Free Markets Are Costly; Who Should Pay for Them?

Markets are not free. They are the product of immense expenditures of land, labor, capital, and enterprise; for they cannot be maintained at any considerable scale except under conditions of good political order: laws, lawfulness, an efficient and just system for the administration of justice, the enforcement of agreements and the adjudication of disputes; safety and security (furnished by honest police and lethal warriors to deter piracy, crime, and plunder); reliable weights, measures, and media of exchange; complex financial arrangements (banking, brokering, insurance, and so forth); sophisticated transportation facilities (ports, highways, bridges, etc.); a prosperous pool of prospective customers; and the infrastructure to support all these functions (sewers, waste facilities, food, housing, and so on).

Markets do tend to form wherever people are gathered together, it is true, and no one needs to arrange for this to happen any more than languages need to be administered. But like languages, markets cannot flourish except at scale: below a certain number of participants, they wink out. And the achievement of that scale requires political order over a geographic region and a population large enough to form a profitable target market for sellers (whether foreign or domestic).

Political order is of course good for other things than markets. It is the forecondition of any civil prosperity, along any dimension: as, not just wealth, but health, sanity, sagacity, happiness, righteousness, holiness, fecundity, creativity. All these in turn feed back into the vigor and sanity of the political order, and its fitness to conditions. So they do likewise with markets, and vice versa.

Markets, in short, are expensive. Much is paid to facilitate them. Because they are not free in fact, they ought not to be available for free. They ought to be available only in exchange for payment. How ought those payments to be priced, and how collected?

Pricing is key. If the price for entry and participation in a market is set too low, it will be swamped with foreign sellers, who will mine it of its stored wealth. Set it too high, and foreign goods will be unavailable to those who value them, reducing the value of their stored wealth. Too much foreign trade or too little: either one is toxic. How to set the price of market participation so that the amount of foreign trade is just right?

Simple, really: increase entry and participation fees (these can be charged per period of market participation) until the revenues they produce level off. That’s the sweet spot. If prices were any higher, the marginal unit of commerce (and revenue) would be discouraged; lower, and the sovereign (and his people) would be leaving money on the table that they might otherwise have collected.

How to collect these revenues? Transaction taxes: sales taxes, Value Added taxes, and the like; and tolls and tonlieux (in exchange for the sovereign’s warrant of safe passage) at ports of entry or transit, or in exchange for renewals of visa subscriptions.

Optimize sovereign revenues from transaction taxes on the one hand, and – quite separately – from tolls and tonlieux on the other, and the prices of each will converge to the value of participation in the market. Foreign goods will have to pay more revenues overall, for they will generate tolls and tonlieux at their entry to the market, plus transaction taxes at their sale such as are paid by all goods, foreign or domestic. Thus the interests of citizens in maintaining the vitality of their domestic economy will be automatically balanced with their interest in optimizing the value of foreign trades.

6 thoughts on “Free Markets Are Costly; Who Should Pay for Them?

  1. Pingback: Free Markets Are Costly; Who Should Pay for Them? | Reaction Times

  2. “[I]t will be swamped with foreign sellers, who will mine it of its stored wealth…”

    So scarcity is preferable to abundance and high prices to low? Why should money be preferable to goods? If all the money in the world were to vanish overnight like fairy gold, that would be an inconvenience; if all the grain, meat, clothing and fuel were to vanish in the same way, mankind would be extinct within a week.

    • Notice that I wrote “wealth,” not “money.” Nor a fortiori did I suggest that money is preferable to other goods.

      Wealth can take many forms. These include grains, lands, cattle, buildings, and so forth. They include also moral and cultural forms. A nation’s morale and vim, e.g., are aspects of its wealth.

      I suppose I should spell out how tariffs, tolls and tonlieux set too low – that is, set lower than the market bears – will have the eventual effect of mining a people’s total cultural wealth. As the post I hope makes clear, it costs a lot to maintain a market, not just in taxes and the labor of sovereign employees and the compliance costs borne by subjects, but in myriad ways never accounted for in financial records. A prime example is the cost of inculcating in the young the characterological habits of people who tend to make prosperous markets, such as honesty, enterprise, discipline, thrift, foresight, canniness, creativity, respect, civility, and so forth. Forming such traits is long, hard work, as any diligent parent can attest: years of it, for each child; centuries for a people as a whole.

      If I can sell to such a people without paying a cost more or less equivalent to the costs they have borne in forming themselves a prosperous market, I am extracting from them some of that stored cultural wealth without paying for it. That the exchange happens at a lower monetary *price* to them than it would have in the presence of optimal tariffs, tolls and tonlieux masks its cultural *cost* to them. They bear the cultural costs of the exchange without being compensated for them. They sell their birthright for a mess of pottage.

      If we want the cost accounting of transactions to be true and accurate, so that resources are optimally allocated both within and between peoples, we want prices to account for all the costs of goods, whether or not those costs are customarily priced using money. Where the cost accounting is inaccurate, exchanges will be deformed by noise. They will be less economic, and allocation of resources will be suboptimal.

      I can explain in more depth if need be.

      • Yes. It applies to all transactions. Not just to trade – to all social transactions whatever. If you gain access to a market at a cost less than what that access is worth, the market is tilted in your favor, and every transaction will earn you economic profits at the expense of those who have paid full fare – in particular, those who have developed and maintain the market.

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