Which form of free market matters most?

How do you insure the survival of free markets and are there different forms of free market? Let me start simply by explaining that defenders of free markets like myself believe that liberty is not about the inexistance of a state or some form of institutions but rather that liberty is about constraints on liberty to maximise it. Thus we all agree that we should not be free to shoot Bryan and he is not to do the reverse (even though I believe he must be thinking about it since the last few days after those pranks I pulled on him) . We find ways to restrict our capacity to exerce such actions. Now without those institutions, no trade can occur and no exchanges can take place. Thus there are no free markets. In very large societies, its a form of organized state that promotes formal law.

But here is a question, in large societies we need to be able to fund such legal systems. A good way for me to illustrate this is the British Industrial Revolution. The reasons why the Industrial Revolution began in the United Kingdom are very simple : it had well integrated internal markets and well protected patent laws that allowed inventors to capture a greater part of the social benefits of their inventions. The use of patents in Great Britain was made possible by an easily workable system for inventors who chose to patent their inventions, even if it was costly.

So to fund such a system, we have to dispel the myth that Britain was a free trading country. We often think of England as the capital of free trade because of its very well publicized 19th century abolition of the Corn Laws which were tarifs on foodstuffs and clothes. However, Britain never was the gold-standard of international free trade in the 19th century, France was. It was mostly on items which were considered crucial for the needs of workers that tariffs and excises were reduced. Indeed, even after the abolition of the Corn Laws by Prime Minister William Peel, several tariffs and duties were maintained on a wide variety of goods (including alcohol) to fund government expenditures. These tarrifs and duties were the source of funding for the laws that I mention above.

Usually indirect taxes on selected goods like excise taxes and customs do harm by distorting relative prices, causing a misallocation of resources. When we talk about funding the government (at whatever level we prefer), we think of direct taxes on income and wealth thate are more efficient mechanisms to generate revenues. However, the transaction costs of collecting revenues with such mechanisms were so high in England at the time that fiscal institutions articulated in that sense would have been inefficient relative to indirect taxes.

Even though indirect and distorting taxes like duties and tarifs are considered more harmful in general, in this case they actually served the British Empire very efficiently in its pursuit of law, order, peace and good government. Thus the legal system that ensured patents could exist and benefit inventors that were crucial to the Industrial Revolution that we described above.

I am not making a case for protectionism, far from that. I am making the case that since what seems to matter are internal markets and property rights to ensure the regulation and protection of trade, international free trade during the British industrial revolution would have deprieved the very small Victorian State from it main source of funding to protect property rights. In a sense, I am saying that there are different form of free markets and that what matters most are institutions like property rights (I do consider property rights as a form of economic freedom if they are well defined and well enforced).

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Allen, Robert. 2007. « Pessimism Preserved: Real Wages in the British Industrial Revolution ». Oxford University Department of Economics Working Paper 314. Oxford: Department of Economics of Oxford University.

Mokyr, Joel. 1990. The Lever of Riches: Technological creativity and Economic progress. New York: Oxford University Press.

North, Douglass. 2005. Understanding the process of economic change. New York: Cambridge University Press.

Nye, John. 2007. War, Wine and Taxes: The political economy of Anglo-French Trade, 1689 to 1900. New York: Oxford University Press.