5 Simple Economic Reasons that the Free Market Cannot Work
June 5th, 2008 by Kavan WolfeA prolific argument in society surrounds the issue of whether, and to what extent, to regulate the free market. Generally, right-wingers claim that a free market economy is good because it leads to a fair distribution of wealth and resources. Left wingers are for regulation, claiming it is necessary to even out market ups and downs, and to protect the disadvantaged. The mainstream media treats this argument as a matter of opinion, with both sides having good arguments. But it’s not.
Whether an unregulated or barely-regulated free market is a sound basis for the economy is not a matter of opinion! It is an empirical question for which the balance of evidence weighs heavily on the free-market-is-a-bad-idea side.
Here are 5 fundamental reasons why a free market economy does not lead to a fair distribution of wealth and resources.
1. Imperfect Competition
Free market economics assumes “perfect competition,” a technical way of saying that no single firm or person is sufficiently powerful to influence prices. Monopolies, oligopolies and cartels, all demonstrate that perfect competition is obviously a myth. Anti-competitive behaviors also undermine competition. For instance, when the telecom companies erect barriers to entry (like locking your cell phone) to prevent competitors from gaining ground. As another example, when the six largest tobacco companies conspired to “to preserve and expand the market for cigarettes and to maximize the Cigarette Companies’ profits”, they undermined competition between smoking and other activities, that, you know, don’t kill you. As a third example, intellectual property laws, especially the inane US patent system and the more inane copyright legislation undermine competition and innovation. All of these things mean that competition is far from perfect, and this, by itself, refutes the whole free-market hypothesis.
2. Problems with Bidding
For the market to efficiently distribute wealth and resources, everyone has to be able to “bid,” that is, offer money for goods and services, or offer their good and services (including their labour) for money. If everyone can bid as they choose, environmentally-concerned individuals can offer to pay more for environmentally friendly goods. In this way, the market will reflect the concerns of all people. The only problem is, this is bullshit. The ability of children to bid is seriously limited, and people who haven’t been born yet obviously can’t bid. Thus, future generations are subject to the despotic hegemony of the present. In a hundred years, when the world’s gone to shit from today’s environmentally destructive actions, our progeny can’t exactly go back in time and fund the development of clean energy, now can they?
3. The Price of People
Since everything in the free market works on money, a monetary value must be assigned to all things, including human life. I don’t care whether economists determine that a year of human life is worth $50K or $129K, the whole concept of price-tagging life is morally reprehensible. Yet, insurance companies, hospitals and governments do it everyday. We could save thousands of lives every year by simply legislating higher safety standards in automobiles, replacing lead water pipes and removing asbestos from old buildings, but we don’t, because it costs too much. How much is your life worth?
4. The Real/Nominal Costs Divergence
Nominal cost is literally how much cash you take out of your wallet and hand over for something. The real cost of something is its out-of-pocket cost plus all the implicit and hidden costs of getting and using it. For the whole free market system to work as advertised, nominal costs and real costs must be equal. There’s just one problem: they’re not. For example, the nominal cost, to you, of driving your car down 1 km of road includes the cost of 1) the fuel burned, 2) the maintenance to your car and 3) a small amount of wear and tear on your car. In addition, the real cost includes the 4) the cost of road maintenance, 5) the cost of the air, noise, land and water pollution created by your vehicle, 6) the opportunity cost of not using the land under the road for something else, 7) the administrative cost of maintaining and policing the road, and 
a fraction of the cost of building the road in the first place. Costs 4 through 8 are paid by society. For the market to remain efficient, the tax on cars and gas would have to cover these expenses. It doesn’t. The same analysis applies to all sorts of things, including practically everything imported from China, everything that creates pollution, everything that uses a limited resource, and everything that relies on society’s infrastructure.
5. Socialists are Happier
If free market economics was really the best basis for a national economy, then wouldn’t you expect citizens of free markets to be happier than, say, citizens of highly-regulated socialist economies? You would right? Too bad it’s the other way around.
Bonus: Calling it “free” doesn’t make it good.
The right-wingers have a huge advantage in this argument: the misnomer “free” market. People have been brainwashed to believe that freedom is the very definition of good and therefore anything that inhibits freedom is bad. This is, of course, absurd. The freedom to defer the cost of your actions onto society is not good. The freedom to have slaves is not good. The freedom to start an unjust, hopeless war and thereby murder thousands of your own soldiers is NOT GOOD. Freedom is neither good nor bad, it depends on what one is free to do.
Conclusion
Any one of the above reasons is grounds to refute the argument for deregulation. Yet the incompetent, defunct mainstream media continually fails to point out any of these basic truths.
June 5th, 2008 at 6:29 pm
When the market talks about about human life they rarely ever talk about the human them self but rather the skills that human has to offer that you can put the price tag on. I do find it strange that a man who talk BS all the time makes more money than a man who labors to build roads, homes and even grow food
June 6th, 2008 at 12:18 am
Loved the article. I have just one addition to your first aspect, just to make it more clear:
The anti-competitive tendencies are not just “bad apples”, it is actually the goal of every player in the market, because that means that you win. Wanting to destroy all your competitors and milk as much money as you can from the market is not just something that some low-life scum does, it’s the goal.
Just as a defense against free-market people claiming that cartels are only formed by a few bad people.
June 6th, 2008 at 1:01 am
You don’t know what the word “empirical” means, do yo?
June 6th, 2008 at 2:34 am
Socialist are happier? Did you read the entire article you linked to? I quote “Capitalism, meanwhile, fared quite well. Free-market systems are sometimes blamed for producing unhappiness due to insecurity and competition, but the U.S. was No. 23 and all the top-ranking European countries are firmly capitalist—albeit of a social-democratic flavor.”
I know free markets are not perfect but having the government choose the economic winners and losers would not contribute to my happieness.
P.S. There is no such thing as a free market in the world today. So we will never know if it makes for a happier existance.
June 6th, 2008 at 9:31 am
@ Zander, good point, but who is the man who talks BS all the time that makes lots of money? Bill O’Reilly maybe?
@tante, excellent addition. Yes, capitalism encourages centralization of power, which then undermines the properties of capitalism
@Cayse, empirical means derived from observation (evidence) rather than just theory. Bonus: a “dictionary” is a book or online repository in which you can look up meanings of words you don’t know.
@Bill, you will find that, despite the so-so analysis in the article, all those top-ranking European countries regulate their economies more than the US does. They also have much higher income tax rates. Regulating the market is not the same as letting the government choose who wins – that’s a straw man constructed by more right-wing propaganda.
June 7th, 2008 at 1:32 pm
The beautiful thing about a “free” market is no matter how pervasive the monopoly (or how big the Goliath) all it takes is one guy with a great idea to bring it down. Imperfect competition will cease to exist as soon the dominant player in the industry becomes inefficient or some “David” comes along. The internet is doing it to the MSM. The Privatized Military Firm is doing it to the Armed Forces.
In reality a monopoly (where there is a restriction on entry to a market) has not existed in the US since Rockefeller insane vertical integration in the 19th century.
June 7th, 2008 at 5:14 pm
“In reality a monopoly (where there is a restriction on entry to a market) has not existed in the US since Rockefeller insane vertical integration in the 19th century.”
How about the pharmaceutical industry?
June 8th, 2008 at 2:02 am
@J, perhaps I wasn’t clear. The principle of “Perfect competition” means that right now, in the whole economy, no single entity can, directly or indirectly, influence prices, of anything. That isn’t true. OPEC can influence the price of oil. Zales can influence the price of diamonds. Microsoft can influence the price of operating systems. Walmart can influence the price of lots of things. To use your own example, Blackwater can influence the price of mercenaries.
Economists keep saying that, “in the long run,” we’ll see perfect competition. This is the long run. We’ve had capitalism for hundreds of years. There has never been, nor is there today, perfect competition. I’m not talking about hypothetically, in the future, I’m talking about now.
Tangent: humanity has had mercenaries for thousands of years. Machiavelli discussed the best uses of mercs vs. government soldiers. Pretending that “privatized military” is somehow new and will change the military landscape forever is historically myopic.
June 10th, 2008 at 10:21 pm
@ H,
“How about the pharmaceutical industry?” Who monopolizes that? Pfizer, Bayer, or GlaxoSmithKline?
@Kavan,
You are referring to perfect price competition. Perfect competition (period) is not a necessary precondition of a functioning free market.
“The ability to lower the costs of production is the base of price competition. It enables an efficient producer who lowers his prices, to gain most of the new customers in his field; his lower costs become the source of additional profits, the reinvestment of which enables him to expand his capacity…Thus price competition, under capitalism, is the result of a contest of efficiency, competence, ability.” http://mises.org/story/1988
Perfect competition is static and not desirable to free market proponents.
June 11th, 2008 at 12:07 pm
@J, actually Pfizer, Bayer, etc. cooperate to control big pharma, as in through their intellectual property lobby.
Depends what you mean by “functioning.” You can create a free market just by repealing all economic legislation, and it will “function” in the sense that goods will be bought and sold. However, for the market to lead to a *fair distribution of wealth,* we must have perfect competition. It would take a whole book to explain why this is the case, but the short answer is, if a large powerful company is threatened by a small company that has lowered the price of some good, the large company can run the small company out of business (GM’s strategy), or buy it (Microsoft’s strategy).
Perfect competition is not desirable to free market proponents because it limits their abilities to become absurdly, and unjustly, wealthy.
June 12th, 2008 at 11:01 am
The cooperation you refer to is the “iron triangle” of all industries. It is when government (in this case the FDA) restricts access to the market–lobbyists from the industry (in this case the intellectual property lobbyists of the big pharmaceutical co.) are “cooperating” with government to limit competition. Ask any Chiro or “unorthodox” health profession what they think of big health business and they will invariably find fault with the government (can’t sell supplements, unnecessary licensing procedures, ad nausem).
Perfect competition is not desirable to some free market propopents because it is utopic. Prices change with differing needs and wants. Why enforce static prices (and therefore goods) on a dynamic and changing populace?
Construing “fair” into a condition of human nature is sophistry. Why is being wealthy unjust?
June 12th, 2008 at 6:01 pm
@j
You’re missing a lot of economic fundamentals here. Perfect competition means the consumer is not being screwed. The rising price of gas, for instance, has nothing to do with government interference, and everything to do with big oil cooperating to reduce supply and squash innovations that improve fuel efficiency. Because these companies have grown so large and powerful, they can manipulate the market. Perfect competition does not mean prices are static, it means they reflect the real value of goods.
Being wealthy is not unjust. Becoming wealthy by screwing the consumer, as opposed to by innovating, is unjust in the economic sense (I’m not talking about social justice). If you create a more efficient way of, say creating electricity, resources should accrue to you. However, if you use your power and influence to squash innovations in efficiency to maintain your incumbent position, and resources accrue to you, this is unjust. Perfect competition is desirable because this doesn’t happen. My thesis is that with or without government interference, the free market will not lead to this desirable outcome, for the reasons discussed above.
June 13th, 2008 at 6:21 pm
I am missing economic fundamentals? Do you mean real value or nominal value? Or do you need a refresher of the fundamentals…
The rising price of gas has everything to do with government interference and public opinion. Ask any American if they’d like a refinery in their county–short answer: hell no. Meanwhile China drills off the shores of Florida…
Congress creates a deficit, the Federal Responds and prints more money—->the dollar value goes down. Thus the price of gas goes up. Then to reduce dependence “gas taxes” are created to deter domestic consumption. And again gas prices go up.
Rising gas prices are the unintended consequence of foreign invasion, poor Iran policy, inflation, and energy regulations/gas taxes (among many other factors). The oil companies have every incentive to increase supply, not shrink it. The ethics of oil elite may be debatable; but the “screw the consumer” attitude is hardly a profitable.
Without government intervention, the free market leads to desirable outcomes. Squashing innovation only occurs when the law is against “innovation” as is the case today…
June 13th, 2008 at 6:51 pm
Your blog is called “the War on Bullshit”. I see a heck of a lot of bullshit and very little war!
To start: the idea of “perfect competition” is a ridiculous straw man invented by socialists to have something to bash away at; it absolutely is not and has never been an element of free market economics. (In fact, “perfect competition” is a misnomer anyway; it refers to a state in which no competition is possible at all)
June 13th, 2008 at 7:35 pm
>1. Imperfect Competition
Cartels are inherently unstable. The members constantly cheat another, cartels fall apart, and upstarts undercut spring up and undercut the cartels. And the “monopoly” brush is inappropriately applied all the time, e.g. Microsoft Windows is called a “monopoly” despite multiple alternative computer OS’s existing. And how can draconian US intellectual property laws be blamed on the free market??
>2. Problems with Bidding
“In a hundred years, when the world’s gone to shit”
So not only can you predict the weather 100 years from now, you think you can control it to? Can you also control Jupiter, Titan and Mars’ current global warming? If you could control the temperature, would you rather have it colder or hotter? Perhaps you would have the government expand subsidies of ethanol production, which are encouraging expanded agricultural territory and helping to destroy the worlds’ forest?
>3. The Price of People
>a monetary value must be assigned to all things, including human life.
Yes, if my loved one gets brutally run down by a car, then I think I deserve to receive damages of a particular value. What’s your point?
>4. The Real/Nominal Costs Divergence
When I buy a car, I take into account the cost of gas, maintenance, safety risks, etc. Ever hear of Consumer Report? Notice SUV’s aren’t selling well now?
>5. Socialists are Happier
The article claims US is a free market economy? Is that really true? What makes us free? The freedom to not be able to grow the plants we want? The freedom to have capital confiscated and turned into devices that blow themselves up? The freedom to have the Federal Reserve counterfeit arbitrary amounts of money out of thin air?
June 13th, 2008 at 7:39 pm
>removing asbestos from old buildings, but we don’t, because it costs too much. How much is your life worth?
It’s not worth enough to check for abestos or hire an abestos abatement company, apparently. That’s a free choice I make. I also don’t wear a hardhat to protect against falling meteors. Another free choice.
Also, if I see property and suspect or am told of the presence of abestos, I am less inclined to purchase that property. Others consumers will think like me. The price of that property will go down. This is a free market signal for them to fix their property, or not build that kind of property in the first place.
June 13th, 2008 at 8:18 pm
>4. The Real/Nominal Costs Divergence
In a free market, disaster-prone areas would have high insurance costs, low property values, and people would be less likely to build and live there, knowing the real costs. But when the government intervenes and bails out disaster-struck areas, it hides the real cost and wastes money by motiviating people to live in disaster-prone areas. The government encourages inefficient placement of real estate. Insurance costs are lessened because everyone knows the big government will be there to bail you out. In this example, the free market works better than statism.
June 14th, 2008 at 12:14 am
Well, you can bullshit all you want, freedom has no price, and you’ll have some hard time trying to enslave others “for their own good”. That including me. I don’t usually let parasites like you dictacte my life because “they know better”.
So does free market work or not? That’s not the point. But if you really want an answer, think harder: http://mises.org/literature.aspx
June 14th, 2008 at 2:11 am
“5. Socialists are Happier”
Convincing
June 14th, 2008 at 9:58 am
>a year of human life is worth $50K or $129K
Aboo ahoo ahoo… So you would expect an insurance company to spend $1 million on a treatment that will delay someones death by a day? Ever hear of pragmatism? Calculation is the only fair way to allocate scarce resources. Do you think a socialist medical plan will not also assign a price to human life and calculate based on it? The difference is that in socialism prices aren’t determined by the free market and inevitably lead to inefficient allocation of resources, i.e waste.
>The freedom to defer the cost of your actions onto society is not good.
Agreed. If I dump piles of garbage into a river I am at risk of civil lawsuits and possibly have trespassed on someone else’s property.
>The freedom to have slaves is not good.
Agreed. It violates the freedoms of the would-be slaves.
>The freedom to start an unjust, hopeless war and thereby murder thousands of your own soldiers is NOT GOOD.
Agreed. But the free market doesn’t do this. Governments do this.
June 14th, 2008 at 10:12 am
>The rising price of gas…has nothing to do with government interference
So the Federal Reserve’s counterfeiting and growing the M3 money supply by 16% per annum, flooding the country with money, has nothing to do with the drop in dollar and corresponding rise in price of oil? Oh. Thanks for clearing that up.
>everything to do with big oil cooperating to reduce supply and squash innovations that improve fuel efficiency.
Big Oil does not force the government to subsidize ethanol production. Big Oil does not prohibit itself from drilling in Anwar or building refineries. Governments do that.
>Perfect competition … means they [prices] reflect the real value of goods.
The “real value” of a good is a completely nonsensical concept. A man stranded in the desert will pay much more for a cup of water than for a diamond. Value is entirely subjective and depends on the observer. Goods do not have “real values”.
>Becoming wealthy by screwing the consumer… is unjust
Um… who is screwing you? Maybe you should stop giving them your money?
>if you use your power and influence to squash innovations… this is unjust.
I thought Patents were the primary club used to squash innovation.
June 14th, 2008 at 10:21 am
BTW, part of the rise in the price of oil is due to the fact that production is peaking while demand continues to rise. Essentially the world is running out of oil. Fortunately, the speculators are performing a beneficial function. They are helping to boost the price. Instead of people being unaware and using oil normally at a low price - only to have it viciously rise later, the prices are “smoothed out” over time which means that the price is high now, people will start using less of it now and stop buying SUV’s, and in the future it will still be possible to purchase oil at a reasonable price. The speculators are working to speed things toward an equillibrium. This is the free market at work.
Of course, if the government allowed us access the oil in our own territory, that would be very helpful. But that’s not the case. The free market isn’t being allowed to operate in this case.
June 14th, 2008 at 10:42 am
>The anti-competitive tendencies are not just “bad apples”, it is actually the goal of every player in the market, because that means that you win.
Having a monopoly is not necessarily “winning”. It can spell your doom. Suppose I run a computer company and sell an operating system, mine is called “Doors”. My suboordinate who runs the “media player” division wants a budget of $1 million to make improvements to the media player. Are the improvements worth that much? Looking at the market, I see that I’ve wiped out all the competing creators of media player programs. The free market now offers no similar product and no way of determining a reasonable price my media player or for improvements for it. I’m basically blind and am just guessing at this point. With a free market, I’d be able to have outside companies bid for the work, and help me at least establish a fair price, and I might hire them to save money.
The point is that a sufficiently dominant companies lose the ability to calculate because the free market signals that convey price information disappear. This is also a problem with socialist governments. Trying to fix correct prices for every good leads to ridiculous inefficiencies and eventual collapse.
June 14th, 2008 at 10:51 am
Actually Intel used to have a monopoly on PC chips. As expected, the prices became too high. Eventually upstarts rose up to challenge Intel - Cyrix (which went under I think) and AMD, which undercut Intel greatly for many years to establish a foothold and is now a fierce competitor.
Walmart is the most powerful company in USA, I think. There computer systems to manage transactions are more powerful than the Pentagon’s. And yet they only are 1 or 2% of GDP. And they face competition from many, many other companies (e.g. Target). Hardly something to worry about.
If Microsoft’s “monopoly” OS, Windows, costs about $200 while Linux OS is free, and yet people still buy Windows, what does that say about Windows?
June 14th, 2008 at 5:15 pm
Let me try to state this more simply:
Hypothesis: An unregulated free market will lead to a fair distribution of wealth and resources. (By fair, I mean commensurate with an individuals work, talent, innovativeness, etc.)
According to *economic theory* (not socialists), this hypothesis assumes:
1) Perfect competition
2) Everyone can bid
3) You can put a price on everything.
These assumptions do not hold, for the reasons stated above.
Therefore, we no longer have a theoretical basis for our hypothesis.
Do we have empirical evidence against the hypothesis? Yes. Good ideas get squashed (like the electric car) and governments protect big business from their own screw-ups (like Bear Sterns).
Therefore, since we have no theoretical basis for the hypothesis, and some (not all) evidence against it, we can claim that either it’s wrong altogether, or it’s not that simple.
The facts that some monopolies fail, that a plurality of factors affect gas prices, or that pragmatically speaking we can’t spend infinite amounts of money to prolong life have nothing to do with the basic argument here.
I’m not saying that a free market is good or bad, I’m saying that it does not work in the way it’s intended to, and therefore it might be wise to question it.
The possible counter evidence in this case would be evidence that ALL THREE assumptions hold or empirical evidence that the income of people and corporations reflects their work, innovativeness, etc. Everything else is just a distraction, or a restatement of the assumptions I’ve already debunked. Whether the free market leads to a fair distribution of wealth is a scientific question, not a debate topic.
June 14th, 2008 at 7:41 pm
According to *economic theory* (not socialists), this hypothesis assumes:
This is simply false. You don’t mean “according to ‘economic theory’;” you mean “according to false ‘economic theory’.” Or maybe that’s what the scare quotes are meant to represent. Either way, it’s like saying “according to ‘physics theory’ the moon orbits the Earth because he’s in love with her.” Or something equally ridiculous. That may even be what you believe; that may be what some guy who calls himself a “physicist” wrote in a book which you read. But nevertheless, that’s not what real physics says. And your idea of “economic theory” is not what real economics says.
Good ideas get squashed (like the electric car)
Squashed by whom? Electric cars never seemed like a very good idea to me, and apparently not to very many other people, either, since they don’t buy them … but the car manufacturers keep trying to sell them.
and governments protect big business from their own screw-ups (like Bear Sterns)
And this has what, precisely, to do with free markets?
[And as for your questioning “putting value on human lives” - who does that? If you go to buy a car and can buy one without airbags for $X or one with airbags for $(X+Y) and you choose the cheaper option, you’re the one putting a value on your safety. On the other hand, if you (I mean you, Kavan Wolfe, personally) have money to spend on, say, maintaining your internet connection, etc., when you could be using that money to buy food for starving Africans or whatever, what does that tell you about your valuation of human lives?]
June 16th, 2008 at 4:18 pm
@Peter, by “according to *economic theory*” I’m referring to the implicit assumptions of many theories in both macro- and microeconomics. If you want a specific example, the basic ideas of supply and demand taught in first-year economics classes, like ‘when supply is held constant, a drop in demand leads to a drop in price,’ make these assumptions.
Whether or not electric cars seemed like a good idea to you is irrelevant. Slavery seemed like a good idea to George Washington, and he was probably smarter than you are.
My point is that, in an UNREGULATED market, the government can still screw up fair distribution by bailing out companies. I’m not talking about markets with zero government interference, but you can talk about that if you wish.
As to your last comment, read the post again.
June 16th, 2008 at 10:04 pm
“My point is that, in an UNREGULATED market, the government can still screw up fair distribution by bailing out companies. I’m not talking about markets with zero government interference, but you can talk about that if you wish.”
Please change the title to “5 Simple Economic Reasons that the UNREGULATED market Cannot Work.” The term free market presupposes zero government interference. I figured from your first reply that we were talking about two different things…*cough* straw man *cough*…
June 17th, 2008 at 12:44 pm
~”good inventions like electric cars get squashed”
good inventions don’t always have a good cost. if we ran around using a completely regulated system, like socialism or fascism, making unprofitable “good” inventions, eventually we’d have to look to the black market for illegally imported bread, finding all the arable land being used for greater production of “good” inventions.
pricing and profit tells us what individuals want - they determine what is “good”. free choice often tends to choose good over bad.
June 17th, 2008 at 12:45 pm
btw, this article is a f’in joke. stick to art.
June 17th, 2008 at 9:59 pm
“Good ideas get squashed (like the electric car)
Squashed by whom? Electric cars never seemed like a very good idea to me, and apparently not to very many other people, either, since they don’t buy them … but the car manufacturers keep trying to sell them.”
In fact, the electric cars manufactured by GM were never offered for sale, they were leased in limited numbers, mostly to celebrities in California, many of whom found them quite functional. At the end of the lease, they were taken back by GM, who would not sell them to the lessees even though many of them wanted to buy them, and they were all scrapped in the desert. There is a documentary on this by PBS, see http://www.pbs.org/now/shows/223/electric-car-timeline.html.
Incidentally, I agree with bob, this article is a joke, we have no historical free market to use as an example. There are many barriers to competition imposed by government, including expensive licensing, ridiculous levels of regulation in many industries, and many forms of government intervention in the market at all levels. Intervention has kept gas prices artificially LOW for decades, do some real homework. You should change the title of your website to “The war OF bullshit”
June 18th, 2008 at 12:29 am
@J,
A free market is one in which buyers and sellers determine prices without coercrion. If the government buys and sells, but does not regulate, the market is simulteously “free” and affected by government.
@bob,
Sorry, but I have no idea what that has to do with my rebuttal of the hypothesis that a free market will lead to fair distribution of wealth by undermining the assumptions of the mathematical models that support said hypothesis. The electric car was squashable because GM had the ability to control, in some part, the market, which was just an example to show that we don’t have perfect competition.
“this article is a f’in joke” - nice counter argument. That’s almost as good as, “Oh Yeah?”
@Marc, 1) I’m well aware that various governments have suppressed oil prices. 2) my thesis is about the economic models of free markets, not historical free markets, 3) implying that I’m using bullshit rather than fighting it was not witty the first time someone said it, nor is it witty now. This post questions the assumptions of economic theories. What would you prefer, arguing about the relative importance of flag pins and garrulous preachers?
June 18th, 2008 at 8:13 am
@”my thesis is about the economic models of free markets, not historical free markets”
Well you’re really complaining about the economic models of highly regulated markets, which is what we have right now. This economy is regulated to the extreme- the very existence of the Federal Reserve bank is proof of that.
The economic theories you are using also are Keynesian- which is not a free-market model in reality.
June 18th, 2008 at 10:12 am
1-couldn’t resist the BS line.
2-”For instance, when the telecom companies erect barriers to entry (like locking your cell phone) to prevent competitors from gaining ground”
This is not a good example, companies are protecting an investment, as they usually give you the hardware free, or very cheap, below their cost for the phone, and locking it insures that you use the “free” phone to purchase their services. Not all telecom companies lock their phones, anyway.
3-”As a third example, intellectual property laws, especially the inane US patent system and the more inane copyright legislation undermine competition and innovation” Although I agree with this point, I take it as a reason why free markets ARE desirable, not that they “cannot work”. I miss your logic, it seems backwards. It is just a symptom of more government intervention.
What you seem to be saying is that free markets cannot work in our current economic system, which is NOT a free market, as S points out. Government intervention in the market has been going on for many decades. The monopolies, oligopolies and cartels you lament are NOT the result of a free market, but the result of companies with power and influence who have, over the years, influenced government into regulating them into a position of even greater power by erecting barriers to new competitors.
Freedom is something individuals should possess, not governments. With that freedom comes responsibilities, such as not polluting the property of others, not shooting at those whose beliefs are different than yours, etc.
June 18th, 2008 at 10:23 am
“This post questions the assumptions of economic theories.”
I have never bought the assumptions of economic theories, they leave out WAY too many variables. (I have an engineering background, and the mathematics of economic theories rarely adds up)
June 19th, 2008 at 9:27 am
@S, well please educate us then. Please tell me the name of an economic model that predicts fair distribution of wealth without assuming that everyone can bid.
@Marc, yes, I agree that companies erect barriers to entry to protect their investments. My point is not that this is illogical, but that it alters prices. If a company can alter prices, the assumption of perfect competition is undermined. In a totally unregulated economy, nothing would stop telecoms from doing this, and the incentives are obvious, so it seems that perfect competition would be violated there too.
You may have a point about the IP legislation - it depends on how you define “free market.” I am assuming that a free market economy does not negate the presence of criminal law, i.e., the government still prosecutes murders, rapists, thieves, etc. The main reason the IP laws are “insane” is that they take something that should be tort law and make it criminal. Since it’s criminal, I’m assuming that an idealized free market would still have it. If you make the contrary assumption that a free market economy is altogether lawless, this example does not apply. However, my point about imperfect competition does apply, because the basic idea is that if there are no regulations to keep competitors from cooperating, they will, thus creating pseudo-monopolies that can basically set prices. I don’t agree that cartels require help from the government to stay afloat, especially in areas where the costs of entry are high. A rich, powerful cartel in, say the diamonds industry, can easily squash, buyout or undercut new entrants.
I will speak to freedom in another post.
June 19th, 2008 at 10:13 am
@Kavan
The free-market doesn’t mean you’re going to have a “fair distribution of wealth”. There are so many factors in an economy that its really impossible- especially since not everyone views the same things as valuable. You also continue to mention “perfect competition”- , that model is very unrealistic and not representative of what free-market advocates talk about. Austrian economics/Ludwig Von Mises/Rothbard is more in the tune of the type of economics that proponents of the free-market adhere to.
Your concerns about Monopolies are understandable- but the theory of a monopoly truly being possible without some type of government intervention has been thoroughly discussed and refuted. Dominick Armentano’s “Anti-trust: The case for repeal”, discusses in more detail the false worries of market monopolies and government using anti-trust legislation to make things WORSE for the consumer.
June 20th, 2008 at 4:42 am
@Peter, by “according to *economic theory*” I’m referring to the implicit assumptions of many theories in both macro- and microeconomics. If you want a specific example, the basic ideas of supply and demand taught in first-year economics classes, like ‘when supply is held constant, a drop in demand leads to a drop in price,’ make these assumptions.
And I’m saying “no they don’t”.
Whether or not electric cars seemed like a good idea to you is irrelevant.
Sure. But the fact that you think them a good idea is also irrelevant. Since you were holding up your opinion as the basis of your belief that there’s something wrong with the state of economics because electric cars aren’t produced, my opinion is at least equally good as a refutation.
Slavery seemed like a good idea to George Washington, and he was probably smarter than you are.
There’s no way to know, but the Wisdom of the Internet puts GW’s IQ at somewhere in the 118-125 range, so I guess not.
A free market is one in which buyers and sellers determine prices without coercrion. If the government buys and sells, but does not regulate, the market is simulteously “free” and affected by government.
But where does the government get the money and/or goods to buy and sell? Only through coercion (regulation), which affects the market. (E.g., every dollar the government takes off you in taxes is a dollar you don’t use in whatever way you would have spent it if the government hadn’t taken it; or, as you say, bailing out failing companies, etc.). The government can’t do anything, can’t even exist, without affecting the market. A “free market” can only exist in the absence of government. (The minarchist idea of a government that only protects rights wouldn’t negate a free market, but it’s impossibility - for an entity to be anything we would recognize as “government” it must necessarily infringe on rights, and therefore can’t be a protector of rights; a fully voluntary “government” isn’t a “government” at all)
The main reason the IP laws are “insane” is that they take something that should be tort law and make it criminal. Since it’s criminal, I’m assuming that an idealized free market would still have it.
But the point is that it isn’t criminal. At least if you draw a distinction between legislative law and what, for want of a better term, I’ll call “natural law”. (I think we can all agree that Hitler’s treatment of the Jews, to take the canonical example, was wrong. But since he was in a position to make the law (legislation), and did, in order to say it’s wrong you have to have some concept of “law” beyond merely whatever government legislators write in their books, or how courts interpret those scribblings. That’s all I mean here) That governments make something a crime that isn’t actually a crime, is itself a crime. So no, “an idealized free market” wouldn’t (couldn’t) still have it.
If you make the contrary assumption that a free market economy is altogether lawless, this example does not apply.
On the contrary, a true free market is not lawless. Regulation of the market is lawless!
However, my point about imperfect competition does apply, because the basic idea is that if there are no regulations to keep competitors from cooperating, they will
There’s nothing wrong with people cooperating, surely? (There is, however, a “law” against what you mean - not one made by governments (governments wish they could repeal it!), but one that arises naturally out the “physics” of human action - it’s the reason socialism can’t work: the inability to calculate without prices, or to have prices without a (somewhat) free market)
A rich, powerful cartel in, say the diamonds industry, can easily squash, buyout or undercut new entrants.
I’m not sure what you mean by “squash”, but how is buying out or undercutting potential competitors a bad thing for anyone? That means lowering prices, which is precisely the effect you want from the competitors anyway, right?
June 23rd, 2008 at 10:28 pm
@S, yes, the free market doesn’t necessarily result in a fair distribution of wealth. That was the point of my post. I believe you will find that, to refute the “theory of a monopoly truly being possible without some type of government intervention” requires you to make certain assumptions. A simple example would be the Mafia. If there is no government intervention, and we have a single, powerful Mafia, they’ll just kill anyone who dares to compete with them. This is essentially what governments themselves have done through history. For thousands of years, kings were simple replaced by other kings, not by proliferations of lesser lords.
@Peter, you are entitled to your opinions, even if they are at odds with the facts. I have neither the time nor patience to point out the flaws in your arguments. Just to show that I’m not full of shit, I will address just your last point. Suppose we have a monopoly, and a small company challenges it. Suppose the monopoly undercuts the small company and runs it out of business. Temporarily, this lowers prices. Now suppose it happens again, and again. After a few times, people start to catch on that if you try to compete with the monopoly, they’ll run you out of business. Eventually they just give up trying. Unless you have a graduate degree in economics, I suggest you ask yourself why you’re so sure you’ve got this figured out. I’ve been reading economics research papers on and off for years, and I don’t pretend to have it figured out. I’m just pointing out the assumptions that keep recurring in these papers.
June 25th, 2008 at 7:20 am
>A free market is one in which buyers and sellers determine prices without
>coercrion. If the government buys and sells, but does not regulate, the market
>is simulteously “free” and affected by government.
If I don’t pay 50% of my money to the government every year, they will come and shoot me. That’s coercion, and its plenty of money to allow bureaucrats and their ignorant policies to trash the economy like they’ve have for the last few decades. They’re actually spending even more money than that through reckless borrowing. (BTW I’m a minarchist: I’d prefer a small government and a much freer market over a grotesquely obese government that’s trillions in debt.) If only the government would grant me “bank” status, then I would be allowed to pay them with money I don’t actually have.
>An unregulated free market will lead to a fair distribution of wealth and
>resources. (By fair, I mean commensurate with an individuals work, talent,
>innovativeness, etc.)
IMO that’s a tautology. From an economic point of view, “fair” and “commensurate with talent” is exactly that determined by looking at free market prices. For example, a major baseball player makes thousands of times more than a college professor. This is totally fair. The baseball player provides enjoyment to millions, while the college professor teaches maybe a hundred students.
Do you have some other way of determining “fair”??
June 26th, 2008 at 7:30 am
>The minarchist idea of a government that only protects rights wouldn’t negate a free market, but it’s impossibility - for an entity to be anything we would recognize as “government” it must necessarily infringe on rights
That’s not what minarchism is. Minarchism simply means a desire for a small government. I do want the government to violate the rights of victimizers. For example, if someone doesn’t pay their debts, the government should violate their rights and facilitate seizure of their property. If someone goes on a shooting spree, I want the government to violate their right to be unharmed. But non-vicitimizing acts like growing certain kinds of plants, smelting pennies, or having a brown lawn (http://abcnews.go.com/US/wireStory?id=3621205) shouldn’t be prosecuted as crimes.
July 6th, 2008 at 1:50 pm
@ G, If the economic prediction that an unregulated market will lead to a fair distribution of wealth is tautological, it is also irrelevant to policymaking. This is one of the great tricks of economists. If we define fair as everyone getting what they deserve, most people think this is a good idea. However,if we define “fair” as the state produced by a free-market, how do we know “fair” is desirable?