July 27th, 2014 by Edward Miller

The free market is one of the more bewildering concepts around. Polemicists who are in favor seem to be living on another planet from those who oppose. When the ideas are put into practice, whether they succeed or fail seems to be a total mystery.

Why did Ireland crash so badly while Hong Kong succeeded? Why is Botswana being pulled out of third world poverty under free market policies, while Russia retreated back to third world conditions for a decade after Shock Therapy?

The answer to all these questions can be traced back to landed property, and economic rent more generally. Land is necessary for all production, and even life itself. Access to land is a prerequisite for any other activity.

A land title is, at root, an arbitrary threat of violence backing up an exclusive right to natural opportunities that neither you nor I have created. If you are stranded on an island that I have claimed, and I have an enforceable right to exclude you, then you are completely at my mercy. If I decide you aren’t welcome, I can send you back into the ocean to your death.

And if I decide to let you stay, the terms by which I allow you to stay are entirely at my discretion, since your bargaining power is nothing. If I decide that I’d like you to be my slave, then your choice is slavery or death.

It wouldn’t matter whether you had a backpack full of rare jewels or not, the terms by which you can live on my island are at my whim. I can demand your backpack. I can demand your subservience. I can demand anything. An exclusive right to land can override virtually any other right you have.

This raises an important question. Under our current system, what is it which is preventing us from this same outcome?

As it stands, virtually all habitable land is owned by someone, but not everyone is a landowner. As Herber Spencer once noted, which I’ve quoted before:

“Supposing the entire habitable globe to be so enclosed, it follows that if the landowners have a valid right to its surface, all who are not landowners, have no right at all to its surface. Hence, such can exist on the earth by sufferance only. They are all trespassers.”

Serfdom is partly defined by landlessness, so why aren’t all landless people serfs?

The answer is largely because we are not living in a “perfect market” and individuals are not solely self-interested. A perfect market requires such things as perfect information, rationally self-interested actors, free entry and exit by producers and consumers, and internalization of costs. We are not living in such a world.

However, there’s good reason to suppose, in the context of exclusive land rights, the more perfect the market becomes, the closer we get to a situation of serfdom.

Communications technology generally is moving us closer to a world of perfect information, and making it harder to prevent entry and exit into markets. Perfect information allows for all manner of behaviors. One such behavior is “price discrimination.”

This means that the prices are charged based on the peculiarities of an individual’s circumstances. Student discounts are a benign example. Under a system with no free land and perfect information, one could envision that rental prices would be subject to price discrimination.

In this circumstance, what I mean by price discrimination is the financial circumstances of individuals are as meaningless as the backpack full of precious jewels on the island. People who earn more in wages, or have more in savings, would simply be charged more in rent. And if they tried to go somewhere else to get a better deal, the other rationally self-interested landlords with perfect information would do the same thing.

Luckily, landlords don’t all have perfect information, and aren’t all rationally self-interested. And the more that are not, the better that is for everyone. Because everyones’ next best alternative is improved. And it is your next best alternative that determines the rent. In my original island scenario, there are no other alternatives. But if there were alternatives, then the owner of the island can only charge the difference between the value of his land over and above the next best alternative.

And likewise, it isn’t literally true that there’s no land upon which one can live rent-free. There’s a variety of mediocre options, such as living in a WalMart parking lot, which allows free parking for RVs, or sleeping on park benches. But the more that cities crack down on this, and the more that private individuals put up “homeless spikes,” the less alternatives are available. And the alternatives of the worst-off affect the best alternatives everyone else, right up the chain. The bargaining power available to everyone is set at the bottom.

Instead of hoping for our system to have more fraying at the edges, we should instead work on fixing it on a deep structural level. Luckily, there is a way to fix it, and it has nothing to do with destroying the free market. Indeed, no market resulting in serfdom can fairly be called a free market, and only cynical rent-takers would dare to call it that.

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4 Responses to “Is the Free Market the Road to Serfdom?”

  1. In economics, price discrimination involves a charging a price LOWER than a monopoly price, for those who will not pay the higher price. For example, student and senior discounts. Price discrimination for prices higher than the basic monopoly price will not work, because secondary markets will arise to buy at the standard price and sell to those who would otherwise pay a higher price. Even if landlords could read minds, they would not rent out a unit at a higher than normal price, because competition would whittle down the price down to normal. I agree, however, that serfdom is not a free market.

  2. Thank you for your comments. Even if my thinking is in error, I don’t think it is terribly off. I do think a monopoly price itself can be based solely on ability to pay in the circumstance that the good or service in question is essential for the life of the consumer.

    For instance, it is well known that AIDS medication is sold at far cheaper rates in Africa than in the United States. You could also imagine other scenarios.

    For instance, if you are locked in a room with no food or water, and you are going to starve to death, and there’s a guard in control of a locked door… that guard could let you out at any price he wants. And the more he knows about your wealth holdings, the more he will ask.

    My scenario is just as absurd, since I am assuming that every landlord on the planet has perfect information and is purely self-interested. That case is very much like my example of the stranded person with a backpack on an island.

    It falls apart if any of the landlords are willing to offer a better deal out of altruism or imperfect information, which is essentially always the case.

    Recognizing that it is the degree of market imperfection and altruism which accounts for the lack of pure serfdom is important, since under the Law of Rent… when there’s no free land, wages should drop all the way to subsistence.

    If we had a perfect market, they would. But we do not. So the Law of Rent is still true, but its premise of a perfect market isn’t a reality.

  3. Your piece has a provocative title that hopefully will get peoples’ attention. I basically agree with what you say. You cannot make a free market work when the foundation is a basic monopoly – which what exclusive ownership of land and resources is. The leverage of landowners is immense as you observed. Certainly some way of treating land as common property would ameliorate the situation. However, remember we are social animals and economics is only one part of our total social behavior.

  4. Your essay answers the question it sets out, admirably. What I gather from the history of Capitalism, (enclosure and primitive accumulation) lends support to the thesis that while concentrated ownership, (mergers and acquisitions), may contribute to overall growth in the imaginations of economists, that mentality is also towing 200 years of superstition that extends to a belief in the natural law of competitive equilibrium. In terms of political economy, on the other hand market fundamentalism constructs the equivalent of an expressway back to serfdom in the less theory driven world of tragedy, in which most of us dwell on land seized by force, which now belongs to someone else by the same strange alchemy that grants freedom to our contemporary peasantry to pay rent to the rentier class of our own day. In short, in the real world of geographic resource limits and increasingly dire social consequences, the free market really operates for the benefit of the few and promotes a situation that is bound to get worse before it gets better.

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