The free market doesn’t exist except as a rhetorical device.
Posted by: kellio in Inside My HeadI’ve talked about this before, and it is also discussed very well here.
The line of thought goes like this: “Producers competing against each other benefits us all. Free of government intervention, supply and demand sets the optimal market price. Through open and free competition, the invisible hand of the market leads to the most efficient economic outcomes.”
The offshoot of this logic is “The free market outcome is the best and natural outcome, free from interference”.
I don’t think this is true in a practical sense.
Firstly, the government creates the market. Always. Look at our economy and I’ll challenge you to find one significant instance of a market that is not HEAVILY underpinned by government. Here are some (but not even close to all) examples of the underpinnings.
Corporations: Our modern economy is run by corporations, which are government created entities. They are a legal invention. There is nothing natural or free about them.
Money: Without the government creating commonly accepted currency, I’m not sure how we’d pay for anything in our fictional free market. Companies could issue their own currency (so could I for that matter), though I’m not sure who would accept it.
Contracts and Law: The court system and contract law allows companies to interact and provides a baseline enforcement of trust. I’m not sure what kind of entrepreneurship business you’d get if there were no common contract law…because you’ll never find an instance of it. Government creates the opportunity for the market in the first place by underpinning it with the rule of law.
Copyright: The modern, technology enabled market is created in large part by intellectual property protection. This is a legal creation of the government. Name a few large companies (e.g. Apple), and you’ll find many of them are insulated from the free market by copyright protection. There is nothing natural or free about copyrights.
Employee Education: Every employer and market benefits from government/publicly educated employees. Companies don’t like to train their employees; its expensive. What if entry level employees couldn’t even read?
Roads: There is no market if people can’t get to it. I’m sure companies could build their own roads; not sure how many there would be though, or what kind of expensive pass you’d need to get on each company’s special road type that only led to their store.
Secondly, it is really hard to argue in practice against a free market that only exists in theory.
You can’t “disprove” the free market, because you’ll never find a real instance of it to argue against. Some markets are surely less regulated/governed than others, but because the government creates the conditions of the market…they are never separate and so defending the free market is like arguing over the hair color of Bigfoot: We can come up with lots of good reasons for white or brown (depending on habitat or season)…..but since there are no actual Bigfoots, we will never arrive at a conclusion.
Thirdly, thinking that the absence of interference in the market is good, is like saying that what is natural is what is good.
That isn’t true, period. Hume solved this for us long ago. Dying of cold in the winter would be quite natural if we didn’t put on a jacket (something that isn’t natural). In fact, we can owe the relative comfort of our existence, to the struggle against what is natural. We seek to be cooler in the summer, and warmer in the winter. We want abundant food when scarcity is natural. We seek to be dry when it is wet, and want water when it is dry. We want youth as we naturally age, and want to be well when we naturally fall ill. We seek order always, when disorder is naturally all around us.
Saying that we should leave the market to itself, and that by some “invisible hand” it will produce the best outcome for us goes against all evidence. Its like saying “I’m going to sit outside in the winter and expect an “invisible hand” to make me warm and comfortable.” We intervene in what is natural all the time to our benefit…why would the free market be the exception to that?
Thinking that the free market, natural outcome is the best outcome leads to some odd lines of thought (quote from Robert Reich):
“By this view, if some people aren’t paid enough to live on, the market has determined they aren’t worth enough. If others rake in billions, they must be worth it. If millions of Americans remain unemployed or their paychecks are shrinking or they work two or three part-time jobs with no idea what they’ll earn next month or next week, that’s too bad; it’s just the outcome of the market.”
To me, that sounds like we’re shirking our responsibility to ourselves. It is as if we’ve given “the market” omniscient, god-like properties. It “knows” what prices should be. It “knows” how best to allocate between capital and labor. It “knows” how many hours a week we should work. How? I look at a market and I see people.
The market is a metaphorical construct that can’t “know” anything at all in the traditional sense. People know and decide. Leaving it up to “the market” is much like leaving it up to chance…a practice which, if employed outside in the winter, will leave you frozen to death.
The bottom line is that, through government, we create the conditions of the market. We are free to change them if we don’t like the current market outcome, because we created the current market outcome in the first place.
In light of the above, I maintain that the “free market” is, in practice, a rhetorical device used by those interested in deregulating a certain sector of their market for their own benefit. If it were not for “their own benefit”, they would be arguing for continued or increased regulation (For instance car dealerships are arguing Tesla’s direct sales model is illegal.).
Tags: economics, free market, government