If there's one thing everyone in America knows, it's that free-market economics is true and free markets are best.
After all, we're not Communists, are we? They starved and lost the Cold War because they believed otherwise. And their watered-down European cousins, the socialists? More of the same, only less so. Even liberals get this nowadays. All hail the free market!
Trouble is, things "everyone" knows are often wrong. And this is no exception.
It's time to start getting honest about a very simple fact: Nobody, but nobody, really believes in free markets. That's right. Not the Republican Party, not the libertarians, not the Wall Street Journal, nobody.
Here's why: a truly free market is a perfectly competitive market. Which means that whatever you have to sell in that market, so does your competition. Which means price war. Which means your price gets driven down. Which means little or no profit for you.
Oops!
Naturally, businesses flee perfectly competitive markets like the plague. In fact, the fine art of doing so is a big part of what they teach in business schools.
That's why businesses use strategies like product differentiation, so their competition is no longer selling the exact same product they are. That's why they use strategies like branding, so their buyers don't think the products are the same.
Businesses will, in fact, do almost anything to get out of the hell of pure head-to-head competition.
They don't do it because they're crooked; they do it because they have an intrinsic economic incentive to. Always.
This is part of the innate essence of capitalism. It is not a flaw or a defect. It is part of what makes the whole system go. It is part of what makes capitalism capitalism.
People are the same way. Consider your own career. Why do you get paid more than the minimum wage? (I'm hoping you do.) Probably because you have some skill that everybody else doesn't have. So you don't have to bid against every unemployed person in your area to hold your job. Just a few of them. Which pushes your wage above the legal minimum.
That skill of yours is what economists call a "barrier to entry" -- entry into the market for your job, that is. And if you're anything other than a damn fool, you'll cherish it like your very life.
I sure do.
Now let's consider the other side of the equation. We've looked at free markets in things you sell. Now let's consider free markets in things you buy.
Here everything gets turned around. If I'm buying something, I want the freest possible market in that product.
I don't, to take an example recently on my mind, want there to be only one market for live Christmas trees in my town. I want there to be two (or more), and right next to each other so I can easily comparison shop. And I want to shop for more-easily shippable goods on the Internet, if possible, where I can potentially find the lowest price in the entire world.
I want, in other words, every seller's nightmare. Which every smart seller will use every legal trick in the book to avoid.
As a result, nobody with any wits about them really believes in free markets. People believe in them when it's in their interest, but not when it's the other way around.
This is a systemic, structural condition, so anyone who tells you they believe in "free markets" is either lying, stupid, or hasn't thought the whole concept through properly.
The latter category is quite common. Many people do their thinking about political ideology in an entirely different -- and dreamily disconnected -- mental space than they use for managing real life.
Frankly, everyone I've ever met gets the truth well enough in practice, in their own personal life or in how they run their business, so I just don't believe anymore that anyone does believe in free markets.
Like any rational person, I'm open to counter-examples if anyone can show me any. But I've been asking around for a while on this, and haven't come up with much.
This is not just an esoteric point, still less yet one more example of the familiar fact that people are hypocrites in politics.
Here's why it matters. The political players in America today who claim to support free markets don't. They support free markets in the things their backers buy, but maximum barriers to entry in the things their backers sell.
For example, one of the great unnoticed achievements of the Republicans (and their Democrat collaborators) from Reagan onward has been to gut U.S. antitrust law. Having a monopoly, or a cozy oligopoly with friendly rivals, is one of the best barriers to entry around.
As recently documented in Barry Lynn's fine book Cornered: The New Monopoly Capitalism and the Economics of Destruction, American industry is now concentrated as it hasn't been since before the era of Teddy Roosevelt and his trustbusters. (There's a different kind of Republican for you, by the way. These truths are not liberal or conservative.)
Most Americans don't realize this has happened because, unlike in the old days of Standard Oil, oligopolies today are cunning about masking their existence.
To take just one example, America's eyeglass frame industry is now dominated by the conglomerate Luxottica. That's why frames are so expensive. And any company, like Oakley the sunglass maker, that tries to break into the market? They find themselves shut out of a Luxottica-controlled distribution system. And retailers are now afraid to receive distribution from anyone else, lest they be cut off.
It's a remarkably well-oiled scheme, and it has its parallels in many other industries. But the average consumer has no idea about this, because the range of brands, if not suppliers, in optical shops remains diverse.
We're fat, dumb and happy. We've been fooled. But behind the smiling mask of a hundred labels smirks a single monopolist.
But aren't there laws against this sort of thing?
Well, there sure used to be, enforced by unsung lawyers and bureaucrats (horrors!) at the Justice and Commerce Departments. Whom nobody considered very glamorous, but who were doing the rest of us a big favor. Talk about forgotten wisdom!
Consider some other examples:
• Tyson in chicken
• Smithfield in ham
• Menu Foods in pet food
• Frito-Lay in chips
• InBev and MillerCoors in beer
• PepsiCo, Coca-Cola, and NestlĂ© in bottled water
• Dickinson in medical devices
• Microsoft in operating systems
• Iron ore (three companies)
• Aluminum
• Cement
• Railroads
• Banking
The number of problems caused by letting monopoly power -- whose key consequence is known as "pricing power" -- is astonishing.
For one thing, this is a huge part of what ails American farmers. Family farmers are caught between the agribusiness monopolies who push up the price of their inputs (feed, seed, fertilizer, etc.) and the agribusiness monopolies who push down the price of their outputs. (The economists' term for the latter is "monopsony," with an "s" -- but it works the same way as monopoly.)
It's the perfect racket.
And it's no surprise that on the other side of the equation, "free" market politicians are very diligent in imposing genuinely free markets where this suits the interests of the multinational "American" corporations that fatten their campaign coffers.
This is done, of course, as a matter of high principle and sophisticated economic rationality. It's remarkably easy to make wonderful after-dinner speeches about free markets.
Let's start with labor. Post-Nixon Republicans have genuinely supported just about every policy designed to weaken the pricing power of labor. This starts with weakening unions and letting the inflation-adjusted minimum wage fall, but it doesn't end there.
You think Ronald Reagan got in 1986, and George W. Bush wanted in 2007, amnesties for illegal immigrants because they were nice, compassionate people? To ask the question is to answer it. Whatever the ultimate merits of amnesty as policy, for them it was about cheap labor, plain and simple.
The reality is that the past prosperity of America has never been based on pure free markets -- starting with the fact that we had the highest average income in the world in 1776 because the colonies had structurally tight labor markets due to the open frontier. (Europeans and other Old World peoples were trapped by the iron law of wages because they had nowhere to go.)
Free, or nearly free, markets do have their rightful place in many parts of the economy, and it would be foolish to sabotage them. But in other areas -- above all, in labor markets -- our prosperity was based on pricing power.
A number of areas other than labor also worked better thanks to a healthy dose of pricing power. Try advanced technology, for a start. The patent system, which is not natural, is a fairly recent invention, and does not de facto exist even today in much of the world, is one. Innovation doesn't come cheap, and without pricing power for innovators, few companies could afford it.
Even the existence of scale economies, which are intrinsic to modern, large-scale, capital-intensive industry, implies markets that are less than free. Why? Because scale economies intrinsically imply a small number of large producers and thus give rise to oligopoly, with the consequences mentioned earlier.
This is why most other industrialized nations aren't romantics about free markets, are honest about their frequent nonexistence, and focus their policies on taming the negative effects of oligopoly while capturing the positive ones. They understand, for one thing, that big corporations are necessary but often pirates, and focus on making them share their loot with their crews.
We, on the other hand, live in a state of denial about the piracy.
So the next time someone tells you to believe in "free" markets, just tell them you'll believe as soon as they do.
When pigs fly.
Follow Ian Fletcher on Twitter: www.twitter.com/IanFletcher
He begins his essay by claiming that we all falsely believe that “free-market economics is true,†but then reveals his mis-understanding in suggesting that “free-market economics†is an ideology (to believe); free-market economics is primarily a description of how markets tend to work (even though often unpredictably) when unfettered by control of the state or monopolies or oligopolies. And, his idea that we need “lawyers†and “bureaucrats†from the “Justice and Commerce Departments†to control us and our economies is an interesting (though romantic) idea, that has already lead us to real fraud on a monumental level unmatched in the history of the human race. Yes, we have the corruption of Enron rulers, but just study for a moment the bureaucrats who have (total?) power over our lives today. Though we are not there yet, the real analogy for those who want to “eliminate the competition†is to those who have had total power over the lives and markets of the so-called “Peoples’ Republics†of China, Vietnam, the Soviet Union, Nazi Germany, and the many other countries brought to poverty, misery, and uncounted millions dead. Oops!
Such governments will “freely†print money for you, since they want you to believe that pigs do fly.
Read “I-Pencil†attached by Read.
For example, another assertion Fletcher makes is that “a truly free market is a perfectly competitive market. Which means that whatever you have to sell in that market, so does your competition. Which means price war. Which means your price gets driven down. Which means little or no profit for you.†If I understand him correctly, he claims here that competitions try to defeat (and often corruptly) the sales of those who sell the same product in the same market, and therefore price wars result in lowering all profits (a negative result of the “free-marketâ€).
Ian Fletcher’s “Why Free-market Economics Is a Fraud†presents a grossly self-contradictory argument that claims we all that know free markets do not work to our best interests, so we use them only when they suit our best self-interests, and through corrupted means. Interestingly, the author himself seeks to find the best prices online and offline that are the result of the free-market competition that he acknowledges is threatened by monopolies that crush competition. He does not, however, seem to acknowledge that the biggest monopoly humanly possible is a socialist state, since properly defined (unlike Fletcher) Socialism is the state ownership of the means of production. Fletcher seems completely ignorant of the actual structure and consequences of the latter.
In defense of state interventionism (though he does not use this expression), his argument is absurd that because people and corporations corruptly and immorally protect their own business endeavors that (free)markets do not work (without intervention and control). It is equally absurd of him to argue that because people only want “free markets†when buying not selling that no-one believes that markets should be free of state ownership. It is surely the case that many who advocate “free-markets†do indeed not practice the same for all; but a hypocrite does not an argument for atheism make.
Every major television and cable news show is for Free Trade, and Open Borders or Guest Workers.
Every single political party (except Constitution Party) is for Free Trade, and Open Borders or Guest Workers.
All of them. ALL OF THEM!!!
Govts need to fight to maintain a free market (just like fair courts), despite many forces fighting against it.
Also Franklin D. Roosevelt exercised the Anti Sherman Act to break up the big monopolies in 1938. This was to get the competition going again; it was a way to get businesses hiring again also.
They will come to learn in the end, at their own expense, that it is better to endure competition for rich customers than to be invested with monopoly over impoverished customers.
Frederic Bastiat
"But we cannot rely on custom or conscious alone to interpret and enforce the rules; we need an umpire.These then are the basic role of government in a free society; to provide a means where we can modify rules, to mediate differences among us on the meaning of rules, and to enforce compliance with the rules on the part of those few who otherwise would not play the game."
For whatever reason, this part of Dr. Friedman's philosophy is never mentioned when it comes to making "free markets" work.
The patent system is meant to prevent theft. If I invent something and then you steal it and sell it, I get screwed. That doesn't mean that I have no tools at my disposal in a market that lacks a patent system. In a freer market I could simply operate like the mafia. If people stole my technology, I'd "steal" their lives...if enough people are made into "examples", then the theft would be reduced or eliminated. The government understands this and instituted the patent system partly to prevent this from happening.
My point is that, despite your support of the contrary position, a free market has an answer (a very violent one) for the protection of intellectual property.
If a free market's solution to the protection of intellectuÂal property is force or violence, a free market ceases to be a free market. Participants (whether buyer or seller) would be hampered in their actions, if they were to face such a deterrent by a more or the most powerful participant in such market.
Much as communism was a utopia, so is a truely free market. In communism, it was supposed all means of production were in the hands of the people. Anybody who studied the USSR or any other Eastern Block economy knows, this was far from the case.
The reality was a rigid topdown driven economy by the state, lacking or ignoring the informatioÂn to make choices. Instead, the USSR's main concerns were defense and control of the state.
Ironically, the very same problem persists with a "free market". A totally free market, where eventually one or a small number of parties seize control, a rigid topdown driven economy will be the result, arguably with defense and control of the status quo ante as the main concerns.
This brings me to the point Ian Fletcher makes, is that we have to start thinking about a different way of running the economy.
Ditching the false dilemma between "socialism" (in the Glenn Beck/GOP/TP sense) and "free market" would be a good place to start.
Only if you assume that I would have a problem with personally defending my intellectual property, which I wouldn't.
"If a free market's solution to the protection of intellectuÂÂal property is force or violence, a free market ceases to be a free market."
Untrue.
"ParticipanÂts (whether buyer or seller) would be hampered in their actions, if they were to face such a deterrent by a more or the most powerful participanÂt in such market."
Being hampered by something doesn't necessarily make a market unfree. If a snow storm makes it more difficult (but not impossible) for me to get to the main shopping district, thereby leaving the expensive convenience store as my easiest option, that doesn't make the market unfree.
But I do agree with your 3rd through 7th paragraphs. I just took issue with Fletcher's starting point and a few of his examples.