What is a free economy? A recent article on The Wall Street Journal, by Jeffrey Friedman and Wladimir Kraus from The American Enterprise Institute, tells us some important truths: “In a complex world nobody really knows what will succeed until it is tried”, they wrote. So we need a society where people compete through innovation, not through imitation.
The real economy can be very different from an ideal system of competition through innovation: the herd behavior is always among us:“The capitalism will probably always be prone to asset bubbles and other manifestations of homogeneous behavior, but only because it is part of human nature for people to go along with the crowd. This is a risk that can be mitigated but not eliminated”, wrote Friedman and Kraus. Competition, on the other hand, “does mitigate [herd behaviour] by both encouraging and taking advantage of heterogeneous behavior, that is, innovation”.
This means that competition and innovation require an appropriate environment to bloom. Markets are not simply a sum of businesses, but a special relationship among them; they are not a natural order, and they are vulnerable: governments and corporations could impair their functioning. This is the important lesson taught by Adam Smith, Joseph Schumpeter and even Friedrich von Hayek.
Therefore, it is a mistake to argue – like Friedman, Kraus and many economists in this neoliberal era do – that the economic system needs less rules: is not a matter of quantity, but of quality of rules.
Economic freedom, like freedom in general, which is the prerequisite for innovation, is based on good rules and is broken by arbitrary decisions: this is the lesson of the first “