Opinion: for a market to be free you must have regulation

Whenever I utter the phrase ‘free trade’ within those Liberal Democrat circles in which I am permitted to mix, the reaction is akin to that which I might get if I suggested making it compulsory for all party members to worship statues of me.

And that’s a pity (the reaction to the free trade, not the statues) because most people when they meet an advocate of free trade, mutter darkly about the effects of ‘light touch regulation’. But free trade and light touch regulation are not the same, indeed in many ways they are inimical to each other.

The debate should not be narrowly about how much regulation is the right amount, but rather about making regulation effective in those sectors in which it is deployed, and tailoring the types and degrees of regulation for each individual sector of the economy and mode of production.

When Vince Cable in his conference speech spoke about shining a light into the murkier corners of capitalism he was referring to those sectors of the economy where monopoly and oligopoly still exist, industries which set themselves up as paragons of free trade and yet exist and thrive in restricted markets at the expense of the public good. Vince was probably referring to banks and the law, but the scope goes way beyond that, to the creation and preservation of private sector monopolies across the transport industries and through disastrous commitments such as the Private Finance Initiative.

It is ironic that many critics of rail privatisation cite it as an example of the market failing, while in fact its an example of the failure which is inevitable when competition doesn’t exist, in exactly the way Smith was highlighting over two centuries ago.

Free trade does not mean allowing the market to regulate itself, it means the government ensuring that markets operate without any participants within the market erecting barriers to entry, within any of the modes of production, or indeed of the market acting against the public good.

Another phrase which has entered the political lexicon and been misunderstood is the Adam Smith phrase ‘invisible hand, which has been interpreted as meaning the great Liberal believed that their should be no regulation. But that’s inaccurate. The Invisible hand was a metaphor for government being disinterested in, but also involved in the processes of commerce.

Its very rare for a free trader such as myself to enjoy any comments a Tory leader makes regarding markets, but an exception was David Cameron’s recent admission that the Tories have not traditionally been a party of free trade, but rather have focused on creating and protecting private companies which are “national champions”.

This has been the traditional dividing line between Liberals and Tories, protectionists and Free Traders, and it’s a battle which Adam Smith started on behalf of the free traders in the 18th century, its one which Lib Dems should look to continue today by ensuring that while in government we seek to free markets which are in the death grip of monopolists and oligarchs.

So to whatever wing of the party one belongs, its important that sight is not lost of the benefits of free trade even as the Lib Dems coalesce with a party which has been the traditional enemy of the system.

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17 Comments

  • Paul Pettinger 5th Nov '10 - 2:31pm

    Here here. Support for free trade is something that has united British Liberals throughout the ages and it should continue to do so, whether you are a classical or social liberal.

  • david thorpe 5th Nov '10 - 3:06pm

    I also think free traders should be opposed to tuition fees. These craete a barrier to entry to eductaion, restirciting people from partaking in and consuming ideas, and this is as nbad in eductaion as it is in all other sectors where barriers to entry restrict the public good.
    Universities should exist in a non monetised market, with the universities competing to get the brightest students, and foing this by constantly striving to improve the quality of their facilities and tecahing, while students strive to enter the best universities, doing this by attaining better grades.
    The current system, and the browbe proposals, both prevent this from happening, and the consequences in the long term will be just as disastrous for the public good as barriers to entry in montised markets are

  • david thorpe 5th Nov '10 - 3:32pm

    andy I would argue that ‘free markets’ are systems which allow markets regualte themselves, not free trade.
    Its like we all want to live in a free society, but all want policeman and laws to ensure that happens, having a police force does not end free society, abolishing the criminal justice system does not mean a free society

  • There is an oft-repeated myth that large companies want free trade.

    They are generally hugely against it, lots of regulation helps large businesses as smaller competitors cannot hope to comply. Large companies can comply with or ignore regulations – small companies cannot.

    Let’s face it almost all our large banks are bust by any fair valuation of their balance sheets, yet the barriers to entry have prevented a single new entrant to the market coming in to sweep up all the savers deposits. In any free trade system the deposits would have moved and the failed banks would have collapsed, taking with them the investors. This is what capitalism is, what we currently have in the world is corporatism.

  • david tjorpe 5th Nov '10 - 4:03pm

    andy

    ebay are sunject to many laws, and they have been clever in their methods by anticipating problems before they happen and require new laws

  • A good very good article, and one that all liberals need to think deeply about. It is not free trade if there’s bias towards big companies or protection of them.

    I would also say that whilst we need to increase competition by bring down barriers to entry etc, we also need to make businesses more open, and also ensure that they don’t mislead customers. One of the main points of free trade is that the competition is supposed to drive up quality, but that can’t happen unless customers know exactly what they’re buying so that they can choose what they believe to be the best product.

  • A great article -support for free trade is something which should unite all Liberals.

  • I agree with the sentiment of the article, but would argue that there is more than one definition of free trade, and what the poster is arguing for, is a form of free trade that free market liberals and libertarians would resist. The distinction might rest in the definition of free. The social liberal would include ‘freedom from’ whereas the free market liberal/libertarian might deny such freedoms exist or that they are at least unenforceable, and would therefore only acknowledge ‘freedom to’.

    Hope this makes sense.

  • david thorpe 6th Nov '10 - 1:06pm

    mpg.

    Great post.
    I agree broadly with your definitions, and think freedom from is key to the concept of free trade.
    Also big companies dont want free trade, thats the difference between us and the tories

  • david thorpe 6th Nov '10 - 1:08pm

    @ timak and re banks

    metro have recently enteredt the uk banking market, and arguably santandar are a new entry,but yes banks practiv ce oligopolistic practices

  • david thorpe 6th Nov '10 - 1:13pm

    lib dems have noticed since the election that tories voters appear to be coming over to us.
    this could be a way of differentiating between them and us

  • david thorpe 7th Nov '10 - 2:18pm

    thanks for your contributrion geoffrey.

    In the sense that I , and liberals, mean free markets thw US is probably the leats free market capitalist country in the world.
    Writers as far back as galbraith senior have piointed this out, when reeagan was a champion of the ‘free market’ but not practicing it.
    Even now, the US is replete with oligopolies.
    It may have unrestrained markets but it doesnt have free ones.
    I was not advoacting a free market solution for the railways, I have blogged on this site in the past advoacting their renationalisation.
    The point I was making is that critics of the free market use the british railways as an exmaple of the free market failing, when the british railways are not run on free market lines, they are a series of monopolies, so their failure or success at this time is nothing to do with the free market economic system

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