It is often claimed that the free market is nothing more than a system of exploitation, one where the “haves” gain at the expense of the “have-nots.” The very existence of haves and have-nots is said to create conflict, and we are supposed to lament inequality in ownership as proof that the market is against society. Free market pricing looks, on the surface, like a case in point: those who are willing to pay higher prices get the goods. Are they depriving others? At its core, is the free market really against society?
When we look at the free market with these prejudices, we miss that its pricing does not actually check who is rich and who is poor—it harmonizes the preferences of everyone. Also, free exchange makes no one better off through making another worse off. Taking a closer look at its operations, we see the free market working to benefit society, contrary to the charges made against it.
What helps us avoid flimsy conclusions about benefit is the fact that preferences can only be proven through action. People can say what they will, but their actions always demonstrate preferences. Through their very action, a buyer proves that they prefer buying a good to using their money for another purpose. Similarly, the seller who sells the good to the buyer proves that they prefer selling the good to using it for another purpose. Both are made better off from the exchange, and no one else is made worse off.
We can extend this reasoning further to compare a buyer and a non-buyer, when both are able to buy the same good. At the good’s price, the buyer prefers to buy the good, and the non-buyer prefers to save their money for another use, such as buying a different good. Likewise, we can compare a seller and a non-seller, when both are able to sell the same goods. At the good’s price, the seller prefers to sell the good and the non-seller prefers to save their good for another use, such as selling for more in the future.
As long as the buyers and sellers want to make exchanges, while the non-buyers and non-sellers would prefer not to, everyone can do what they prefer at the same time. However, the good’s price can prevent this from happening.
In a shortage, more than one person wants to buy the good at its price, but there is not enough of the good in stock for all of them to be able to buy it. Some people will buy the good first and leave the others as reluctant non-buyers who would prefer to buy the good at its price but are unable to. Similarly, in a surplus, more than one person wants to sell the good at its price, but there is too much of the good in stock for all of them to be able to sell it. Some people will sell the good first, and leave the others as reluctant non-sellers who would prefer to sell the good at its price but are unable to.
In both shortages and surpluses, conflicting preferences prevent people from doing what they would prefer to do. The issue is the price, which everyone is considering when deciding whether or not they want to buy or sell the good.
We can use an example to see how the free market pricing system solves this problem. Two men, Peter and Jim, are considering what action to take based on a ranking of four different options: (A) Buying an apple for $2; (B) Buying an orange for $2; (C) Buying an apple for $3; and, (D) Buying an orange for $3. Peter’s preferences are in this order: A, B, C, D. Jim’s preferences are in this order: A, C, B, D.
If an apple and an orange are both $2, Peter and Jim both prefer buying an apple to buying an orange. However, if the price of an apple rises to $3 while the price of an orange is still $2, then Peter now prefers to buy an orange, while Jim still prefers to buy an apple. Based on this, what would happen if there was only one apple and one orange, such that only one person could have either the apple or the orange?
If the apple and the orange are both $2, Peter and Jim cannot both do what they prefer to do: buying the apple. Only one of them can. However, if the price of the apple rises to $3 while the price of the orange is still $2, Peter and Jim can both do what they prefer to do: Peter can buy the orange, and Jim can buy the apple. Since Jim prefers buying the apple for $3 to buying the orange for $2, he also prefers outbidding Peter and raising the price of the apple to $3. That way, he would not have to let Peter buy the apple for $2 while he buys the orange for $2. Thus, Jim bids the price of an apple up to $3 and buys it, while Peter buys the orange for $2.
By outbidding Peter and raising the price of an apple to $3, Jim allowed both to pursue their preferred actions under the new price at the same time. Under the apple’s old price of $2, only Peter or Jim could pursue their favorite action: buying the apple, leaving the other one with their second-best action, buying the orange. Under the apple’s new price of $3, Peter and Jim can both pursue their favorite actions: buying the orange and buying the apple respectively, at the same time. The same example works to analyze sellers and non-sellers when we flip the terms and consider Peter and Jim as men who are considering selling money for the apple or the orange. Then, Jim undercuts Peter by offering a higher quantity of money—$3 rather than $2—for the same price of one apple, enabling both to pursue their preferred action under the new price.
Where goals conflict in a market, the free market price system coordinates resources to their most urgently-desired uses and signals supply and demand. Where potential buyers are allowed to outbid each other, and potential sellers are allowed to undercut each other, everyone will tend to find themselves in a situation where if they are better off buying and selling the product, they are able to do so, and if they are better off not buying or selling the product, they do so as well. No one is blocked by another’s choices.
The role of the free market price system is to improve social benefit by harmonizing the preferences of everyone in the market. Considering that society is the sum of all individuals within it, making one individual within society better off than otherwise, without making another one worse off than otherwise, makes society better off overall. All are pursuing their peaceful goals under the circumstances, and no one’s actions are preventing another from doing so. We can make an even broader conclusion from this and say that the free market improves social benefit through its free exchanges. Buyers and sellers pursue their preferences and are made better off, without making anyone else worse off, and no one is forced to participate in free exchanges.
Where is the brutal market encouraging conflict? All that can be seen is a free system working to harmonize the preferences of all, and working for the benefit of society. This must be contrasted with the unfree system of the state, which inherently causes conflict. Any interference by statists with free market pricing causes or lengthens shortages or surpluses, putting preferences in conflict with each other.
State actions can never improve social benefit as long as they rely on the extortion of one part of society through taxation to enrich the other part. If the taxed victims had truly wanted to give the state their money, no coercion would have been required. Since the state had to force payment, however, the victims proved that they preferred another use of their money to whatever use they thought the state had in mind. They were made worse off. Society does not benefit through state action—it is divided. Further, individuals, especially in a democracy, are encouraged to use the state at one another’s expense.
Where is this social contract we are all supposed to have signed giving the state the right to dominate us? And, even if we signed it, why can we not withdraw our signatures? The accusations against the free market are a distraction from the real source of conflict and exploitation in society: the state.