Allan Massie: There is no such thing as a truly free market

THE phrase “the free market” is much bandied about. Capitalism, we are told, depends on the efficient working of the market so that the operation of Adam Smith’s “invisible hand” may make for general prosperity.

Actually, as James Buchan observes in his book on Smith, “the phrase ‘invisible hand’ occurs three times in the million-odd words of Adam Smith’s that have come down to us, and on not one of these occasions does it have anything to do with free-market capitalism”.

The Italian immigrant shoeblack who was asked what he had learned in his 40 years’ shining shoes on Broadway replied: “There is no such thing as a free lunch.” I don’t know whether he required a licence to practise his trade, but he might as well have said: “There is no such thing as a free market.” All markets are regulated to some extent, either by the law or, in the case of illegal markets such as the market in drugs or the market in alcohol in countries where its sale is prohibited, by the gun or the knife.

Actually, illegal markets, such as those operated by the various Mafia-type organisations, approximate more closely to the ideal of the free market than legal ones.

They exhibit the first paradox of markets. Markets thrive on competition, but competition is wasteful, time-consuming and, if intense, will cut profits. Intelligent criminals therefore draw sensible conclusions. They either eliminate the competition and achieve a monopoly, or, if this is beyond them, they come to an agreement to divide up the territory.

The aim of those who profit by the “free market” is always to achieve a dominant position which will have the tendency to remove competition and so, in effect, kill market freedom.This is not in the public interest and so the politicians step in to regulate the market.

The era of “robber capitalism” in the United States in the late 19th century provoked anti-trust legislation intended to promote the competition that unregulated capitalists were seeking to eliminate. In the UK, politicians eventually set up a Monopolies and Mergers Commission (which still survives under a different name) to curtail the liberty of the successful. Without such restraint of freedom, the “free market” would cease to exist.

In 2005, Alan Greenspan of the US Federal Reserve Bank attributed the ability of “today’s awesome array of international transactions” to “produce the relative economic stability that we experience daily” to an “international version of Smith’s invisible hand”. This sounds like a bad joke today.

Regulation of the market has always been necessary in the public interest. Everyone recognises this at some point. A few years ago, Gordon Brown was applauding his “light regulation” of the financial services industry. Now it is generally agreed that the regulation was too light, and that regulation must henceforth be stricter. So it is perceived to be in the public, or general, interest that financial markets be less free.

The confusion over the proper limits of the free market, even among those who are normally its most ardent defenders, has been amusingly on display in the debates between the candidates for the Republican presidential nomination.

Republicans, and especially the Tea Party activists, are deeply suspicious of the role of the state in the economy. Many, absurdly, regard President Obama as a socialist. But the moderate – that is, inclining to the centre ground – candidate, Mitt Romney, has been fiercely attacked by his rivals for his role as head of Bain Capital, a company that specialised in the taking over and restructuring of failing businesses; restructuring almost invariably means “downsizing” – that is, shedding labour – and often “outsourcing” – that is, transferring production to countries where labour is cheaper

By the standards of free-market capitalism, Mr Romney was very successful. He made a lot of money for Bain Capital and for himself. His success is being held against him by his rivals, all of whom would in other circumstances speak up for “free enterprise” and deplore government restrictions on active capitalism.

Conclusion: nobody likes the free market when it hurts. You may approve of free trade and globalisation till it is your town that suffers when local businesses are destroyed by the removal of tariff barriers or other defences against foreign competition.

The Treaty of Rome committed the states of what is now the EU to “the free movement of capital and labour”. Capital and labour. When labour is free to move, some countries will experience high rates of immigration. This may create social tensions. It may result in higher rates of unemployment among the native population, because immigrants may be more motivated to work and take unattractive jobs. A survey recently disclosed that only 19 per cent of people employed in London by the sandwich chain Pret a Manger were native English-speakers.

Calls for tighter controls of immigration come mostly from the Right, which nevertheless proclaims its support for the free market and its dislike of “excessive regulation”. Businessmen are exceptions; they tend to approve of immigration, which provides them with industrious workers at competitive rates of pay. Employing illegal immigrants is, of course, even more profitable. Yet there are many who would be horrified by the reimposition of controls on the free movement of capital, but who would approve of restrictions on the free movement of labour.

The global financial and economic turmoil of the past five years is likely to provoke a reaction: more stringent regulation and controls of economic freedom imposed in the general or public interest.

It will be surprising if there isn’t a revival of trade unionism in the private sector, as a response to the instability of employment which is a natural – whether healthy or unhealthy – consequence of a free market in jobs.