The point of all this free market stuff

Innovation creates wealth.

By , Guest blogger

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    In this file photo from July 22, Chang Chieh-kuan, 58, uses a hand press to make prints with Chinese character type sets at his Ri Xing Type Foundry in Taipei, Taiwan. When printing presses with movable type were first created, the innovation revolutionized the flow of knowledge and the role of the written word, and the technology is still in use (in a few corners of the world) half a millennium later.
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Leave aside all the stuff about freedom and liberty that goes with free (or, to be precise, as there is no such thing as a "free" market, freer or freeish) and consider the very basic bedrock of the argument in favour of them. They make us all, over time immensely richer. Yes, much more so than planned economic systems. Consider printing:

I find that between 1500 and 1600, cities where printing presses were established in the late 1400s grew at least 60 percent faster than similar cities which were not early adopters. I show that cities that adopted printing in the late 1400s had no prior growth advantage and that the association between adoption and subsequent growth was not due to printers anticipating city growth or choosing auspicious locations. These findings imply that the diff usion of printing accounted for between 20 and 80 percent of city growth 1500-1600. They are supported by historical evidence and instrumental variable regressions that exploit distance from Mainz, Germany — the birth place of printing — as an instrument for early adoption.

As William Baumol has repeatedly pointed out, planned systems are indeed capable of inventing some pretty spiffy stuff: I've made much of my living these past two decades marketing what the Soviets invented. However, what planned systems are very much worse at than market ones is getting those spiffy things into the hands of people who will actually use them: innovation, not invention that is.

And it is innovation, not invention, which is what drives wealth creation: the use of the inventions to do things in a new way, or to do new things.

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This is why we want to have a free (or freeish if you prefer) market based system: not because it is better at allocating resources or distributing production in a static economy or technological landscape: but because such a system is better at driving the innovation which leads to a dynamic and growing economy.

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