hasn't found its way out to the layperson like me. In any case, I'm not sure the questions (and answers) surrounding what a free market actually is have found their way into the public rhetoric surrounding public policy debate. For the moment, the entity known as the free market remains highly refered to, but elusively undefined.

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