I was thinking yesterday about all the criticisms made of the free market. Though there are many, one that seems to enjoy some currency is that, while it may be apparently efficient, producing low prices and similar benefits, the free market is unfair. You can hear echoes of this in the protectionist call for "fair trade not free trade", which almost inevitably translates into a variety of trade barriers designed to correct real and imagined inequities, though most often the corrections are not for inequities so much as some perceived competitive advantage, be it low wages or lack of government regulations.

And, to be honest, the proponents of the free market have not spent much time talking about fairness. Most proponents, myself included, have been interested almost entirely in showing either the economic efficiency, or the ability to best meet individual wants and needs, and have had little time to talk about nebulous terms such as fairness. In truth, we have often dismissed terms such as "fairness" and "equity" as sneaky attempts to discredit what is otherwise an optimal solution. I even wrote in an earlier essay:

Yes, some people "unfairly" lost business, but that is life. Competitions is not always "fair". This isn't a board game or sporting event, some companies have "unfair" advantages, and sometimes the best man doesn't win. It is not the purpose of the government to make life "fair", simply to protect rights.

What I said, while technically correct, is probably badly worded, and gives the advocates of fairness an opportunity to attack the supposed unfairness and heartlessness of the market.

The problem is, while many free market advocates ignore it, the free market is inherently fair, and it is a point we should make. We should not focus on fairness to the exclusion of all our other arguments, but it is a topic we should mention. We can easily make a case that not only does the free market, over time, produce fair results, but that even in cases where it might seem unfair, the regulatory alternative is far less likely to produce anything approaching fairness.

Let us start with a simple example, wages. Many have argued that racism, sexist, and all other manner of social ills would have persisted forever but for the government intervention. Now this is true in one respect, that of government discrimination. To the degree discrimination was de jure, enforced by government edict, yes we needed the government to correct it. However, beyond that, discrimination, at least discrimination in hiring or wages, would be corrected by the market itself¹.

Now many will not believe this, as it is an article of faith among some Americans, even among some conservatives, that, without government intervention in employment practices, companies would strive to pay employees as little as possible², which likely would hit minorities and women especially hard³. And in some ways this is true, though it takes that truth and draws the wrong conclusions.

The basic premise is true, employers will try to pay as little as possible for labor. They will also try to pay as little as possible in rent, for flour, or for nylon, yet the government does not worry about keeping rents high⁴ or flour expensive. The reason being that we recognize that there are two parties negotiating, and the seller of flour or the renter of space will negotiate in his own interest, setting the price fairly. They also recognize that there are many competing sellers and buyers, a situation which prevents any one seller or buyer from "setting" a price, no matter their desires. Only in terms of the labor market do we encounter the twin fallacies of one party to a transaction "setting" the price, and the myth of a  non-competitive competitive market.

Let us look at both fallacies, and then I will explain why the reality of the labor market guarantees, absent government intervention, a fair outcome.

The first fallacy of those who think we need to government to "set" a fair wage for minorities or women, or for that matter for union workers or those on the low end of the wage scale, is the belief that the employer can "set" the wage. Yes, in a very limited sense this is correct, the employer does have final say over whether or not to hire, so he does "set" the price, but that would be akin to saying you "set" the price at McDonald's as you have final say over whether or not you buy that Big Mac. The employer does have the final say, as he is doing the hiring, but the employee has just as much say, as he can accept or refuse the offer.

Some will respond that, while the employee can refuse, it is not a realistic option, a she needs to work, while the employer has any number of employees he can hire. And that brings us to the second fallacy, the belief in a non-competitive competitive market. Just as those who propose this theory seem to think employer can "set" the wage, they also seem to think there is only competition on one side of the equation. There is an endless "pool" of labor competing for a given slot, but the job in question is the only job available.

In truth, provided the government has not managed to inflate away all economic growth⁵ or regulate the job market into rigidity⁶, there will be competition on both sides of the equation, with multiple employees apply for each job, and multiple employers seeking employees. So for any given employee any single job will not be his only choice. He may still be disappointed with his options, but, thanks to competition between employers, he will be pretty confident that the wages he is being offered are close to what he is worth.

And that is the way the free market forces fairness, by penalizing unfair practices, or any practice at all which uses anything other than economic worth to figure salary. If a man intentionally tries to avoid hiring minorities, or pays women less, he will be at a disadvantage relative to his competitors. Now, granted, an employer an make some mistakes, suffer some disadvantages and survive. However, eventually, those disadvantages will add up and his less disadvantaged competitors will drive him out.

Basically, in a free market, an employer will have no choice but to consider all applicants, and to pay those he hired as close as possible to their actual worth. To do anything else is to either surrender advantage to competing firms, or to set up ones staff to be poached by rivals. Thus the free market enforces decisions that are, at least in economic terms, incredibly fair. Everyone is paid what they are worth, no more and no less.

Of course, some will argue with this definition of fairness and talk of representation and disparities and so on. But the truth may be that some groups are simply, for one reason or another, less suitable for some positions, less interested in some positions, or worth less to an employer.For example, employers are not to blame for women's reluctance to enter fields such as construction or long distance trucking, it is simply a fact. For whatever reason certain jobs appeal to certain people, and, unless the state is going to select jobs for every adult, there will be deviation for a statistically normal distribution of sexes and races in various jobs.

And that is but one example, it could be expanded upon over and over for all manner of questions of "fairness". But the point is, for too long we have conceded that the free market may not be fair, though it is the most efficient system. However, time has come that we point out that the free market IS entirely fair, while other systems, based mainly upon the whim of regulators or the pleading of lawyers, produce far more arbitrary results than the free market ever would. It is time we reclaimed the mantle of "fairness" and "equity" from the left, who have attached the words to socialist goals which, in the long run, have less to do with those terms than anything the free market ever produced.

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1. We need here to make a distinction between racist beliefs and racist practices. As I mentioned in my essay "Private Versus Public Racism", we are unlikely to ever completely eliminate individual racist beliefs, and to hold that as the requirement before we cans ay racism is eliminated is to make the elimination impossible. However, so long as the government does not explicitly discriminate, and the market prevents racist firms from prospering, does it matter if some individuals continue to hold racist beliefs? There are people who think Catholics are not Christians, and those who think Jews are behind every ill (in fact quite a few of the latter, some who post comments on Townhall), does that cause Catholics or Jews to suffer from discrimination? No. So why do we believe that racism is not conquered until every single individual holds the views of a university diversity coordinator? (Some similar thoughts are also addressed in my essay "Some Logical Problems With Reparations" and it's sequel "More Thoughts on Slavery".)

2. The same justification is also used for pro-union closed shop laws, minimum wage laws, and many other interventions into the employment market. The assumption employers will "set" wages as low as possible is at the foundation of economic theories as far back as Marx and his "Iron Law of Wages". However, as I will show, they are all based on a fallacy of a non-competitive competitive market.

3. My earlier writing on wages may be helpful here. I wrote on wage inequality for women in my essays "Pay Disparities" and "Just Asking For It". I addressed similar questions in terms of race in "Some Questions on Discrimination"

4. If there is any group the government regulates more than employers, it is landlords. Just as the government seems to think high wages are an absolute good, they seem to think low rents are an even more absolute good, as shown by the many cities which have continued enforcing rent control despite the obvious, devastating consequences for the housing market. It doesn't even matter to many that the beneficiaries are the connected and wealthy rather than the poor who were supposed to benefit, they have such faith in the benefit of low rents and the iniquity of landlords (often dubbed "slumlords"), that no consequences are severe enough to cause them to rethink rent control.

5. Inflation can stop new employment by causing a flight into material investments, which will dry up any money for expansion. Without funds available, companies will retrench and stop expanding. With the job market stagnant, employee will stay at their jobs as there is nowhere else to go. This will end up in a jobless market. However, again, this is the result of government intervention, not of the free market. Despite myths tot he contrary, the "boom and bust cycle" is not part of the free market, but of centralized banking schemes imposed by the state. A fully free banking system could not have the synchronized inflation of the money supply needed for such cycles. But that is too much to cover in a footnote. See my essay "The Limits of Technocracy", "Memories of Jimmy", "War Stimulates the Economy? Let's Nuke San Francisco!", "Inventing a Crisis", "And Here It Comes Again","Some Brief Thoughts on the Bailout", "Critique of Krauthammer", "Monetary Issues Made Simple Part I" and "Monetary Issues Made Simple Part II".

6. Of course government intervention can hamper free competition. For example, minimum wage laws can prevent an employee from lowering his asking price below a certain point, or closed shops can exclude any non-union competition. Even when laws do not explicitly exclude applicants, they can hamper new hiring, such as France's laws which make firing employees almost impossible, which make employers very reluctant to hire anyone without a lengthy work history. However, as I am writing about the free market, I have to assume such intervention has not taken place.

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UPDATE (01/30/2009): As I did not provide any concrete examples of the unfairness inherent in regulatory schemes, I would refer readers to my post "Spread the Wealth Around ". It is only one of many posts on the same theme, but it does give a good example of how government intervention intended to help one group can end up harming them, which is clearly far from a "fair" result. (The same theme is also covered in my post "How Democrats Keep the Poor Poor ".)