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Free market

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The free market is the idea that the economy works best when the government interferes as little as possible. This concept was first espoused and explained by economist Adam Smith, based on Enlightenment ideals posited by classical liberals in the 18th and 19th centuries, but is more embraced by conservatives and doctrinaire libertarians in the 20th and 21st.

"Free market fundamentalism" is the term sometimes given to a strain of libertarianism that proposes that government can do no right when it comes to commerce, and that market pressure will weed out any bad products or corrupt businesses (the term used is laissez-faire, translating from the French approximately as "let it happen"). Liberals have largely abandoned laissez-faire capitalism as a dead end, believing the idea to be too easily abused by the amoral and dishonest.

It's worth noting that Adam Smith's works, like other texts invoked by fundamentalists, are rarely read in their entirety by those who expound the doctrine they think it outlines. Smith did see a place for governmental regulation in a healthy marketplace. For example, without government regulation, companies such as British Airways would have had free rein to collude with their rivals and fix prices when setting their fuel surcharges,[1] and Microsoft could continue its anti-competitive practices in Europe, thereby allowing it to maintain artificially high prices for its Office products.[2] Or, in the case of the South Korean shipping industry, you don't want the market to kill off all its customers.[3]

The Pros[edit]

A rising tide lifts all boats.
—John F. Kennedy[4]

In a true free market, the price of goods and services will reach a natural equilibrium with no bureaucracy needed. A truly free market, however, is virtually unattainable in a modern economy. To enable business able to conduct their day to day commerce, laws are required to maintain competition.[5] Another case where intervention is required is with fraud. Companies can not misstate the ingredients in their products by omission and must adequately label their products. No law requires people understand what the ingredients are so we have people worried about dihydrogen monoxide poisoning. In cases where fraud is more financial than edible, the Government requires public accountants are trained by professional bodies and follow certification schemes. Without a third-party assessor, more unethical-leaning companies will hire their own auditors to sign off on their cooked books. Eroding what little trust companies have amongst themselves we've seen manifest in the real world with the 2007 Banking crisis. With a little regulation the free market can go a long way on a short leash.

If there are several competing businesses in a market based on voluntary trade, a customer can refuse to buy from a business that provides worse service or shoddier goods than the others. This acts as an incentive for companies to keep service (or at least to appear to do so). Nevertheless the quality of service is generally higher under these conditions than when a firm has a natural[6] and/or legal monopoly.

A free market puts minimal restraints on innovation: if you have a bright idea and can finance its development, or get any one of the large number of venture investors to do it for you, you can develop your bright idea without being stopped by harrumphing or political meddling from a regulatory bureaucracy. If patents (another form of government regulation) are removed, you don't even have to worry about patent trolls; however, mega-corporations will be free to copy your idea and out-compete you.

Throughout history, the existence of free markets, or mostly free markets, has coincided with arguably the most productive moments in human history. Examples of civilizations that define this trend: the Roman Republic, the enlightenment-era city states, the British Empire, the American Republic, etc. Just ignore coincidently these were far from utopia and have histories of colonialism while having your lunch as ideas can work in the abstract but the reality is far messier for how they play out.[7]

And Cons[edit]

So if you're gonna use a phrase like "a rising tide will lift all boats", you need to add something to that phrase. Something like, "a rising tide will lift all boats, which is great as long as you have a boat!!"
—Nish Kumar, The Now Show, BBC Radio 4, 17 Oct 2014

Labouring is included in the idea of a free market; however, in the present day, it is much easier to compete if you are offering jobs rather than seeking them. This oversight led to the formation of trade unions.

There is an on-going problem known in economics as the "business cycle," where the economy expands too rapidly (the boom) and finds it cannot sell enough goods to pay to maintain its expansion then goes into recession. Which is where business contract in size and starts laying off workers (the bust) causing a lot of unhappiness as people don't like being unemployed. John Maynard Keynes proposed that governments could take money out in a boom and put money back in a recession. While definitely not a dirty red with a sweet moustache as advocates of other economic schools see him as, his proposals were accepted in his lifetime and considered responsible for whats called the Golden Age of Capitalism.[8] Other economists from less reputable schools consider his proposal for stimulating the economy in a bust as a dangerously authoritarian idea and should be disregarded in favor of doing absolutely nothing; because eventually it will all sort itself out. Very few societies like to let economists use them as a laboratory to test their theories [9] Despite empirical difficulties, Keyes' detracters are cocksure that modern economic instability shows that Keynesianism failed to accomplish what it sets out to do: correct the boom-bust cycle.

Also, in many cases the assumption that a free market means free competition does not hold up. There are many industries that are recognized as "natural monopolies" — public utilities, which have large fixed costs that prevent anyone short of an oil baron from entering the market, would be an example — in which an unrestrained market will lead to or maintain a monopoly for one supplier. Hence why utilities are often nationalized or run as collectives owned by the workers in the monopoly. Even an industry that is not a natural monopoly may be dominated by a cartel or oligopoly that make competition impossible (see the Gilded Age for the most well-known example ) and hold the consumer by the balls, if not permanently then at least for a few years; more creative monopolists may attempt to conceal this with the use of multiple brand names for products produced by the same company. Unfortunately, businesses don't like competition; they'd prefer to drive their rivals out in order to eat up as much profit as possible.

Ironically, maintaining a maximally free market (yet without monopolism and the abuses that follow from it) would require one of three things:

"Market failure"[edit]

When a market does not produce the most efficient possible outcome, this is called "market failure" in economics. There are several reasons as to why this may happen that are even acknowledged by most (though not all) libertarian leaning economists who know their shit.

The most often acknowledged causes of market failure boil down to either monopolies or external effects.

Monopolies[edit]

There are various ways in which monopolies arise and some even argue that completely unregulated free markets naturally tend towards monopolies, pointing to the Gilded Age (which gave us the very term "antitrust") as an example. Monopolies, wherever they exist and are not subject to regulation will set prices at a higher level than would ensue in maximum competition. Similarly, monopolies tend to be less willing to innovate or invest as there are few outside forces making them do it.

Classic examples for monopolies besides those arising from one company buying out or outlasting competition are the so-called "natural" monopolies. A classic "natural" monopoly would be a bridge - who ever wants to cross the river has to use the bridge. There is little reason in building another bridge and all the owner of the bridge has to do to keep his monopoly is to not charge an amount that would encourage a competitor to build another bridge. Analogous situations occur with other public infrastructure like power lines or railways. This is one of the reasons why such infrastructure is publicly owned and/or tightly regulated in most of the world.

Externalities[edit]

Another problem with completely unregulated free markets that most economists admit exists are so called "externalities", i.e. effects of economic activity that are not paid for by those that decide on said activities. While externalities can be positive and negative, negative externalities are discussed much more often. Let's give some examples.

If a person lives in an old house, the retention of the house and embellishing its facade creates a positive externality - people who pass by that house are delighted by its facade, more tourists come to visit and so on. The owner of the house may have some small benefit from that beauty himself, but mostly he is forced to bear the costs and will not benefit much from the external effects he generates. Thus he may be tempted to let the facade fall into disrepair or to replace an old and aesthetically pleasing house with a newer, cheaper house. In many cities local zoning ordinances or heritage protection laws partially ensure that owners provide those positive externalities, thereby regulating the free market.

On the other hand, negative externalities are more often discussed as there are many more immediately obvious examples. Driving a car for example creates noise, air pollution and endangers pedestrians, costs which drivers don't or only partially bear. In an unregulated free market, people will thus drive more cars than would be optimal in a perfectly rationally planed and organized society. Another example is environmental pollution in general. Unless some entity regulates, businesses and individuals will pollute more than would be optimal.

There are some economists who argue for "market based" solutions to externalities and that a perfectly free market could find a solution where people make contracts regarding externalities, but overall most economists agree that some sort of state intervention is needed to promote activities that create positive external effects and to discourage activities that create negative external effects.

Free market mythology?[edit]

The hidden hand of the market will never work without a hidden fist.
Thomas L. FriedmanWikipedia's W.svg[10]

While there's mountains of historical evidence that free-marketeers can point to to show the successes of the free market, there are many that never accept cases where the market failed. So they have to churn out piles of revisionist history and misleading statistics to cover up the times when the infallible market screwed up. With the election of Barack Obama, wingnuts needed a new set of talking points and various myths seem to have gone into overdrive lately. Usually, some bogus study or press release is cooked up by a conservative or libertarian think tank, which wingnuts like Glenn Beck or Michele Bachmann then boil down into easily digestible talking points. Here are some articles covering this bullshit:

See also[edit]

External links[edit]

References[edit]

  1. BA's price-fix fine reaches £270m, BBC News. August 1, 2007
  2. EU fines Microsoft record $1.4bn, BBC News. February 27, 2008
  3. 4 Employed by Operator of Doomed South Korean Ferry Are Arrested, The New York Times. May 6, 2014
  4. https://english.stackexchange.com/questions/230520/origin-of-a-rising-tide-lifts-all-boats
  5. Competition Law, Wikipedia provides through origins of the Sherman act, and the article on Signalling in Game Theory elaborates more on when companies choose to accommodate rather than compete with one another.
  6. Natural Monopoly, Natural Monopolies are formed entry into the market is high, once a Capitalist is set up his business his monopoly is natural as long as their would-be competitors are unable to acquire the funds for their own enterprise.
  7. East India Company, Britain wasn't the best trading partner to its former colonies.
  8. Post-WW2 economic expansion.
  9. Pinochet's Chile, for its reputation as the dismal science, not screwing up and around with economics is vital to a nation's health.
  10. http://www.nytimes.com/1999/03/28/magazine/a-manifesto-for-the-fast-world.html