The Virtues of Free Markets

Edon Shaqiri
President

Here is a very interesting and counterintuitive journal article written by Mark Zupan on The Virtues of Free Markets. The author argues on behalf of the free markets and how they encourage integrity and trust, rather than being castigated, as they usually are by the political arena and media for promoting immorality.

He writes:

This article’s central point is that the common wisdom regarding free markets and their impact on a wide array of positive and normative virtues is dead wrong. In fact, free markets—based on private property, freedom of contract, the rule of law, and individuals’ pursuit of their interests—represent the most effective means for promoting integrity and other forms of cooperative behavior through their ability to foster repeated, mutually beneficial exchange as well as specialization.

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Free markets, based on clearly defined and enforced private property rights and the liberty of individuals to pursue their interests, maximize the opportunities for repeat interaction across time, products, places, and people. By creating the broadest possible opportunities for repeat interaction and thereby a future, free markets have an edge, relative to other systems for organizing economic activity, when it comes to promoting prosperity as well as the practice of integrity and other cooperative virtues.

However, Zupan is also aware that the markets are not flawless:

Stressing free markets’ relative benefits, of course, does not mean that the system is flawless. As is well known, free markets can fail to satisfy the conditions for Pareto optimality in cases of market power, imperfect information, and externalities/public goods (when private property rights cannot be fully specified and readily enforced). Monitoring costs and the resultant agency problems faced by stockholder-principals seeking to ensure that their manager-agents appropriately promote their interests (Jensen and Meckling 1976) create further potential for breakdowns—especially if managers lack appropriate “skin in the game” or are rewarded in ways failing to ensure that they bear some of the future risks associated with their present corporate actions.

Read the rest of the paper here.