The Myth of the Free Market
For years now, actually dating back to Reagan’s term, the free market advocates want us to deregulate and let the free market work. Well, the deregulation hasn’t worked well recently. But the real problem is that the “free market” that’s being discussed isn’t actually a free market in the actual economic meaning.
This happens in many fields. A technical term with a precise definition is taken in a more colloquial form and misinterpreted.
Back in Economics 101, a free market was defined as a exchange of products or services where there is a number of equivalently-sized buyers and sellers. All buyers and sellers have pretty much the same amount of control over either the price or the market in general. All the products and services from the sellers are more or less equivalent as well. The market is free in the sense that it is free of control from any particular buyer or seller. But there isn’t really a market like this. The free-market advocates didn’t finish their economics courses.
Much of economics is the study of how the real world differs from this theoretical free market. Economists use this like physicists use a “friction-free world” as a theoretical case. It’s a way to consider a complex problem in stages. In fact, there are very very few places that a free market really exists in the pure form. A local garage sale or farmer’s market may be the closest thing. But even my local farmer’s market there are limitations on the sellers by the group organizing the market.
In the auto industry, there are three companies in the US that have a high degree of control over price and products. There’s no way that you personally can have as much influence in the car market as GM does. This is not a free market. You can chose your car to buy, or where to buy it, but you just are choosing between a few possible prices that are set by the company and their dealers.
Businesspeople, like all of us, want to have more control over their lives. They will over time try to take business steps to make a free market more controlled for their benefit. Over time, an industry will generally proceed from a freer market towards an oligopoly. (An industry that is largely controlled by a few dominant companies.) Reading any economic history makes that clear. Regulation by the government determines the playing field and sets the rules for what businesses can and cannot do. This regulation is to maintain the open and fluid qualities of a free market. However, when business and government cooperate in a bad way, regulation becomes another way to control markets for those businesses.
There are various other ways besides just size or government regulation that can cause markets to be controlled. Some markets are fairly technical and knowledge or information is a key. Those with good information about products and the market can do well, those without suffer. Market information and the control of that information is a key research topic in economics in the last few decades.
Most products are made from other products. So another way to control a market is to control the inputs to that market. At one point there were many companies that pressed CDs of music, but there were only three plants in the world that made the CD blanks to be pressed. (This is no longer true.) The music CD price was ultimately determined by the companies making the blanks. (Music prices are high now due to other factors.)
Then there are externalities. These are things about product that aren’t taken into account in the price of that product. This can be due to poor information, long-term effects, or lack of a market mechanism. Regulation, when done correctly, can also help address this problem. Climate change effects from energy production and use is a topical example of an externality. The purpose behind carbon trading markets is to incorporate this externality in the cost of energy.
Economically, the purpose of regulation is to create a framework where buyers and sellers don’t take advantage of each other. It’s also to allow new companies to start and to permit competition to occur. Regulation also helps to control externalities, those things that are not taken into account in the market.
Regulation today often falls far short of this. Instead, through lobbying efforts and other influence peddling, regulation today serves often to help the dominant player (usually the company and not the consumer) to take advantage of the other people in that market. Or regulation is used to raise barriers to entry in the market and protect the current companies there.
Our efforts should not be to fight against market economies, but to properly manage the market economy for our mutual and long-term benefit.