Rule of Law: Free Market Essential #5

By: R.J. Moeller

Here's the 5th installment of "Free Market Essentials"

Rule of Law-

Without law and order, economics, like most everything else in a society, is chaos. If I cannot trust that the local government will do what it can to protect me from burglars, my habits will change (or my address will). If I cannot trust the state government to enforce the legislation that the legislature has voted into law, I have no way to gauge the impact something like zoning laws will have on my business. If the federal government cannot be trusted to protect me from foreign invaders, I will spend less time working and more time at a target practice range.

Private property is meaningless if it cannot be protected and legally enforced and recognized. If I produce pencils in my factory, but I cannot rely on the government to enforce a broken contract between me and my lumber supplier, I will not keep the factory open and all my employees lose their job. If I invest my money in an institution that is, unbeknownst to me, buying bad loans that are subsidized by the federal government (via Freddie Mac and Fannie Mae), I lose my shirt and never trust the market again. No one wins.

Everything is dependent upon the rule of law. Our “law”, at a very basic, foundational level, is the Constitution. The Founders envisioned a republican democracy (as opposed to a straight democracy and “mob rule”), with a limited and de-centralized government. It should come as no surprise to any of us that as both political parties have wandered off the Constitution’s reservation; we’ve seen the economy grow more and more volatile. A significant reason for this is that Americans involved in the private sector cannot rely upon the public sector (our government) to abide by the same “rules” year-to-year.

Economist Milton Friedman explained it as follows:

Just after the Berlin Wall fell and the Soviet Union collapsed, I used to be asked a lot: "What do these ex-communist states have to do in order to become market economies?" And I used to say: "You can describe that in three words: privatize, privatize, privatize." But, I was wrong. That wasn't enough. The example of Russia shows that. Russia privatized but in a way that created private monopolies-private centralized economic controls that replaced government's centralized controls. It turns out that the rule of law is probably more basic than privatization. Privatization is meaningless if you don't have the rule of law. What does it mean to privatize if you do not have security of property, if you can't use your property as you want to?

For the college student returning from a semester abroad in a poorer country than their own, the reason your adopted homeland isn’t better off usually has little to do with the price of Italian beef in Chicago and everything to do with the rampant, unfettered corruption at every level of that country’s government. Will every country have the advantages and wealth that the United States has? Of course not. But does Costa Rica or Ghana or a former member of the Eastern Bloc have to remain a slave to 3rd world-like conditions? Absolutely not. The rule of law, and the protection our military affords us, is the thing that enables prosperity to flourish. Throwing money at the problems of other nations will only exacerbate the problem if it is not coordinated with the implementation of stable governments.

But, you ask, what about human nature and the fact that people, even in free, safe America, will always look for ways to circumvent the law?

I’m so glad you brought that up...but you'll have to tune in next time to get the answer in Free Market Essentials Part 6: Morality