What Exactly is a Free Market?
What do we mean by “free markets” or even “capitalism” for that matter? It’s probably not what you think. For many people, these terms conjure images of Wall Street bankers and multinational corporations. Perhaps they also bring to mind small businesses and scrappy startups. All of those are part of free market capitalism, but they’re only one piece of the puzzle.
To understand the whole picture, you need to start with a single individual.
Start with yourself. You have hopes and dreams, talents and passions. You want to build a life that brings you and the ones you love happiness and excitement even as you achieve independence and stability. Ultimately, you want to build a life with meaning, filled with purpose. Everyone of us wants that for ourselves. And for each one of us, that life looks as unique and diverse as we all are. For all the things we share as a community and a society, there is no getting around the fact that each of us values different things at different times in different ways. One person’s trash is another person’s treasure. No one can know you as well as you know yourself. The same is true for every one of us.
So here you are, a unique individual, out in the world trying to figure out life. Doing it the “free market” way means following three pretty simple rules.
Those are the rules of the free market: so long as you don’t hurt other people or steal their stuff, and so long as you keep your word, you’re free to do whatever you want. You’re free to work for whoever you want. You’re free to love and marry whoever you want. You’re free to worship whoever or whatever you want. You’re free to trade with whoever you want.
And with this freedom, you’re empowered to take on any problem you want to. Free markets destroy the problems in our society because they empower free people to destroy those problems and offer new solutions. Free markets empower everyone, but especially underdogs, upstarts and immigrants to take on the status quo precisely because they don’t need to seek permission first. Free markets don’t respect traditions unless those traditions are maintained peacefully. Free markets are the most radical, revolutionary force for change humanity has ever discovered. And the reason is simple. Free markets are nothing more and nothing less than each of us and all of us having the right to try our best at improving everything for each other.
In 2018, the National Low Income Housing Coalition announced that a renter earning minimum wage at a full-time job could afford a typical two-bedroom apartment in exactly zero U.S. counties. Zero. The same full-time minimum-wage worker could afford a one-bedroom apartment in just 22 out of more than 3,000 counties nationwide. To call this an affordability crisis seems like a massive understatement.
Across America and Europe, home prices have been soaring for three decades. Meanwhile, incomes have flatlined. In cities like London, Boston, and Seattle, the ratio of home prices to earnings has doubled or even tripled in the last 10 years. And restrictions aimed at limiting growth and pumping public money into subsidized housing have actually made the problem worse—much worse—in many of America’s most unaffordable cities.
But rental prices aren’t rising everywhere. In Tokyo, home prices have remained relatively stable for 25 years. What gives? With an estimated population of 38 million, the greater Tokyo area is the most populous metropolitan region in the world, larger than New York City and Los Angeles combined. Tokyo is a global financial center, home to 36 of the world’s largest companies, and a major hub for media, design and manufacturing. So why hasn’t the affordability crisis hit the Japanese capital?
One major reason, according to experts, is markets. With essentially no rent controls and very few restrictions on height and density, Tokyo is the rare modern city where supply can respond to demand in real time. In other words, it’s a free market. Prices rise and fall as the supply of new and available housing changes to meet the needs of residents.
Adjusted for population, Tokyo approves two “housing starts”—new residential construction projects—for every one in New York City. That’s why the average rent for a two-bedroom apartment in Tokyo was less than $1,000 per month as recently as 2018—less than half the cost of the same apartment in Seattle.
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And in San Francisco, where strict housing regulations and misguided attempts at rent control have produced the highest housing costs of any major American city—nearly $4,000 for a typical one-bedroom apartment.
In 2015, after San Francisco's Board of Supervisors attempted to pass a “moratorium” blocking all new housing development in the popular Mission District, San Francisco City Supervisor Scott Wiener (now a California state senator) published an op-ed titled “Yes, Supply and Demand Apply to Housing, Even in San Francisco.”
Wiener declared, “We’ve never come close to producing enough housing to allow anyone to argue that increasing housing supply doesn’t stabilize housing prices. But, we do have evidence to the contrary. Since 2003, San Francisco has grown by nearly 100,000 people, while producing around 24,000 units of housing. During that same time period, housing prices have gone through the roof.”
Wiener concluded, “Economic principles aren’t always convenient, but they are real. Supply and demand exists, and it applies in San Francisco.”
One U.S. city that has succeeded at keeping rents relatively low, even as the local population has exploded, is Houston, Texas.
In the first decade of the 21st century, the greater Houston area grew by a staggering 20%, ballooning from 4.7 to 6 million residents, but during that same period rents actually decreased. So what’s the secret to Houston’s sustained affordability? Deregulation.
Houston is the only large city in America with no official zoning restrictions. The results can be eccentric: Adult video stores located next to corporate offices, modern churches wedged between warehouses, and residential buildings in a wide variety of shapes, colors, and styles. But at the end of the day, this laissez faire approach to housing has helped Houston remain one of the few American cities where Millennials can afford to buy first homes.
“Houston’s success,” wrote Harvard economist Edward Glaeser, “shows that a relatively deregulated free-market city, with a powerful urban growth machine, can do a much better job of taking care of middle-income Americans.”
In large cities, restrictions and regulations advertised as “protections” tend to insulate wealthy neighborhoods from low-income renters. Historically, these restrictions were overtly racist, the machinations of city councils and “experts” who wanted to exclude people of color, and other marginalized groups. Even when regulations are well-intentioned they often have the intended effect of making cheap housing illegal by banning tall buildings, small apartments, and anything eccentric or ugly.
The road to an affordability crisis is paved with regulations. If we want to bring rents down and create more opportunities for everyone, we need to follow Tokyo’s lead and unleash the power of markets.
A project of
WASHINGTON POLICY CENTER
