By Infometrics economist Matthew Nolan

The market is a concept that takes many guises and forms. For some the market is a mythical beast that provides people with ultimate freedom, while for others the market is seen as a dictator determined to hold people down.

The collapse of Lehman Brothers, and the subsequent credit crisis, has seen calls for both more and less government intervention. However, in order to understand what (if anything) needs to be done we need to think of how the market relates to the freedom of choice.

Wikipedia defines a market as "one of a variety of different systems, institutions, procedures, social relations and infrastructures whereby persons trade". More simply, a market is some place where individuals trade.

A freer market is a market which is subject to less intervention from government; it is a place where the actions of individuals and the structure of institutions are left to their own accord.

At first brush, this way of viewing a market indicates that we should leave them be. If a market is simply a place where individuals meet and trade voluntarily then how can we say that any trade is unfair? How can we justify trying to stop people doing something they want to do?

If we accept this way of viewing a market then the idea that freer markets increase individuals' freedom, and happiness, is true. However, such a view of the market is too simplistic.

A society where we pull away from government intervention does not ensure that individual actions will be voluntary. What do I mean? Without government, there is potential for other groups in society to form in order to coerce actions or transfer resources.

Coercion does not need to be purposeful. When the voluntary trade of two people has an impact on a third, unrelated, person's choice we can still view this trade as coercive to some degree. In a case with private coercion, the government can have a role in improving individual freedom and thereby happiness.

People that fear the idea of a free market do so because they equate the market with a situation where there are groups that will try to control and manipulate people's actions. In the same way, people who believe in greater market freedom often do so based on the idea that the government is a type of organisation that is coercing people.

When we view the issue through this frame, it becomes evident that it is not the market (or the lack of it) that is the underlying issue "“ but the concept of coercion and power. The conflict between those on the left and those on the right of the political spectrum often boils down to differing beliefs regarding the ability and intention of government and private groups to manipulate people's choices.

Take for example the recent credit crisis. Some analysts believe that a lack of regulation was at fault for the collapse of credit markets, some believe that too much regulation was at fault, and some believe that there were no regulation issues and we were just unlucky.

Those blaming government will say:

• given past government bailouts, financial institutions didn't face the full risk of their actions, as the risk was spread across everyone in society "“ leading to excessive risk taking.

Those blaming the financial sector will say:

• people in the financial sector were in a position of power where they could shift risk from their own actions onto other individuals "“ leading to excessive risk taking.

Those blaming no-one will say:

• there are good times and bad times, we just had some bad luck "“ there was no excessive risk taking.

In the first two cases, there was some setting which distorted or controlled individuals' choices, implying that what occurred wasn't the best choice. In the last case there wasn't any issue, society was just unfortunate.

What this indicates is that, even following something as monumental as the credit crisis, it is unclear whether it was private or public coercion that made matters worse "“ or if matters actually could have been any better than they appeared to be. But it does tell us that any regulation should be based on the idea of avoiding coercion either from the private or the public sector.

For example, during the current crisis there were suggestions to limits to bonuses in the financial sector. However, such a policy does not pass our smell test of coercion "“ as the provision of such a bonus is a voluntary act. Instead of attacking the act of giving bonuses we should be asking what mechanisms have led to "too much" risk taking, and how we can ensure that people face the full cost of the risk they take on.

Another such suggestion was that the government could help to co-ordinate transparency in the accounts for different financial institutions, thereby clarifying the risk of different investments. This type of policy does pass our test of coercion, as its sole purpose is to increase the accessibility of information for people instead of controlling their choices. As a result, such policies appear deserving of a closer look.

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* Infometrics is an economic information and forecasting company based in Wellington. To find out more, see its website here. This piece first appeared in the Dominion Post on September 26, 2009.

* Matthew Nolan also edits economics blog 'The Visible Hand in Economics' at www.tvhe.co.nz.