Free market

From Wikinfo

Jump to: navigation, search


A free-market (free-trade or neo-liberal) economy is an idealized form of a market economy in which buyers and sellers are permitted to carry out transactions based on mutual agreement on price without government intervention in the form of taxes, subsidies, regulation, or government ownership of goods or services. The free market is considered the mainstay of ideologies such as minarchism and libertarianism and Western definitions of capitalism. It is anathema to communism and some variants of socialism, as defined in the West, although most variants of socialism seek to mitigate what they see as the problems of an unrestrained free market.

In reality there are no totally free or ideal markets in operation. Lack of perfect knowledge, monopolistic practices, cartels, taxes and government regulation bias the equilibrium points of most large markets in existence today. Participants engage in information bias practices such as insider trading and price fixing. Some believe that the notion of a free market is inherently inachievable because they believe that governments are fundamentally involved in markets through the creation and enforcement of property rights. Others argue that the concept of property comes from natural law and therefore it is incorrect to see governments as creating markets.

In the ideal free market, the law of supply and demand functions, influencing prices toward an equilibrium that balances the demands for the products against the supplies. At these equilibrium prices, the market distributes the products to the purchasers according to each purchaser's use (or utility) for each product and within the relative limits of each buyer's purchasing power. In the limited mathematical ideal market this distribution of products is Pareto Optimal (see Pareto efficiency), meaning that no purchaser could have their purchasing limits filled in a way more useful to them without reducing the usefulness of some other purchaser's bundle of products. This type of optimality doesn't necessarily have anything to say about the distribution of purchasing power itself (which is often an input to the mathematical ideal market) - the optimality generally refers to the distribution of products given the pre-existing purchasing power of the purchasers. The necessary components for the functioning of such a free market include no artificial price pressures from taxes, subsidies, tariffs, or government regulation, perfect (or at a minimum, equivalent) knowledge about the value of the goods, geographic availablity of goods to all people, and no artificial monopolies or other forms of economic coercion on the part of the actors.

The distribution of purchasing power in an economy depends to a large extent on the Labor market and the Financial markets, but also on other things such as family relationships, inheritance, gifts and so on. The ideal free market does not explain particularly well the performance of many real markets such as the Labor market, or Financial markets. It explains better the markets for consumers products.

The economic and political application of the concept of the ideal free market is known, primarily by detractors, as neoliberalism.


Contents

Benefits

  • Greater efficiency
  • More innovation
  • Lower taxes
  • Greater freedom
  • Pareto efficiency

Detriments

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.

  • Rebuttal This contradicts the fundamental definition of the free market. In a free market, the government cannot intervene, lobbying is intervention, so a government that premits lobbying isn't a free market.

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.

  • Rebuttal Private industries would have the incentive to build better, less congested roads.

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.

  • Rebuttal Who says that a free market cannot get involved? There is no absolute free market. Free markets have to provide non aggression, which it have to use coercive action to protect the citizen's liberties. Pollution can be protected by private property. What are other externalities besides global warming?

Short termism

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, ...

  • RebuttalCorporations have the incentive to innovate fast and invest resources more efficiently, thus creating inventions.

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.

  • Rebuttal These inventions are not governmentally developed.

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.

  • Rebuttal Monopolies and lobbying does not exist in a truly free market. Before the FDA, the consumers went better on taking medication then after the FDA is made. Free market education is better.

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.

  • Rebuttal No, the better washing machines sell more, which the companies can use the money for advertising. Some poorly made washing machines sell less so they are less afford to advertising. Advertising improves product quality and mangifies competition. They don't have to advertise to sell. Some would produce less washing powder, so there is no need for advertising.

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.

Social Inequality

In the absence of redistributive taxation, the gap between the rich and poor tends to increase. People who inherit wealth essentialy obtain birth rights. Free markets provide equality of rights, but not equality of opportunity. Even if the poor benefit materially from the "trickle down effect", their subjective level of poverty still tends to increase, and they become more and more excluded from sectors of the economy that are zero-sum, such as high quality housing.

  • 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.

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.

  • Rebuttal Yes, free market exist governmental intervention in the physical world, but your argument is completely philosophical. Practally, the free market is better.

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.

  • Rebuttal With out free market, we would live in the stone age. We would not have television, which we take for granted.

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.

http://www.mises.org/story/2317 http://www.cato.org/pubs/regulation/regv12n2/reg12n2-debow.html http://www.mises.org



See: Austrian School, Friedrich Hayek, Adam Smith, command economy, capitalism, socialism, communism, LIEO

See also: Free software, Nash equilibrium, Game theory


References

Retrieved from "http://www.wikinfo.org/index.php/Free_market"
Personal tools