Why Free Market Democracy is Better than all the others

Democracy, freedom, rule of law and free markets. They complement each other and work best when all four are abundantly present. But why are they good? Most of the world’s great philosophers would restraint all four and probably dispense with one or two of them all together. Plato favored the rule of law but distained the other three traits, at least in the forms we know them, and the rule of any rule of law besides God’s law was anathema to theologians through the ages.

The secret is in the mechanisms for making decisions. Nothing lasts forever and most things don't even last a long time. Every system besides the free market makes the mistake of not recognizing this. They develop detailed plans for the future or try to create societal and economic structures that will be forever sustainable. These plans and structure are often more elegant and well considered than anything the free market produces. Intellectuals and philosophers love these sorts of things. But that misses the point.

Free market democracies are not better at making decisions, but they are much better at changing their minds. One reason is that they never make up their minds in the first place. In a free market, a thousand different solutions are working at any one time. Most of them will fall flat and fail utterly, but some will succeed. Those that succeed will draw resources, which guarantee that the better (not always the best) will dominate at any particular time. When the better solution stops being better, we move along.

Another reason free markets work is information. Planners never have enough information and the biggest threat is not information they don't have but information that they don't know they need. That is why ambitious government programs fall on their faces or why socialism has never worked. The corruptions, cronyism and decay are symptoms of the failure in state run enterprises, not its cause. The free market is no better than the government at gathering any particular piece of information, but it has the advantage of millions of information gatherers transmitting through channels of which even the users might be unaware. What is more, the free market can immediately deploy information, since decision-making is spread and non-hierarchical. The consumer knows he wants an MP3 player before the government bureaucrat knows what one is.

So far I have been giving the standard defense of freedom. The one trait that might seem out of place is rule of law. Rule of law, after all, restrains freedom. But consider each of the words. Rule of law contrasts with anarchy or rule of people. Rule of law provides a consistent framework and minimizes risk and uncertainty. Without that individuals dare not take risks or accumulate fortunes. With trusted rule of law, you take your fortune and invest it in creating greater wealth for yourself, your family and your society. If rules are arbitrary and capricious, you hide or bury your wealth where it does you little good and does nobody else any good at all. Laws must change, of course, but they need to change gradually and predictably. Making a law to address a particular situation of today is usually an attractive bad idea.

After thousands of years of missing the point, the world is finally coming around to the realization that the big four: democracy, freedom, rule of law and free markets, are the best for human kind. Freedom is on the march and when people in Lebanon or Iraq march, the big four is they really want, even if we (and they) sometimes don't know it.

Posted by Jack at March 4, 2005 11:59 AM