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B. Venkatesh

PEOPLE like free market. They believe that the new government will not encourage free market. That is one reason they hammered stock prices after the election results. But what is free market?

It essentially refers to an economy where you and I can enter into any transaction without being bothered by the government. That is, there are no government taxes and regulations. Importantly, the government does not manage business enterprises.

Of course, free market in its purest form does not exist even in a capitalist economy. It cannot because we require government regulation to maintain market discipline. Market refers to a place, physical or virtual, where there is exchange of goods and services.

Imagine what would happen if we do not have traffic signals. You and I would have to spend more time in a traffic jam rather than engaging in some productive activity.

What if police were to manually regulate the vehicle flow? Experience tells us that we are more likely to see a traffic jam. Why? The police are likely to micro-manage, which is not the best way to enforce traffic discipline.

Now substitute the government for the traffic police. There may be inefficient allocation of resources if the government micro manages the economy. Look at all the loss-making public-sector units.

Most people, therefore, believe that the government should just frame policies, allowing the market to transact business. These rules may work because they are unbiased. Just as the traffic lights.

The Austrian school of economics is a strong supporter of free market.

Friedrich Von Hayek, for instance, argued that the market could evolve its own rules and discipline as people come together to transact business. He called such self-organisation "catallaxy".

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