Archive for December, 2010

I can’t believe I haven’t written about this before, but here goes:

Free Market: When we think of the free market, it conjures up the classic example of an open air market where there are a near infinite number of sellers all right next to each other with similar items.  If you don’t like the price, simply buy it from the next vendor.

The problem is that almost no market on the planet works like this.

Let’s give a real world example:  The Grand Bazaar in Istanbul should be a carpet shoppers paradise.  There are an infinite number of carpet sellers all right next to each other with near infinite choice of carpets.

Its a free market right?  There is lots of competition.  The prices should be great right?  WRONG.  Almost everyone is getter ripped off.  The mark-ups are unreal.  Why?  Most of the shoppers are not savvy.  Buyers know little about carpets, and so if told a price, they think it is fair.

Unequal access to information causes unfair prices.  The seller knows they bought the carpet for 10 dollars and tries to sell it to the unsuspecting tourist for the maximum price they can get, which can be 1000+ dollars.  That is the profit motive and we expect that….but unless the buyer has adequate information about the product, the market may be “free”, but it is certainly not fair. In this case “free market” almost certainly means “free to make a bunch of profit”.

Information inequality is a huge source of profit in all kinds of industries.  When you buy a house, you know how much that house costs, and you know the fee that the real estate agent gets.  It is all disclosed at the closing.

What if you didn’t know? What if the real estate agent could negotiate any price they wanted for the house (perhaps they got it at foreclosure), and sell it to you for any price they could get you to agree to (and pocket the difference)?  My guess is there would be a lot more real estate agents as it would be EXTREMELY profitable.  They could get a foreclosure, and sell it once at full price and not work for the rest of the year.

Why can’t they do that?  Because home purchase prices are disclosed as public information.  Why?  BECAUSE IT WAS LEGISLATED THAT WAY.  Without government intervention there would be no price transparency, and so we would not be able to get fair home prices.

Back to our example of the Carpet Shops:

Ok, I’m sure you’ll grant that there isn’t any price transparency at the first shop you go to…but why not go to a different shop? If you shop at a few of them surely you will be able to determine the fair price, right?

No.  What happens is that all the hundreds of sellers know that there is no gain to any of them if the buyer knows the fair price…so they ALL quote inflated prices.  It is silent collusion.  The sellers, whether explicitly or implicitly, are all in the carpet game together and they need to preserve the market.

Collusion is illegal in the US.  There can be no fair market if the sellers all collude to keep the prices high. If the government didn’t make collusion illegal, then businesses would certainly do it even more openly than they do now. From our example we see that hundreds of sellers can collude silently without too much trouble.

Think of most industries in the US (insurance, banking, healthcare, telecom, etc).  There are only a few major players.  It is so easy for them to collude, even if it is not through secret meetings.  Industries with a few major players are never “free markets” in the sense we think of. They behave more like unregulated monopolies, which means the consumer does not benefit.  This means that the majority of the markets in which normal people deal daily behave more like monopolies than the “Free Market”.

Here is the kicker of the free market:  No business wants a free market. Not one.

Why not?  In the theoretical “Free Market” (one in which there are multiple players, information transparency, educated buyers, private property protection, a lack of collusion, etc.) consumers gain at the expense of the businesses.  For business it is a blanket loss.  In business school they taught us that those are unattractive markets, and that you shouldn’t enter them.  Let me repeat:  Markets where businesses to not able to extract abnormal profits are not good markets.

But some companies want a free market, right?  Maybe…if it is not in their core area of business.  For instance, Google might want Net Neutrality (unfettered access to anything put on the Internet) because the more people are on the Internet, the more money they can make.  Their potential market expands through net neutrality.  Let me state it more plainly:  For Google to make money off of you, you have to have internet access (otherwise you can’t use their services).  Not only does Google want Net Neutrality, I’m sure they would like everyone to have free internet.

What about the companies selling internet access?  I assure you they do not want everyone to have free internet.  So one company’s “free market” (Google’s) comes at the expense of another company’s profitable market (Internet Service Providers).

“Free Market”.  It seems that term means that businesses are free to do what they want, even at the expense of the customer.  The Free Market is largely fictional in practice and relative to the company saying the market is free.

When a company advocates the free market, they mean they want the market open for them….which means it isn’t open for others.

To summarize:  A “free market” requires all kinds of prerequisites to make it work in the way that benefits the consumer (i.e. us).


The question is: Where do these prerequisites come from?

There is only one answer to that question:  The government.

The “market” is not self-regulating, nor does it protect the consumer.  The Market is simply the field on which businesses play.  They want that field as uneven as possible so they can make a profit.  (As a reminder profit always comes from somewhere.  It comes from us.)

The government counterbalance is to rig the playing field so that businesses have to compete against each other, which benefits us.

It is not in business’s best interest to compete. Their whole market loses and the customer gains.  To go back to the carpet sellers in Istanbul: If the government mandated that all carpet sellers must include the original purchase price on the carpet before selling it so we could determine a fair price (like homes, where purchase prices are public), then in the end there would still be carpets for us to buy (we would lose nothing), but the profit margin for each seller would be dramatically less (they would lose a lot).

The carpet sellers would never agree to lower prices on their own.  The government has to force them to do it.  If some seller came in and priced fairly, the other sellers would collude to make sure he loses the lease on his storefront or in a completely unregulated situation would simply threaten force against him.

Why do we need the government though? Why can’t WE, the consumers, demand that companies self-regulate? Why can’t we vote with our dollars and just not buy?

I think the primary one is that businesses are organized.  Consumers are not. Businesses can collude in the best interests of their market.  They are limited in number and focused on the parameters of their market.  People are living their lives.  We are not focused or organized.

Besides we have already have a mechanism for consumer advocacy…its called government.  They are the group that is focused and organized and designed to speak on our behalf.  In fact, “on our behalf” is supposed to be the only job they have.

To ask a Machiavellian question: If the counterbalance to corporate power is government power, then what should the corporations do to maximize their power?  They should buy the government.  Voilà.  That is what they are doing.

So.  What is the”Free Market”?  It is the term companies use to sound like they are acting in our best interest when they are trying to bend the rules of the market in their favor.

Ouch.  That’s cynical.

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I will keep Wikileaks separate from Julian Assange, since I’m more  interested in the concept of Wikileaks than the person representing it.  I will also keep the specific content of the cables largely out of the discussion, since that is not central to my question either (btw, I didn’t find anything that damaging in what was released.  Secretary of Defense Robert Gates mirrors my sentiments).

Is it OK to publish secret/private information, even if it is potentially damaging?

Yes.  In fact, isn’t that what freedom of the press is all about?  I know that is what the founding fathers had in mind when they drafted the 1st amendment (not the 2nd or 3rd, the 1st): To allow We the People to hold those in power accountable for their actions.

I understand that leaking the information may have been criminal (Bradley Manning is being indicted), but obviously publishing previously leaked information is not.  In fact, Joe Lieberman is trying to make up a law to make it illegal.

I suppose politicians want freedom, openness, and transparency….as long as they themselves don’t have to abide by the same principles.

Since 9/11 and the PATRIOT act, the ability for the government to eavesdrop on our comings and goings has been greatly broadened (not that it wasn’t sufficient before I am sure).  I hear the argument all the time from politicians that if you have done nothing wrong you have nothing to worry about.

Touché Wikileaks

If the government has done nothing wrong, then why are they worried about leaking their internal memos?

The government argues that a) “diplomacy” is messy and requires secrecy, and b) that leaks of this kind may cause harm to those named in the documents.

A) Ok.  Diplomacy is messy.  I agree.  I also agree that parties may desire secrecy.  But in a country with free press that does not mean that they will GET secrecy; it just means they want it.  I see it as an operational failure….you couldn’t keep your information secret. Don’t shoot the messenger who has not broken any laws.

B) Leaks of this kind may cause harm to those named in the documents.  Hmm….they might.  However, there is not one documented case of this ever happening due to a Wikileak.  Not one.  To shut something down and put people in jail because it MIGHT cause harm…that is as bull headed as the idea of pre-emptive war (another puzzling policy).  You can’t attack someone because they might one day have the capability to attack you….that is a recipe for eternal war. To censor information that might be harmful is a recipe for blanket censorship.

Additionally, suppose there were some unfortunate harm caused by the publication of the cables? That is a thorny issue; however, not one that, in a blanket, fashion says publishing the material was bad.  If we’d had a Wikileak that proved the intelligence used to justify the invasion of Iraq was faulty, then that would’ve caused harm to those concocting the scheme, but it would have saved harm to many others.  Remember, no one has accused Wikileaks of publishing FALSE information, just inconvenient information.  The truth may occasionally cause harm; however, history teaches us that the truth serves the average person far better than government power and secrecy. It is hard to argue with that.

Finally, except in scale, how is this much different than other instances of investigative journalism with potentially harmful impact….like say Watergate?

Didn’t the Washington Post publish harmful information about the politics of our nation?  A president got impeached and Bob Woodward got a Pulitzer Prize.  Fast forward 27 years: no one is impeached or harmed and they want to shut down Wikileaks and put Julian Assange in jail (can you get a Pulitzer Prize from jail?).  My how times have changed.

I think the media is at least a little bit mad that they aren’t doing journalism anymore and some no name computer hacker from Australia is doing it for them.

—- Again, if the government is not doing anything wrong, then why do they care if their internal correspondence is made public?  It would simply be boring drivel (which it largely is this time, though that might not always be the case).

—- If they are doing something wrong, then Wikileaks is performing a journalistic service.


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