Free Market, Poor Baby
The free market has gotten a bad rap lately. I disagree with those in opposition, and I mused the other day that I'd love to hear a coherent, complete, rational, and emotion-less argument against the free market, because I haven't seen one yet. For those who are interested, I started a Free Market fan page on Facebook, please join in what I'm hoping to maintain as a rational, calm, solutions-oriented exchange of ideas.
I think it is important to simply illustrate the concept of the free market: you have something to sell, I want to buy it, we agree on a price. In general, we both think we are getting the better deal, otherwise the trade would not occur. In fact, the exchange is likely to repeat with the same parties or others if it is found favorable, and if not, the trading stops.
Fun Free Market Exchange Example
For example, let's say I buy a purse and I'm all about it. I tell my friend Tina to buy one too. We both have the purse and we're quite happy, so is the seller. Then my purse zipper breaks. So does Tina's. We return the purses and vow not to buy them again. If we can't return the purses we make sure we tell everyone we know about their faulty construction, and the seller will either change their product or suffer continued future loss of business.
This overly simplified example illustrates exactly how the free market works. In fact, there is nothing sinister about such an exchange. It leads me to wonder why people are vehemently opposed to free markets and falsely accuse what is a neutral exchange for the recent market collapse?
Unless
Unless something gets in the way, which would lead me to conclude something other than the free market is causing problems. The only things that could distort voluntary and fair exchange are: powers of forced exchange (coercion), if one party to the exchange knows more about the product (asymmetric information), and if one party to the exchange knowingly lies or misrepresents the product (fraud). In each case, we unequivocally do not have a free market mechanism at work, but robbery. I can't imagine it could be any more clear.
Unless something gets in the way, which would lead me to conclude something other than the free market is causing problems. The only things that could distort voluntary and fair exchange are: powers of forced exchange (coercion), if one party to the exchange knows more about the product (asymmetric information), and if one party to the exchange knowingly lies or misrepresents the product (fraud). In each case, we unequivocally do not have a free market mechanism at work, but robbery. I can't imagine it could be any more clear.
Angry Mock-Objections 
to My Supposed Idiocy
to My Supposed IdiocyI can already anticipate the objections to this post, so hopefully I can answer them before the hate-comments flood in.
Objection #1: Ha, you are stupid and immoral! You punk-idiass. Maybe the free market works when it's for broken purses, but what if it's a broken seat belt? You are a Randian lunatic who wants people to die for your whacked-out ideologies.
Objection #2: I'm sure you think that asymmetric information is no big problem, people should just get wise to the dangers lurking in the Big Business world and CEO Indiscretions. Oh yeah, except they need an f-ing PhD to go against them, and even then there is no hope unless you sold your soul to Dick Cheney. You are immoral and a blight on this planet.
My Thoughts
Me: Wow, what responses! I'm glad you brought them up as they are excellent points. I think they highlight that the biggest misconceptions are that the free market means unfettered, unchecked, unregulated wild growth. People imagine those who support free markets also support fraud, deception, or any tactic available to be used in the name of said growth. People imagine that the free market supporters oppose any kind of regulation or oversight. This is a false and baseless claim.
The free market is none of those things. Quite the opposite, precisely because the free market is an exchange of products (of which regulation is one) the free market naturally lends itself to being 'regulated'. While independent 'regulatory' bodies exist (which is a testament to the veracity of what I say about 'regulation' being a service that can be provided by the markets), there is a monopoly on provision of regulation-by-force by the government.
How the Government Monopolizes Regulation
It is rather obvious that the government, in any society, is the only body who can exert legalized coercive control over exchange. There is no guarantee various committees assembled will make the right decisions, promote just legislation, nor are they safe from falling into corrupt practices without oversight of their own. But there is no one 'regulating' the government. Furthermore, unlike private entities, there is no competitive force to keep government powers in check. When the government fails to regulate effectively, they don't get their regulatory powers taken away, but increased. They are therefore rewarded for bad behavior, and in turn reward their bad private regulatees. How is this a solution?
It is rather obvious that the government, in any society, is the only body who can exert legalized coercive control over exchange. There is no guarantee various committees assembled will make the right decisions, promote just legislation, nor are they safe from falling into corrupt practices without oversight of their own. But there is no one 'regulating' the government. Furthermore, unlike private entities, there is no competitive force to keep government powers in check. When the government fails to regulate effectively, they don't get their regulatory powers taken away, but increased. They are therefore rewarded for bad behavior, and in turn reward their bad private regulatees. How is this a solution?
While most people support government regulation to a certain extent, it is not because it results in the most fair, efficient, or moral regulation. Few question the quality of government regulation and take it for granted the government will have the best interests, best ideas, and best outcomes, despite evidence to the contrary. I think the recent bailout provides a clear example of government regulatory failures. Sadly, I think many people support government regulatory action simply because they cannot conceive anyone would do it better. Others support government regulation because they are direct beneficiaries and disregard the negative effects on others. I think this is wrong. While it may be true the government could be effective at regulating, a few things keeps them from doing so. One is their coercive power, the second is lack of competition or checks and balances.
So, What's My Bright Idea?
Free markets with private provision of 'regulation.' To be clear, this does not mean allowing private organizations to have legislative powers. For example, even though I disagree with Michael Moore politically, I'd be in full support of his creating a private company to 'regulate', or follow and monitor the health insurance industry. I might even pay a fee or donation to receive his insights. He wouldn't need to lord any coercive power over individuals or companies to do it, he could legitimately profit, or use funds in a philanthropic pursuit, from bridging the information asymmetry gap, and being rewarded for doing so. I'd trust that he'd be unlikely to fall prey to coercion. Even still, the fact that he would be a private provider of the information would mean if I no longer enjoy or trust his services, I'm free to leave and seek someone else, or go it alone. Any individual should be free to make those kinds of choices.
This model of 'regulation' already exists. Just think of Consumer Reports or any number of value specific watchdog groups concerned about the environment, health care, woman's issues or whatever. Religious types do this all the time when they patronize businesses found in their church bulletins. They don't need the government to impose their values on businesses, businesses are happy to accomodate their values in exchange for their patronage!
I'm suggesting that free market mechanisms "fail" because no one is truly regulating them, or the form of regulation is garden-variety back-scratching between corporate lobbyists and the purring political recipients who are all too eager to send favorable legislation to the House floor. The current structures do not allow true 'regulation' or oversight, and in fact, they encourage the things they purport to prevent. In other words: corruption.
14 Comments:
There is an inherent problem with allowing business to regulate itself, as evidenced by the recent market meltdown. We (consumers) trusted the firms to act in our best interest. And they did not. When the regulations were reduced (allowing firms to engage in riskier behavior in an attempt to produce a bigger profit.
Using your example of a purse, your free market system works very well. Government has no business telling purse makers how to do things. And you can go get a purse somewhere else. But take that model and apply it to our a society and countries interact financially, and the system breaks down. After all, I can't go to a different Federal Monetary System if I don't like the one I have.
@norcross - I'm not sure I understand your point. I did not call for business to regulate themselves in this post. A private business could regulate another private business, to ensure impartiality. Furthermore, injecting competition into the regulation and oversight system would guard against fraud on the side of the regulators. This model already exists.
Furthermore, I made the point that government regulation, of which there is plenty, did not stave off the problems, but they are allowed to continue their detrimental regulation practices that lead to corruption.
What's your solution?
@norcross - also, to your point about "can't go to a different monetary system if you don't like the one I have."
This is exactly my point. The Fed is in theory a private organization, but it is quite clear the government has created a monopoly over the money supply through the direct control they weild over the Fed. The Fed chairman is presidentially appointed, and it is in his best interests to follow the government's wishes if he is to keep his job. This is government-encouraged corruption, plain and simple.
Milena...
I definitely support a free market, but I think the need for "regulation" is a cop-out. People fear what they don't understand. They also fear that they aren't smart enough to conduct themselves judiciously within such a system.
If anything, I'm saying "survival of the fittest." There, that would make me the really bad guy. lol
I just think that if folks took the time to learn about what they're purchasing and not just buying because they saw a sexy ad over their bar bathroom sink we would have a need for regulation. A private company to oversee the market - who's to say they cannot be bought? Sure, we can leave them, but if certain companies get strong enough the smoke and mirrors are imminent. It would probably be too late once the populace figures it out.
A truly free market allows the little man a chance to thrive. We have trademark and copyright laws. The only thing that needs to be regulated would be the protection of those features. If I make a lipstick-and-perfume-stain-free purse and my mightier competitor wants to steal my idea, but I have a trademark, then I shouldn't have to fear that they'll steal my idea anyway.
I could be blunt or obtuse in my outlook, but I still don't understand what people are afraid of... outside of their own mental limitations.
@gamalam – You are not a bad guy. I'm with you, but I think perhaps you mistook my call for regulation as a call for government regulation. I should write a post clarifying what I mean by "regulation" and regulation.
Ha. How's that for clear?
How I see it: there is regulation by force via the government who is often fraught with corruption and inefficiency. Bad.
Then there is a natural kind of regulation or oversight that flows from the free market! It's quite cool actually. I mentioned Consumer Reports because it is a perfect example. CR is not a government entity. It is a private organization based on entirely on individual wants and needs, hence the title "Consumer Reports." The individuals say what they like or don't like about products, and companies respond, not by force, but by desire to fulfill the wishes of those who buy their products and support them. A Consumer Reports seal of approval is meaningful to companies and is a sign to consumers they can trust the product, without having to do all the homework. (Although I agree with you, individuals need to do more research on their own!)
So, this is also regulation, it keeps companies in check. How many times does Consumer Reports issue warnings about products? Companies can be punished (naturally and justly for creating a crappy product) and then decide to respond to criticism and change, or risk failing. I think this shows that regulation doesn't need to be a government construct, it happens on its own. That also answers the question of people educating themselves. They kind of don't have to. They can buy Consumer Reports, see what companies are doing things right, and then buy their product. It is simple.
Does that make sense?
@Milena - I really shouldn't make comments when I'm half-asleep.
That being said, the point I was attempting to make is that private regulation, esp. one with competition, wouldn't bring about impartiality. In most cases, this model has brought about the opposite: collusion and more "backroom" deals. Remember, all these firms on Wall Street did deals with each other. And remember the Enron and Worldcom debacles? Private firms, not the government, doing the audits. Also, whomever doing the regulating, whether it's public or private, would need to have something behind them (government) with the authority to actually enforce any rules.
If regulation is leading to corruption, then the model is flawed. When a CEO or company lies and misreports earnings, it is because they want the free market to look favorably on them, not the regulators.
I am not against free markets. However, I just cannot see that model being the appropriate measuring stick to be used in every aspect of an economy. A free market system for consumer products, services, and spending is completely fine and appropriate. But for large-scale functions of our country, such as the inner-workings of the financial markets, is too integrated into every aspect of our lives to be subject to market whims.
@Norcross - You say, "...that private regulation, esp. one with competition, wouldn't bring about impartiality."
You are correct in that fraud can occur, but you are confusing correlation with causation. Competition doesn't cause partiality - greed, fraud, and corruption do. We need to be clear about the enemy. Sarbanes-Oxley, the legislation meant to make sure another Enron never happened, was clearly unsuccessful at stopping fraud, in addition to making any reputable and honest companies’ costs increase far beyond the benefit of their internal auditing. Among other things, this decreases productivity, and in turn, slows down the economy. The complexity of the legislation discourages businesses that cannot afford to keep up with the auditing standards. Mentioning accounting scandals, without identifying the root cause does little to demonstrate solutions.
Furthermore, even Sarbanes-Oxley wouldn’t have prevented the Enron collapse! The intricate strings of fraud were so tightly wound, and so sickeningly perfect, they would have “succeeded” in their fraud no matter what. And rightfully, Enron and WorldCom execs have been prosecuted. I fully support punishing those who do harm in the private sector, unfortunately, we don’t enjoy the same privilege when it comes to the public sector.
The Sarbanes-Oxley act did little to disincentivize the conflict of interests that arise when auditing firms receive favors or promise of continued business from their auditees. That’s why I tried to give an example of private regulatory bodies that are unlikely to be susceptible to fraud and partiality. Gamalam also rightly concludes individuals need to be more self-sufficient. A paternalistic government is doing more harm than good.
While I try to maintain a strict libertarian philosophy, I fully comprehend there will always be calls for government regulation. So, even if you are in favor of government regulation, you have to be critical of its failures and unintended consequences as well.
A more appropriate way to go about solving these regulatory problems is to indentify ways to stop greed, fraud, and corruption. You also did not recommend a way to ensure the government is not corrupt. The government is a large player in the recent collaspe in the financial markets. You cannot omit that glaring fact.
@Norcross – I should add – it is people like you: intelligent, moral, healthily skeptical, financially savvy, and unlikely to fall prey to fraud that I would feel far more comfortable with regulating business. I don’t get that choice. You wouldn’t have political motivations to get re-elected, or lobbyists beating your door for favorable legislation.
@Norcross – I should add – it is people like you: intelligent, moral, healthily skeptical, financially savvy, and unlikely to fall prey to fraud that I would feel far more comfortable with regulating business. I don’t get that choice. You wouldn’t have political motivations to get re-elected, or lobbyists beating your door for favorable legislation.
@Milena
In terms of regulation in the form of something like Consumer Reports, I don't think that's bad at all. If anything, I just see that as an education tool. I personally would not rely on reading Consumer Reports to see if a product is best for me though.
I say we need to encourage people to do their own research, using things like Consumer Reports and Ripoff.com to aid in it.
I believe we're pretty much on the same page though. I didn't get your call for regulation to mean government regulation. Thing is, even the Consumer Reports and the BBBs of the world are susceptible to corruption, so at the end of the day, we're responsible for deeming was is a good buy/trade or not.
@gamalam - I understand where you are coming from.
What do you think of the concept of rational ignorance however? How would you resolve the disparity between the education individuals need to make myriad decisions, with the loss of productivity, time, and possibly, wealth, that comes with taking all the time to learn about each decision? Consumer Reports as an example serves a function not only as 'regulator' but also saves time, through the concept of division of labor. When there is a separate body dedicated to one task, it is more efficient, that is why government regulation exists at all.
I think I need a better way to differentiate between government regulation and that other regulation I'm talking about. Maybe from now on I'll use the words government regulation or private oversight?
You bring up great points, ones that I struggle with myself. This is why I cannot call myself a pure libertarian, I'm halfway between a libertarian and republican/conservative.
@Milena - The thing is, I think our society is far too consumer-driven anyway. We are constantly consuming, which takes away time we could be using to focus on more important things like learning about the things we consume.
Today, a truly free market would look like an Indian village market right before a holiday. It's just maddening to consider. If we really opened up the markets (read: sans-government regulation), I think folks would slow down their consumption for fear of attaining things they really don't want.
I think there is something to rational ignorance, but I know I have very few things that are of serious interest to me. I like to think I'm well-versed in everything related to them. At the same time, whenever I get interested in something new, I definitely try to learn as much as I can before "buying in." That's just me.
I find myself just not very trustworthy of many things. I hate to be such a textbook realist, but I just don't really feel comfortable accepting private oversight on its own.
I'd rather have less stuff than have the headache of dealing with the drama that would come from defective products.
Our financial markets are a great example. I'd rather put my savings in a safe, rather than trust a single financial adviser with it. I learned about investing myself. I learned certain resources really well before I put a dime anywhere. Best believe, all my money wasn't in one just type of account either.
The Joys of Liberalism
I wish I was a liberal. Ok, this may sound a little disingenuous, and perhaps it is. Having said this, it does seem like fun. When you think about it, liberals have claimed all the juicy stuff. You know - Hollywood, the environment, taking care of the less fortunate – even the arts. They’ve also claimed much of the groups that you want to admire - including journalists and most notably teachers. It’s a glorious cause really. Who doesn’t like children, trees, and movies? On the surface, it’s really a delicious notion. Why can’t we just all get along? What is it with these people that want it all for themselves? Don’t they realize that they’re ruining the planet and destroying the lives of those that are not as fortunate?
I’ve thought about this quite a bit recently. I developed a rather conservative point of view early on from my business experiences, academics, and things I had read. I held these beliefs, rather blindly and stubbornly (I must confess) from my teens up through my 30’s. Frankly, it started as early as my first business venture. At the risk of digressing, let me tell you of the marigold stand. I think I was about 6 years old when I discovered that if you pulled the dead flower of a marigold, you got yourself a handful marigold seeds. My mother explained to me that you just need to replant them and magic – you’ve got more flowers. Not just more, but about 50 to one. Hmm, I thought – there’s money in this. Unaware of property rights at the time, I proceeded to pick all the dead marigolds up and down my street. I put them in Dixie cups and sold them back to the neighbors I had recently looted. Adolescent robber baron? Perhaps. It wasn’t long before the other kids said, “wait – what about me?” Suddenly everyone was in the florist business. When I was in college I read “Atlas Shrugged” by Ayn Rand. I think this is where I became a zealot and began preaching to my left leaning friends on the immaculate design of Adam Smith’s “invisible hand”. Many businesses later, my successes confirmed my theories that rewards come to those that work for them. Or did they? My views began to soften after I had children. I don’t know, maybe it was part of just getting older, but I started to question things. Don’t we have a responsibility for the less fortunate? The answer is yes, but not the way you may assume. I’ll come back to this.
The problem with organized politics comes down to pegs and holes. We want to put everything in its place. It’s human nature I suppose. Our brains need and want to categorize things. Is he white or black, gay or straight, Republican or Democrat? You get the idea. Pegs don’t always fit neatly into the right hole, so we just cram it in there. I imagine you’re doing it right now. “What is he driving at – he is a right winger or not?” Well, this is my challenge then – fight the urge.
Everything we have ever learned about human nature is that we see our best interests first. We’re taught in grade school, in church, and by our parents to think of others. The funny thing is, as children, we quickly learn that everyone, including our morality guides seem to be living for themselves. “What – they get paid? They have a union to protect their interests?” Curious. So we have capitalism. You know, the system that has made our country the wealthiest and most powerful (thus allowing us to STAY free)? The notion is that everyone will seek out their own best interests and with self elected government to enforce basic property rights and the rule of law – we’ll all be better off. The problem is that we all feel a bit guilty. Well, some more than others. This collective guilt goes something like this – you practice your clarinet endlessly and combine this with a natural talent for music and you get seated in the first chair, while someone else gets bumped altogether. Or maybe you’re a designer and your designs get you top jobs (and money) and this causes someone to get laid off. The horror the horror. You rise while they fall. Couldn’t you just have shared the job? Would the world be better off if you had just held back you creativity a bit? Well, the answer is no, but people seem to need an outlet for this guilt. So we pick the easy ones – puppies, rainforests, and the homeless. Do you have no heart?
The more I questioned my beliefs, the more they became confirmed. Being conservative means making unpopular decisions. One only needs to spend a little time in nature to realize that things are NOT fair. Far from it. In fact, they’re brutally cruel. I’m tempted to go into Darwin here, but this brings up a contradiction in conservatism that I’ll tackle another day. So, do we have responsibility for our fellow human being? Yes we do. I’ll make the radical (and conservative) point that it’s in our best interest to do so. Not because of some altruistic notion, but simply because all of our lives are better off if everyone is successful. A good society puts in place safeguards to ensure the rule of law, the protection of rights, and provides shelter for those in need. There is, of course, a line between helping your fellow humans in a crisis and social entitlements. This will get covered down the road, but I want you to know that I don’t have some Wild West notion of laissez fair.
So, I think liberalism looks fun. I’d love to be able to freely bash the greedy capitalists. It would just feel good to stand up for the rights of an owl over some filthy oil company or demand that we pass a law to raise minimum wages. Why not? I’d also like to eat ice cream and drink vodka for breakfast. Why not – it’s what feels good. Well, that is until you really think through the consequences. Our country waxes and wanes between conservatism and liberalism. I don’t have to point out that we are waning right now. We went from a gibbous to a new moon within about 2 years. Everybody is saying “why not eat ice cream?” Barack Obama is simply yummy. Spread the wealth. I think it’s ok that our country waxes and wanes – it’s the beauty of our country. Winston Churchill famously once said that “you can always count on Americans to do the right thing – after they’ve tried everything else”. We’ll eventually start waxing again, but we can only hope that our noble citizens don’t go too far.
Do you know this guy?? :-)
@PD - it's interesting to hear your thoughts on this topic, in particular how conservatives are painted as the 'bad guys' even though they share similar values, but have a different way to get there.
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