Posts Tagged “free market”

Pope Francis is doing three things I’ve never seen in religion before (in my lifetime):   1) Being extremely relevant to our daily lives, 2) Potentially offending powerful people , and 3) Leading.  I’m going to focus on his comments on Capitalism because that is my area of interest.

1) Being extremely relevant to our daily lives..

The Pope isn’t just generally commenting on how “love of mammon” is bad.  He is getting specific…arguing against “trickle-down” economics as an “opinion, which has never been confirmed by the facts, and expresses a crude and naïve trust in the goodness of those wielding economic power.”  He has said, “We can no longer trust in the unseen forces and the invisible hand of the market.”  BOOM.

Also, note his reference to “confirmed by facts”.  This is also new for modern religion…the appeal to reason as opposed to faith.

In my life, religion/church is often a limited set of fairly sterile stories that you have to stretch to apply to day-to-day life.  Jesus may turn water into wine, but I don’t.  Judas may have been a betrayer; I am generally too boring to do anything like that.  I’m not saying there is no connection between Bible stories and our lives; I am saying though that you have to draw the connections.  They are not spelled out, and so are indirectly relevant most of the time.

The Pope is starting to spell some things out…lest the rich start to think Jesus would approve of their CDOs and bank bailouts.

2) Potentially offending powerful people..

The Church relies on powerful people to give it money.  The general messages of love, compassion, and morality are compatible with that.

But you start condemning the lifestyles of your patrons?  That is dicey game. No one likes to be reminded they are a hypocrite.

Also, one of our political parties is much more highly aligned with religion and usually favors the rich.  The rich don’t like to be told they are not completely awesome.

I think though the Bible is quite plain here: “And again I say unto you, It is easier for a camel to go through the eye of a needle, than for a rich man to enter into the kingdom of God.”  Matthew 19:24.

Uh…I don’t know how literal this is supposed to be or the definition of “rich” (since even the poor in the US are rich by global standards, and anyone reading this on the Internet would be rich by most any standards…that means me and you)….however, these are Jesus’s words…not some obscure verse from the Old Testament.

The treatment of the poor is very, very central to the Bible and Jesus’s teaching.  If the Pope starts calling out the rich, saying that their lifestyle is immoral, that it is sinful to make that much more than others, etc….that can change the world.

3) Leading..

Catholicism is huge; over a billion people align themselves with the Catholic Church.  The Pope is one of the single largest voices in the world.  When people say the U.S. President is the  most powerful man in the world, I have to agree in practice.  However, if the Pope chooses to lead, I would argue he has more influence.  The Pope usually isn’t considered in that light because the church rarely leads; it sticks to well worn, non-polemic topics.  Maybe we are seeing a change?

Tags: , ,

Comments 1 Comment »

I’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 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: , ,

Comments No Comments »

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.

Tags: , ,

Comments No Comments »