The basic conditions which all markets need to succeed

James PeronPHOTO: Supplied
James PeronPHOTO: Supplied

Planning is what every person does daily. There is no exception: even informal living and trading areas, and taxi ranks are planned.

People always plan.

The question is whether the spontaneous plans of millions come together in ways that allow development or whether central planning, imposed by some authority with coercive powers, is required.

We are constantly supplied with goods and services spontaneously produced.

Every day food flows from agricultural areas around the world to vendors ranging from major supermarkets to informal traders.

Each link in that chain of production and distribution makes plans according to their own subjective standards and desires.

No one mandates what is produced, where it is produced, for how much it will sell, how it will be distributed, who shall distribute it, when they shall distribute it, or to whom they shall distribute it.

Yet throughout the country food is found in abundant supplies.

The coordination of the market takes place when individual planners make decisions based on their own self-interests.

Every individual in the production chain is seeking to maximise their profits.

To achieve this, they cooperate with others, each of whom is also pursuing their own self-interest.

Yet in the end everyone improves their own standard of living.

This is what Adam Smith meant when he said markets appear to be guided by an “invisible hand”.

Each individual has a “harmony of interests” with all the individuals in the chain of production even though they do not know, or will never meet, the vast majority of those individuals.

Herbert Spencer put it this way: “The houses they live in, their furniture, clothes, fuel, food – all are brought into existence by the spontaneous efforts of citizens supplying one another’s wants. The roads, the railways, the trains, the telegraphs are products of combined exertions prompted by desires for profit and maintenance.

“The villages and towns they pass exhibit the accretions due to private actions. The districts devoted to one or other manufacture have been so devoted by men who were simply seeking incomes to live upon. The enormous distributing organisation with its vast warehouses and retail shops lining the streets, carrying everywhere innumerable kinds of commodities has arisen without the planning of anyone.”

Urban development, in fact all development, is simply another type of market, or more precisely, a combination of markets.

Development takes place, often in spite of centralised planning, provided the conditions for trade are present.

The basic conditions, which all markets need to succeed, are simple.

The creation of a conducive environment is absolutely necessary for development to take place.

First, there is the requirement of property rights.

Individuals who do not have security of title in the property they “own” will not develop that property to its highest potential.

Not only must the individual have secure title to the property, but they must also be allowed to trade property when it suits their purposes to do so.

A home, which cannot be sold, is not as likely to be maintained as well as a home that can.

The primary function, some say the only function of government, is to protect the rights of individuals and one fundamental right is the right to own, develop and trade property.

Second, is the need for contracts. Individuals need to know a contract, when entered into, will be enforced.

Every functioning society or market needs “promises” or the situation where people will actually do what they promise.

No one has the inherent right to a specific contract with a specific person, but they do have contractual rights.

This means they can contract with one another for specific purposes.

Once that contract is entered into, it is the “right” of the parties to the contract to see it fulfilled. The enforcement of contracts is a necessary component of a free society.

Third, the question of externalities must be addressed.

Common law has a rich and long tradition of dealing with questions of externalities.

Liberals have long taken the position that the common law is sufficient to handle these problems and that centralised planning, as a means of coping with externalities, will lead to more problems than it can solve.

Fourth, the rule of law is required.

Some misinterpret the rule of law to mean a law must be passed before government may or may not take a specific action.

But the rule of law goes much deeper than that. Yes, it does mean rules imposed on individuals must also apply to the state.

But it also means the laws of good governance (which are inherent in human nature and are thus not legislation) must be followed as well.

There are natural limitations on the ability of governments to do whatever they wish.

These limitations are not imposed by legislation but are natural, or part of the nature of reality.

The Greeks, who originated the concept of the rule of law, meant by law, those principles of nature which are imposed on everyone including governments.

The creation of a conducive environment is absolutely necessary for development to take place.

This not only means government must fulfill its legitimate functions of protecting rights, but it must also limit its activities so as not to impede development.

The latter requirement is one that few governments seem willing to embrace.

  • James Peron is the president of the Moorfield Storey Institute and author of several books, including Exploding Population Myths and The Liberal Tide. The views expressed in this article are those of the author and not necessarily those of the Free Market Foundation.

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