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Institutional framework

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The services provided by a free state to enable voluntary exchange often go unnoticed, but they are no less valuable for that. We take for granted that:

  • the other party to a transaction will not normally try to defraud us,
  • people will not normally try to take our property forcibly or coerce us into exchange,
  • any contractual terms will be honoured because they are enforcible in a court of law,
  • someone cannot with impunity enter into a transaction with us whilst hiding the fact that they do not have the ability to pay,
  • the money we use as a medium of exchange (to avoid the inefficiency of reliance on barter) has a reliable value,
  • others may not foist on us the negative effects of actions and transactions to which we are not a party, and so on.

Markets not "unfettered", reliant on strong rules to protect property

Anti-capitalists often caricature the free market and voluntary exchange as “unfettered”, but in fact free markets require a strong institutional framework and acceptance of moral and legal constraints to ensure that transactions are voluntary, mutually beneficial and with minimal external impacts. Naive capitalists often bemoan any impositions and constraints by government, when what they should be questioning is whether the impositions and constraints are necessary to the functioning of a free market of voluntary exchanges.

Inefficiency and ineffectiveness of institutional partiality

The key to the design of a free-market institutional framework is to remember that it cannot be improved by trying to manipulate the outcomes – away from the outcome that those affected by a voluntary exchange would have accepted, and towards what the designer thinks they ought to prefer. The participants know better than the designer what is really in their interests. All attempts to meddle result in inefficiencies, unnecessary costs, unwise generalizations that do not fit individual circumstances, unintended consequences, and perverse incentives. The failure of the intervention to achieve its intended aim ends up being “corrected” by yet further interventions, which introduce yet further imperfections, and so on; like trying to even a wobbly table by cutting off bits of each leg until the table is nothing more than a board laying uselessly on the floor.

Simple and limited framework is best

Rather than target outcomes, the institutional framework should limit itself to protecting property rights: creating the conditions in which people may participate in voluntary exchanges with confidence that what they thought they were getting is what they actually get, and in which all the material values and costs to all those affected by the transaction are taken account of (“internalized”) to the satisfaction of all affected.

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Dr. Radut Consulting