How the Free Market Works Its Magic

Link to the Wikipedia article on “Harry Potter (character)”

Some people misunderstand free market principles. The free market depends on the establishment of property rights. That is the free market, not a departure from it. In particular, the free market yields good results only because after the obvious ways of getting ahead–lying, stealing and threatening violence–are outlawed, people have to exchange things that are valuable to other people in order to get ahead. 

Monetary policy is another interesting area to talk about. The logic saying that the free market yields good results comes from a model in which monetary policy doesn’t matter for anything important–have a central bank or not, it is all the same in that model. As soon as monetary policy matters, there is a genuine asterisk on the idea that the free market alone can do the job. As Milton Friedman recognized, some sensible monetary policy has to be appended to the establishment of property rights. 

Note: The timing of this post was inspired by yesterday’s post “Narayana Kocherlakota: Want a Free Market? Abolish Cash.”