Free markets include taxation and regulation

by Paul Mero

On the political right, the free market is the holy grail of prosperity. And rightly so. Market-based economies have lifted more people out of poverty than any other economic system devised by man. After all, that is the purpose of any moral economic order: human happiness.

Sometimes the political right forgets that end game. Sometimes the political right sees the means as an end and forgets that, like all other human systems, the market economy has its own ecology comprised of many components that ensure its success. Honest observers understand that free markets have their weaknesses. They do well to encourage work and private property. But free markets do poorly for people who find it hard to work or simply cannot possibly compete for a variety of reasons.

Conservatives understand this social framework in which free markets exist. Libertarians, not so much. Ideologues, not so much. One of history’s finest free-market scholars and perhaps its most successful practitioner, German-born Wilhelm Roepke, reminds the most ardent free marketeers that ethics and humane behavior, not to mention political wisdom, require “economic policy to adapt to man, not man to economic policy.” Put another way, “The market economy is not everything. It must find its place within a higher order of things which is not ruled by supply and demand, free prices and competition.”

In a commentary a couple of weeks ago, wherein I explained my support for Governor Herbert’s online sales tax agreement with Amazon.com, I said, “if you believe in free markets, what is free about a market that uses public policy to pick winners and losers?” One listener responded decidedly that there is “nothing free market about taxation.” Though I understand the spirit of his point, I beg to differ in principle. If you understand that all things, including market economies, exist in a context of a free society, you will understand how wise taxation and responsible regulation play a critical role in a humane economy.

A wonderful example of this context and need for a social framework to guide market economies is the infamous War on Drugs. Many people consider the decades-long War on Drugs to be a fantastic failure. And, in many respects, they are right. But they are often duplicitous in their struggle to legalize drugs – and the free market shows us why.

America now suffers from an opioid epidemic. In Utah, problems associated with opioids is a major reason wrong-headed libertarians push for legalization of marijuana. But the problems associated with opioids are largely the problem of free market behaviors such as hyper-competition. The well-researched and enlightening book Dreamland provides an excellent view of how free market behavior, left unchecked, can lead to a destructive epidemic.

In 1996, Purdue Pharma released the highly popular pain reliever OxyContin. It was released at a time when doctors were becoming more sensitive to pain management and actually listed pain as a “fifth vital sign” for patient treatment along with pulse, blood pressure, body temperature and heart rate. The entire medical industry became focused on pain relief. OxyContin was marketed on the idea that not only did it effectively relieve pain but, surprisingly if not unbelievably, also was not addictive. That’s right, OxyContin was marketed as a non-addictive opioid. Salesmen were instructed by Purdue Pharma to cite research saying that opioid use was “less than 1 percent” addictive. This ruse was based on the irresponsible use of a single letter to the editor in a medical journal saying that, if used properly in severe medical cases, such as life-ending illnesses, patients using opioids were likely to have a less than 1 percent chance of becoming addicted – before they died.

Clearly, the OxyContin market required regulating on that basis alone. Free markets don’t work outside of an honest and humane social framework. Free markets require regulations.

This same War on Drugs narrative provides another example of how unregulated markets can do great harm. About the same time as OxyContin was sweeping the nation a small group of entrepreneurs from the little town of Xalisco in the Mexican state of Nayarit developed a way to short-cut the processing of heroin which they termed “black tar.” Black tar was much less expensive than white-cut heroin and more potent. OxyContin addicts in the United States provided the perfect market for black tar heroin.

Avoiding all of the unwritten conventions proscribed by drug lords and gangs from the violent inner cities, these “Xalisco boys,” as they were known, would provide a new model of heroin delivery, a disruptive economic model, akin to pizza delivery. The black tar would come straight to the home of the user. Addicts tolerant to high doses of expensive OxyContin, requiring them to use more and more and spend more and more, would switch to the much less expensive and more safely attainable home delivery of black tar heroin. The rest is history. America is now consumed by an epidemic of opioid and heroin addiction largely as a result of what could be considered free market capitalism. After all, a black market is nothing more than an unadulterated free market.

The argument to legalize drugs is based on the idea that needed regulations would control abuses – a de facto admission that free markets include regulation and taxation. So, the next time you hear someone tell you that government regulation and taxation are mutually exclusive to market economies, maybe point to one of the many opioid and heroin-addicted teenagers right in their own neighborhood.

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