Regulation is part of a free market, but governmental regulation is not (i.e., regulation imposed by a monopolistic entity).
There are many forms of private governance and regulation that protect consumers. That's not to say free markets are utopias, but believing that governments are the only source of regulation is incorrect. In fact, in many cases private governance is far more effective (e.g., the private regulation Uber is subject to is stronger and more efficient than the governmental regulation traditional taxis are subject to).
See "Private Governance" by Edward Stringham for some good examples of market governance in action. The book received the following review from Peter Thiel:
"Stringham dispels state-worshipping fiction with historical fact to show how good governance has preceded Leviathan, ignores it when necessary, and can surpass it when it fails."
> Regulation is part of a free market, but governmental regulation is not
Until someone comes, holds a gun to your face and takes your sandwich. Then you'll be thankful for government regulation.
I'm absolutely certain that the government's (attempt of a) monopoly on violence is one of the most crucial aspects of free markets. Another is contract law.
Governments did not came from outer space, nor are they form a separate magisterium that's unrelated to free market. It's something that naturally forms as society grows larger than few hundred members and the simple interpersonal methods of coordination and punishing defectors (like losing support of the whole clan if you cheat) stop working. The whole idea of separating government from market models seems strange to me.
Frankly, I fail to see how you can hold a working market in a big population without a somewhat monopolized government structure. If suddenly, say, the USGOV disappeared, leaving behind a libertarian utopia, I'm pretty sure it would quickly degenerate into acts of violence, an era of warlords and famine, after which people would probably figure out that a single entity enforcing some rules was generally not a bad idea.
There are reasonable and intelligent criticisms of market institutions. This is not one of them.
Exactly what recourse would I have against someone who stole my sandwich? Unless I know the person or there is solid evidence to identify the individual, the costs of investigation and prosecution far exceed the value to be recouped. Police will take my information, file a report, and nothing else will happen.
Not only is that state not helpful under these conditions, but private institutions have often found solutions to similar problems before the government does. Look at Paypal. They faced very similar conditions of fighting fraud and theft that couldn't be remedied through legal means, so they developed many private forms of regulation which allowed online exchange to flourish.
The difference between Paypal and real life is that Paypal works with arbitrary laws they set up, and real life works with the laws of physics. You can prevent fraud on the Internet by doing tricky filtering. You can't prevent someone from stealing a sandwich at gunpoint by rewriting how the universe works.
Enforcement is not perfect, but that the police can punish the armed sandwich thief in principle is already a deterrent. It is common knowledge who in this situation would be in the right. Compare with government-free world, where to determine who's right we'd have to make our security companies get into a firefight over it. And they'll probably decide that fighting isn't in their best interest and shoot us instead. They can always find more customers.
There is very little reason to believe private security providers would resort to "firefights" to resolve conflicts. This is an incredibly expensive and undesirable solution for customers.
Go back ten years and have a conversation with someone about a private taxi company that uses technology to operate outside of existing regulations. You would hear outrageous claims about murderers, rapists, and thieves using the system to exploit customers. Of course, Uber drivers can and have assaulted people, but it turns out there are all sorts of creative solutions and private incentives that undermine these outcomes. Fortunately, the future does not lie in the hands of the uncreative people of the past and present. It's the people who can actually envision and deliver solutions--people like Kalanick and Camp--that determine the future.
> There is very little reason to believe private security providers would resort to "firefights" to resolve conflicts. This is an incredibly expensive and undesirable solution for customers.
That's why they'd shoot the customers and get on with it :P.
I'd go back 10 years and I'd find multiple companies already doing the thing Uber does now (sans app, because there weren't app back then) - except they were doing it legally and weren't sociopathic about it.
People who envision and deliver solutions with no regard to anything else than their personal profit surely could determine the future - but it won't be a future any one of us would like to live in.
Are you sure? I've never heard another free market capitalist argue that government regulations are an important part of how their ideal market works. Can you point out any free market economists that have argued for government regulation?
That's because those free market capitalists are (at best) hypocrites or (at worst) stupid. Obviously capitalism relies on regulation - of property rights, IP rights, contract laws, bans on fraud and insider trading (although opinions are mixed on that last one), ...
Free market capitalists argue that what we have now is not a free market. IP rights wouldn't exist in a free market system, for example.
It's probably best to find another term to describe the market you see working, as 'free market' is what free market capitalists argue for. I don't know what a better term would be, but I'm sure that economists would've thought of one.
But what would exist in this ideal "free" market? IMO, without contract law and courts that enforce it and persecute fraud, you can't have a functional market (free or unfree). Also, without some laws that monopolize violence, the market would be much more, well, violent (you might think of that as "free", but I don't think that kind of freedom is beneficial to the society) - we can see that in numerous places on Earth right now, where there is no effective "government" and you have multiple factions fighting for power - it rarely encourages trade and entrepreneurship.
Regulations that make possible entrance to a market - standards, forced ineroperability, common carrier, dumb pipes etc - are generally good and provide more efficient market.
Regulations that prevent entrance to a market - by artificially rising the capital requirements to the impossible, are probably not helping the free market.
Exactly - the government should prevent markets from becoming less free - discouraging monopoly, persecuting fraud, encouraging transparency, taxing (appropriately) externalities, and owning natural monopolies (like infrastructure - dumb pipes owned by the government or a very regulated entity, and used by market competitors). I also think there should be less regulation in certain very regulated markets (banking, food) to encourage experimentation, but those should come with restrictions (e.g. no advertising, limited sales volume, etc.) - I think the world of hedge funds is a good example - they have less restricitons and hence can offer lower costs and better (or less correlated) performance, but they are effectively closed off to the general public (only "knowledgeable" investors can invest).
How do monopolistic entities full of self-interested humans solve problems of externalities?
The economics research on public choice has done a great deal for setting aside the common yet inaccurate assumption that government agents pursue the interests of society. It's not appropriate to compare real world markets to utopian governments. Both are imperfect. The real question is which is superior under realistic assumptions.
> Both are imperfect. The real question is which is superior under realistic assumptions.
And I'd say, why not both? It's obvious that the market is superior in many cases. It's also obvious that the government is superior in others. They both cover for each others' failures.
In a very narrow view (i.e., how the world exists at this moment) I agree that both are necessary.
Over a longer time horizon, I'm not certain how "obvious" it is governments are superior. It takes time for alternative institutions to develop, but the institutional problems that are inherent to governments are avoidable through private institutions. The presence of governmental institutions causes a lot of distortion and disincentives to create alternative forms of governance (governance that could surpass governments in terms of quality provided), so I'm not certain we should simply look at the world as it is today and conclude that governments are inherently superior.
But who says that governments are superior? It makes no sense, it's like saying that a heart is superior to a lung. It's not, you need both!
Governments and markets cover for each others failures. Where a government is inflexible, a market can find an efficient solution. When a market is trapped in a race to the bottom, the government creates coordination. They complement each other.
As for the argument that keeping the current government prevents us from experimenting with alternative forms, you could say the same about free market keeping us from experimenting with different forms of markets...
There are many forms of private governance and regulation that protect consumers. That's not to say free markets are utopias, but believing that governments are the only source of regulation is incorrect. In fact, in many cases private governance is far more effective (e.g., the private regulation Uber is subject to is stronger and more efficient than the governmental regulation traditional taxis are subject to).
See "Private Governance" by Edward Stringham for some good examples of market governance in action. The book received the following review from Peter Thiel:
"Stringham dispels state-worshipping fiction with historical fact to show how good governance has preceded Leviathan, ignores it when necessary, and can surpass it when it fails."