Forum:Free market
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There is much talk about the "Free market", what it is, what it can do and governments role in controlling or not controlling it. The Free Market is a core concept of Capitalism and definitley a force in today's global economy. It is the rallying cry of Privatization proponents and is a good subject for discussion.
[edit] Definition
A free market is a place where people can buy and sell, work and hire, without any other entity using physical force or the threat of physical force to stop a transaction that has been agreed to by the parties involved. Any law which restricts the free choice of people to buy and sell, hire and work as the please is a restriction of the free market. Minimum Wage laws, maximum working hours laws, blue laws such as no working on Sundays, the prohibition of drugs, alcohol, guns, gambling, and prostitution, and antitrust laws are all restrictions of the free market.
[edit] Benefits
- Greater efficiency
- More innovation
- Lower taxes
- Greater freedom
- Pareto efficiency
[edit] Detriments
[edit] Plutocracy
Although a true laissez-faire economy would theoretically prevent it, free market economies in practice, especially when corporations are allowed to influence government policy (either through lobbying or by more nefarious means), often lead to trusts and monopolies that take advantage of consumers.
[edit] Positive externalities
Actions that create positive externalities will be underfunded in a free market. Road building illustrates the point. The economic growth created from shortened commuting times, settling of businesses near roads, and increases in land value more than make up for the microeconomic losses of the construction of roads.
[edit] Negative externatities
Actions that create negative externalities will be overfunded in a free market. Environmental damage, for instance, imposes costs on the economy. In a free market there is no incentive not to damage the collective environment, such as the atmosphere.
[edit] Short termism
Free markets tend to respond well to people's short-term needs, but they can be inefficient when it comes to allocating long term investments.
How many private companies, competing on the global stage, can truly afford to dedicate a large proportion of their resources to fundamental research? Many of the technologies we take for granted today would never have materialised without tax-funded, government subsidised fundamental research: computers, the internet, air travel, MRI scans in hospitals, fuel cells, ...
[edit] Evolution instead of design
Free markets favour local, rather than global optimization (in a mathematical, not geographic sense). In other words, free markets favour evolution over design. Evolution happens in small steps rather than quantum leaps and can often lead to dead ends. Mixed economies have a higher degree of design.
Internal combustion engines are an example. Since the invention of the piston engine 100 years ago, the way a car works hasn't changed fundamentally. Despite investments of hundreds of billions of dollars by the automotive industry, car technology has all but stagnated over the past 30 years. Improvements happen in ever smaller steps and cost ever more to develop. Why is that? It's not like the industry can't help itself to a whole shelf of superior technologies crying to be adopted: The gas turbine and the fuel cell are just two examples. The answer is simple: Make a great leap and you will risk huge losses, while your competitor cuts its risks by sticking to small steps. The piston engine continues to be a piston engine. In the small step process, it cannot suddenly evolve into a gas turbine.
[edit] Non-optimal information
A free market is only efficient if the consumers and producers are well informed about the nature of the goods. In some areas, such as healthcare, consumers are ill-informed and would make non-optimal choices in a free market. Additionally, ill-informed consumers are a benefit to established producers who spend marketing and lobbying dollars keeping the consumers ill-informed, therefore unfairly monopolizing the market with their inferior product. A start-up producer who has a superior product can easily be disregarded in an avalanche of misinformation.
[edit] Prisoner's Dilemma
Free markets often favour mutual defection rather than (the more efficient) mutual cooperation.
An example: In a densely populated city everyone travels by car. But because there is not enough space to accommodate all the cars, the city suffers from serious congestion problems, and journeys are very slow. If everyone decided to travel by bus, congestion would disappear, and everyone would benefit from faster journeys. But if only one person decides to travel by bus, that bus would still be stuck in traffic and that person doesn't benefit. Because in a free market people only make individual choices, society will be stuck in the defection trap where the optimal solution of cooperation (everyone travelling by bus) is not attained. Therefore government intervention to encourage bus travel is justified.
- Rebuttal The rebuttal to this argument is that people are always free to enter into voluntary large-scale contracts. Entering into a contract that only goes into affect if a certain number of people join eliminates the prisoner's dillema problem, because no one has to be the first one to do it on his own. An example of a private arrangement in the free market resulting in an amazingly efficient bus line is the google system for its employees.[1] Because it is in Google's rational self interest to have more productive employees by reducing traffic time, they created their own bus system. This system is completely voluntary, because no one who chooses to not work at google has any of their money taken to fund it.
Another example: Washing powder manufacurers are involved in a marketing arms race. Since washing powders are more or less indistinguishable, they must spend up to 90% of their revenue on branding and makerting simply to maintain their market share. If one manufacturer "cooperates" and cuts the marketing budget, it could lower the price of the washing powder dramatically. But it would lose market share, so this would only work if all manufacturers "cooperated" collectively. In reality, all manufacturers defect. Here the free market has created a suboptimal situation, where the price consumers pay for washing powder is many times higher than what it costs to manufacture the powder alone, despite competition. Also, large amounts of resources are flowing into a non-productive part of the economy.
[edit] Speculation bubbles
Free markets sometimes exhibit non-equilibrating, choatic behaviour, and the failure to self adjust.
An economic bubble (sometimes referred to as a "speculative bubble") refers to a market condition, where the prices of commodities or asset classes increase to absurd levels (that no longer reflect utility of usage and purchasing power). It occurs when speculation in the underlying good causes the price to increase, thus producing more speculation. The bubble is usually followed by a sudden drop in prices, known as a crash or a bubble burst. Both the boom and the bust phases of the bubble are examples of a positive feedback mechanism, in contrast to the negative feedback mechanism that determines the equilibrium price under normal market circumstances. Economic bubbles are generally considered to have a negative impact on the economy because they cause misallocation of resources into non-optimal use.
[edit] Social Inequality
In the absence of redistributive taxation, the rich get richer and the poor get poorer. People who inherit wealth essentialy obtain birth rights. Free markets provide equality of rights, but not equality of opportunity.
- Rebuttal The statement that the rich get richer is often but not always true. The statement that the poor get poorer is not only sometimes false, it is false more often than not. A free market results in real goods being created efficiently, which means it is not a zero sum game. Everyone in a free market can become richer, and no one has to lose money for this to happen. Over the history of free market economies, the poor have clearly gotten richer. Most people have much more later in life than they did when they started. The definition of being poor has also changed. Because the free market creates such cheap goods, the actual quality of life for people considered poor in any generation is much better for the poor of the previous generation. One obvious example is that today, even the poorest of American families can probably afford a TV, which offers entertainment and happiness. This is something that the richest man in the world could not by a hundred years ago, because it had not yet been invented by the dynamic free market.
- While it may be true that absolute poverty is reduced, relative poverty still increases in most laissez-faire systems. Relative poverty is a much bigger contribution to social ills than absolute poverty in developed nations. While many sectors of the economy are non-zero sum games, some are NOT, and in those sectors the effects of inequality can cause social unrest. Real estate is an example of this. In Brazil, which is a grossly unequal country, more and more public beaches have been turned into private resorts only accessible to a small number of people (who could benefit from the beaches equally when they were public). Overall living standards have thus been reduced.
[edit] Not actually "free"
No market can function without enforcement of property rights, the extent of which is arbitrary and infringes on other freedoms. A free market economy isn't automatically more free than a mixed economy, it only offers other types of freedoms.
[edit] Maximum wealth does not equal maximum happiness
One of the stated aims of free markets is to maximize economic growth. However, studies show that beyond incomes of approx. $20,000, extra wealth does not make people happier. Policies should be aimed at happiness rather than growth alone.
[edit] Natural monopolies
Natural monopolies will emerge in free markets. An example is the online auction site ebay, which is more efficient as a monopoly because of network effects, and which often has been criticised for its poor service. State-run monopolies can be more efficient than private monopolies because, in a well functioning government, state run monopolies ultimately act in the interest of the voter, whereas private monopolies act in their own interest.
