Law and state coercion: The liberating effects of free markets

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Wanjiru Njoya
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Many who support state regulation of free markets claim that they are not against free markets, just against unregulated free markets. They argue that regulation is needed to mitigate the harm that may be suffered during market participation, such as people working long hours for low wages or suffering racial discrimination. As Ronald Hamowy explains in his introduction to Friedrich von Hayek’s “The Constitution of Liberty,” these arguments were influential in the rise of both welfare socialism and national socialism:

“It was generally thought that only through vigorous government intervention was it possible to forestall the more destructive aspects of unbridled capitalism, which, if left unchecked, would bring privation and misery to the great mass of people. Equally important, only government direction could galvanize and coordinate the productive facilities of a nation so as to minimize waste and maximize wealth creation.”

The premise that free markets require some form of regulation, so that the debate only concerns how much regulation is needed, strikes many people as superficially reasonable: This premise seems to call merely for moderation, balance, mitigation of harm and the absence of excess. This is usually seen as the basic role of law and regulation. Walter Williams explains that “people have always sought to use laws to accomplish what they cannot accomplish through voluntary, peaceable exchange” in the belief that if free markets do not yield their preferred outcomes, they can achieve those outcomes through law and regulation.

Politicians of all stripes uphold this premise, debating only what types of interventions are required and which should take priority. There is widespread consensus among social scientists on the need for a welfare state, with debate only concerning the precise form of welfare schemes. As Hamowy observes, many intellectuals gave Hayek’s “Constitution of Liberty” a frosty reception because it challenged their belief in the importance of the welfare state and market regulation: “Intellectuals in both Europe and the United States appear to have remained wedded to the view that an extensive welfare state was necessary to insure economic stability and the public’s social welfare and that any defense of free markets bordered on the crackpot, unworthy of comment.”

In the field of labor market regulation, interventions are not limited to protecting workers from privation and misery. Regulations may also be designed to protect vested interests, such as preventing entry into the market by participants who enjoy what is seen as an unfair competitive advantage, or designed for racial protectionism, to prevent demographic encroachment by other races.

Walter Williams gives several examples. An 1836 ordinance in Washington, D.C., stated that “it shall not be lawful for the mayor to grant a license, for any purpose whatever, to any free negro or mulatto, except licenses to drive carts, drays, hackney carriages, or wagons.” In 1927, university professors lobbied for immigration restrictions to ensure that “that large proportion of our population which is descended from the colonists ... have their proper racial representation.” Williams demonstrates the deleterious effects of these types of trade licensing and minimum wage regulations, state interventions that are promoted as instruments of social engineering but which, far from protecting favored groups from harm, only prevent the most disadvantaged from enjoying the benefits of market participation.

In evaluating the effects of interventionist economic policies, Williams aims to ascertain whether the policy is helpful or harmful, including whether it achieves its stated goals. Williams emphasizes that economic policies should be evaluated based on their impact, not their intentions. For example, the stated intention of minimum wage laws is to enforce minimum labor standards, by regulating working hours without exposing workers to the risk of suffering a diminution in income.

However, as Williams documents, the effect of these laws is to exclude lower-skilled black workers from employment. Federal minimum wage laws had such a disastrous impact on black workers that the 1993 case of Brazier Construction Co., Inc., et al. v. Robert Reich attempted to have the Davis-Bacon Act declared unconstitutional on the grounds of being racially discriminatory against blacks. The defenders of minimum wage laws who insist that these laws were not intended to exclude blacks are therefore missing the point. As Williams says, “One must always remember that the effects of a policy are by no means necessarily determined by its intentions.”

For the utilitarian economist, the only valid way to ascertain whether regulatory intervention is justified is by reference to its impact on human welfare. As Ludwig von Mises puts it, “The only yardstick that must be applied to [evaluating such measures] is that of expediency with regard to human welfare.” That is because economics, properly understood, is value free. Economic policies therefore cannot be evaluated by reference to whether the goal pursued is “good” or “bad.” In this context, utilitarians generally seek to limit the scope of government intervention to the minimum necessary to achieve social goals without unduly encroaching on individual liberty. This approach can be seen in Hayek’s work; as Hamowy explains, Hayek “sought more fully to examine the demarcation between the amount and area of government intervention that he regarded as consistent with a free society and governmental actions that illegitimately encroached on personal liberty.”

Murray Rothbard took a different view from Hayek on this point, as Rothbard regarded the state as a predator and regarded private property rights as absolute. In Rothbard’s view, it follows that no regulatory intervention that encroaches upon private property can be justified. Hayek, by contrast, was concerned with “the reduction of coercion,” observing that “I know of no way of preventing coercion altogether and that all we can hope to achieve is to minimize it or rather its harmful effects.” Hayek rejected the concept of natural rights and did not accord a central role to private property in his attempt to delineate the boundaries of liberty. As David Gordon observes, “Readers who want comprehensive arguments against interventionism need to read Mises and Rothbard, instead of following Hayek into the morass of evolutionary speculation.” Hamowy explains that Hayek was concerned with how the state defines rights and the extent to which those rights safeguard individual liberty from state coercion, concerns that he viewed as central to his conceptualization of the rule of law as freedom from coercion:

“Hayek’s concept of the rule of law is predicated on his belief that rights are neither abstract nor do they exist prior to the establishment of government. Rights, at least as they are understood in the Anglo-Saxon world, are essentially procedural and, as Burke earlier maintained, the product of the evolution of political institutions whose current constitution reflects the growth and arrangement most consistent with our understanding of the nature of a free society.”

Rothbard viewed all interventions designed to “protect” people by delimiting property rights as unjustified, no matter how “limited” those interventions might be. The rule of law itself would then have to be evaluated by reference to whether it upholds private property rights. Rothbard defined self-ownership and property as natural rights, so he did not agree with Hayek’s argument that the state, through the rule of law, is needed for the purpose of creating property rights. From a natural law perspective, property rights are inalienable rights neither created by nor destructible by the state. Rothbard saw liberty in the same light, as a concept rooted in private property. Liberty ought therefore always to be paramount regardless of whether free people have the power to achieve all their goals.

In “The Study of Man and the Problem of Free Will,” Rothbard therefore draws an important distinction between freedom and power. The benefit of the free market does not lie in the power it confers on market participants but in the opportunities it creates for market participants to achieve their goals. Disadvantaged groups may well lack political power, but as Williams shows, it does not follow that they therefore lack the freedom to make economic progress.