# Free Market: How would it work **URL:** \ **Category:** Great Debates\ **Created:** [October 25, 2004, 2:09am UTC](https://boards.straightdope.com/t/free-market-how-would-it-work/270976 "2004-10-25T02:09:18Z")\ **Posts on this page:** 20\ **Page:** 9
**Author:** ![pervert](https://avatars.discourse-cdn.com/v4/letter/p/bbe5ce/32.png) [@pervert](https://boards.straightdope.com/u/pervert)\ **Post date:** [November 1, 2004, 1:54am UTC](https://boards.straightdope.com/t/free-market-how-would-it-work/270976/161 "2004-11-01T01:54:06Z")
> [@Gorsnak](#): > > Then perhaps _you_ can explain to me why external costs and benefits don’t lead to structural inefficiencies in an unregulated market, since no one else has even directly addressed the subject. Ok. Can you define for me “external costs and benifits”? ---
**Author:** ![Gorsnak](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/gorsnak/32/7587_2.png) [@Gorsnak](https://boards.straightdope.com/u/Gorsnak)\ **Post date:** [November 1, 2004, 2:06am UTC](https://boards.straightdope.com/t/free-market-how-would-it-work/270976/162 "2004-11-01T02:06:40Z")
> [@pervert](#): > > Ok. Can you define for me “external costs and benifits”? You mean you haven’t read the previous posts in this thread? I’ve little inclination to repeat myself. ---
**Author:** ![Shalmanese](https://avatars.discourse-cdn.com/v4/letter/s/45deac/32.png) [@Shalmanese](https://boards.straightdope.com/u/Shalmanese)\ **Post date:** [November 1, 2004, 9:28am UTC](https://boards.straightdope.com/t/free-market-how-would-it-work/270976/163 "2004-11-01T09:28:19Z")
[Externalities](http://en.wikipedia.org/wiki/Externality) ---
**Author:** ![Frankenstein\_Monster](https://avatars.discourse-cdn.com/v4/letter/f/ccd318/32.png) [@Frankenstein\_Monster](https://boards.straightdope.com/u/Frankenstein_Monster)\ **Post date:** [November 1, 2004, 1:59pm UTC](https://boards.straightdope.com/t/free-market-how-would-it-work/270976/164 "2004-11-01T13:59:42Z")
> [@Sam Stone](#): > > How come arguments around capitalism always wind up devolving into discussions of individual acts, as though that disproves the whole thing? Personally, I _want_ to see arguments centered around real-world cases (individual acts). Even communists can argue how great their system works in theory. The best way to argue shortcomings is by looking at real-world examples. > [@](#): > > And how come when discussing the merits of governments, pointing out the numerous cases of fraud, corruption, and incompetance are dismissed as being beside the point? Well, _I_ would not dismiss them as being beside the point. I think it is very good to point these out. In fact, they can’t be stressed enough. However, I counter them by pointing at other real-world cases. Like Finland. As heavy government as it gets in a free market country. Yet consistently ranking number one in both [non-corruption](http://www.transparency.org/cpi/2004/cpi2004.en.html) and [competitiveness](http://www.weforum.org/site/homepublic.nsf/Content/Nordic+Countries+Lead+the+Way+in+the+World+Economic+Forum%E2%80%99s+2004+Competitiveness+Rankings) in the world. Logically, this disproves the implication that “government -\> corruption”. _Practically_, it suggests where to look for elements that make _good_ government versus _bad_ government. _That_ is what I think is interesting to discuss. > [@](#): > > It’s frustrating in the extreme to laboriously describe how the market works, how it prevents a race to the bottom, and how it is self-regulating, and the response is, “Oh yeah? What about Ivan Boesky? HUH???” I feel ya, brother. I have no illusion that I could put up a great post (yeah right… I wish) explaining my vision for how to make free-market communism work, and _not_ get a response of, “How about Stalin? How about 100 million dead? HUH???” If it’s any consolation, on this board if anywhere, I can’t imagine a well-thought-out post going to waste. I still think [this post](http://boards.straightdope.com/sdmb/showpost.php?p=5401434) of yours is one of the Great Posts in recent memory (see, I even had it bookmarked). If I may: I think this is relevant in a thread about free markets. > [@Sam stone](#): > > from [this thread](http://boards.straightdope.com/sdmb/showthread.php?t=282342) > Finally, I believe that government is the most dangerous institution on the planet. It may be necessary, but it is dangerous. True. Agree. Good point. > [@](#): > > Therefore, its scope should be kept as small as possible, and expansions of government power should only take place as a last resort, and not just because someone has a ‘plan’ to ‘improve’ things. Doesn’t follow. Electricity is one of the most dangerous forces in daily life. Electricity can kill you. Therefore, its scope should be kept as small as possible? If it is dangerous, then you need to be aware of its dangers, and you need to devise a system that protects against the danger. This applies to electricity as well as government. > [@](#): > > I imagine most of you anti-capitalists are strong supporters of labor unions. I am an anti-capitalist, but I’m no fan of the way most labor unions operate. > [@](#): > > Would you consider it a valid refutation of the labor movement if I pointed out that the Teamsters in the past have been horrible corrupt and in bed with the Mob? Absolutely! Give 'em hell! Don’t forget Britain in the seventies, no Mob ties I am aware of, but still almost managed to destroy the country! > [@](#): > > And again, for those of you who keep saying that under capitalism our workers will become slaves, our products shoddy, and our CEOs a bunch of criminals, you need to explain why this hasn’t happened. I think it is in spite of capitalism. It is thanks to the many mechanisms we have developed, that counterbalance its bad tendencies. Plus, I think other posters have addressed these questions and the ones in the next paragraph of your post rather nicely. > [@Shodan](#): > > Regulation is perfectly acceptable if it facilitates the operation of the free market. That is, it is a good thing to enable the exchange of information necessary to transactions, or to eliminate coercion, or to enforce contracts and the rule of law, or ensure a stable medium of exchange. I agree wholeheartedly! I wish more capitalists could see it like this. If I were a CEO, faced with strict regulations against pollution or carbon dioxide or Sarbanes-Oxley, I would rub my hands in anticipation of how I was going to beat my competitors in implementing these. And reap the resultant advantages in the market. (Heck, I _am_ a “CEO” and I do this most every day. I don’t even rub my hands, I _pounce_.) ---
**Author:** ![Shodan](https://avatars.discourse-cdn.com/v4/letter/s/9f8e36/32.png) [@Shodan](https://boards.straightdope.com/u/Shodan)\ **Post date:** [November 1, 2004, 2:35pm UTC](https://boards.straightdope.com/t/free-market-how-would-it-work/270976/165 "2004-11-01T14:35:32Z")
> [@Gorsnak](#): > > Two points: > > 1. Most laissez-faire conservatives I’ve encountered are opposed to environmental regulations of any sort. Or am I just mistaken, and those are all just corrupt crony-capitalists? My experience is different. I have never met a laissez-faire capitalist who thought that pollution was a triviality to be ignored. If you can get any of your corrupt crony-capitalist friends to join the debate, maybe we could discuss their reasoning. Anyway, we are debating a theoretical free-market society, and in **that** society, various government actions to either bring market forces to bear on a problem, or allow them to act more efficiently, are allowed. I think I am talking about totally free markets, and you are assuming a totally libertarian or anarchical society. > [@Gorsnak](#): > > Since when does the government have a monopoly on education, and where did I suggest that it should? The tendency is towards a government monopoly on education, because the public schools are subsidized by taxes and private schools are not. In our totally free-market society, I would imagine that all schools are supported either by fees paid by parents, or charitable donations for scholarships. Somewhat like private schools are today. Thus all schools would compete for students, and thus provide an educational “product” that more closely matches parental/student demand, and more efficiently. > [@Gorsnak](#): > > And your point about demand completely misses the point of the problem posed by externalities. Of course there would be a strong demand for education in a laissez-faire system. That goes without saying. The point is that the demand would not be as high as would be expected given the total benefits it produces… I don’t see why that would be the case. If education is a benefit, then the demand for that benefit would stimulate producers to create the product and offer it for sale. If it were really the case that demand for education dropped off, then that means that the perceived benefits are lower than bureaucrats think they are. Thus the demand drops, the supply shrinks, and consumers take their money elsewhere, either to another school that matches their needs more closely, or to spend on something completely different. > [@Gorsnak](#): > > The point isn’t that education in a laissez-faire system will be a disaster or anything, just that the production levels will be suboptimal because of the structure of the system. No, exactly the opposite. The production levels will tend to be optimal - that is, efficient - because supply and demand balance each other off in a free market system. If people are being forced to “buy” education that they don’t want or need now, then in our free-market system that inefficient allocation of resources will be eliminated. If, for instance, students are currently being forced to undergo training in basket weaving or art history, and parents think these are a waste of time, they will not pay for that training, but spend their money on something else. If they are wrong, and art history really has some concrete benefits, then eventually people will notice that, and demand for those benefits and thus for art history courses will go up - and there will be an incentive to increase the supply. If the parents are right, and art history is not really worth whatever the parents are currently being forced to spend, then the money will not be wasted on it, and thus the system is more efficient. > [@Kimstu](#): > > **Shodan: A. Real free markets work fairly well, and are fairly efficient. They tend to correct the distortions and inefficiencies inherent in all human interactions.** > > “Tend to correct” is pretty vague and feeble. I do recognize that markets have self-correcting tendencies, but they are not always speedy and effective enough to be tolerable. I don’t agree that the economics of the free market is vague, and it certainly isn’t feeble. It’s a complex subject, but what I wanted to avoid is a framing of the argument where we look at a set of problems in the short term, and then use that as a argument that nothing but bureaucratic fiat will fix the problem. I think this goes towards what **Sam Stone** mentioned. If we can argue that “the free market isn’t working here”, we need also to look at the prospects for other kinds of regulation, and judge whether they are more likely or less likely to work well. But you are not going to be able to snap your fingers and have the free market solve every problem immediately. Overall, however, the more you rely on consumers and producers all being freely allowed to allocate their own resources to meet their own perceived needs, the better overall your system will operate for the benefit of all. Indvidual gains and losses, overall, add up better under the free market than under any other economic system. > [@Kimstu](#): > > \*\* > B. Everything else is sorta like real free markets, except that they are less efficient and subject to far more distortions and inefficiences, which are much slower to be corrected.\*\* > > But that’s not a demonstrable fact, that’s just a statement of faith. It seems to me at least equally likely that there’s some level of market regulation that makes the market more efficient than no regulation at all. Yes, there certainly is. I have already argued in favor of government actions to enforce the law of contracts, preserve social order, to enhance communication so that the market can operate, and so forth. If we are going back to silly stuff about employers enslaving their workers, I am not going to bother with that discussion, which would be pointless. I am not arguing in favor of a government that does nothing. I am arguing in favor of a government that does everything in its power to allow the free market to work, and which tries to encourage the operation of free market economics in areas where it is currently shut out. Thus we would still have a police force. But we would not have farm subsidies, import tariffs, Medicare, Social Security, corporate welfare, or transfer payments in general. A free market, not anarchy. > [@Kimstu](#): > > **Shodan: There is no mechanism that works better than the free market in correcting excesses.** > > Another statement of faith, and in many cases, a very unconvincing one. Not really. Attempts by government to overrule the market are doing much what the market would do if it had been allowed to operate. That is, government attempts to impose a cost, or to fix a price. The belief is that the government knows better than the aggregate of consumers and producers how things “ought” to be. The trouble is, there is no feedback mechanism available to a bureaucrat which is nearly as swift or efficient as the price mechanism inherent in the free market. The government decides, for example, that widgits cost too much, and therefore the poor who cannot afford a widgit are being arbitrarily denied their rights. Widgits cost two dollars apiece. So the government passes a law that henceforth, widgits will be sold for one dollar. Now the poor, who have a dollar to spend, can buy a widgit. Suppose there are two producers of widgits. Both produce equal numbers of widgits, but the cost of producing widgits varies with the producer. The more efficient producer can turn out widgits for 99 cents, and the less efficient can do it for $1.01. Now the less efficient have to go out of the widgit business, since they lose money every time they sell a widgit. Now the supply of widgits has been reduced by half, since the marginal producer has been driven out. The number of people who can get a widgit is now half what it was. The number of rich vs. poor who own a widgit is now more balanced, but on the whole, fewer people have widgits now than did before we passed the Widgit Fairness Act. Now the Acme Widgit Company, which is the only one remaining in business, notices that their profit margin on widgits is only a penny apiece. If they retool their machinery, however, they can go into the business of producing framistans, which returns $1.01 in profit per unit sold. So that is what they do. Now nobody has widgits. The law intending to make widgits more available to the poor has ended up ensuring that nobody has a widgit. This is the sort of regulation that would not be allowed in our theoretical free-market society. We can freely pass legislation to force people to abide by their contracts, or list the ingredients on the side of packages, or pay to clean up their mess. But we never try to claim that we know better than the market place knows what the supply is (or should be), what the demand is (or should be), or what the price is (or should be). If you see what I mean. Regards, Shodan ---
**Author:** ![Leonard](https://avatars.discourse-cdn.com/v4/letter/l/a6a055/32.png) [@Leonard](https://boards.straightdope.com/u/Leonard)\ **Post date:** [November 1, 2004, 2:46pm UTC](https://boards.straightdope.com/t/free-market-how-would-it-work/270976/166 "2004-11-01T14:46:16Z")
> [@Frankenstein Monster](#): > > Doesn’t follow. Electricity is one of the most dangerous forces in daily life. Electricity can kill you. Therefore, its scope should be kept as small as possible? To me, the difference is this-- Government, as a corporate entitiy retains some of the characteristics of its components. Namely, it seeks to preserve its own existence and to expand its influence. For-profit corporations do this too, even though they are not “alive” and do not even empirically exist, except abstractly. I think if electricity had this property we would do well to minimize its use. ---
**Author:** ![Frankenstein\_Monster](https://avatars.discourse-cdn.com/v4/letter/f/ccd318/32.png) [@Frankenstein\_Monster](https://boards.straightdope.com/u/Frankenstein_Monster)\ **Post date:** [November 1, 2004, 3:06pm UTC](https://boards.straightdope.com/t/free-market-how-would-it-work/270976/167 "2004-11-01T15:06:13Z")
> [@Leonard](#): > > To me, the difference is this-- Government, as a corporate entitiy retains some of the characteristics of its components. Namely, it seeks to preserve its own existence and to expand its influence. For-profit corporations do this too, even though they are not “alive” and do not even empirically exist, except abstractly. I think if electricity had this property we would do well to minimize its use. 🙂 To me, the similarities are this - one of the dangers of Government is that it seeks to preserve its own existence and to expand its influence as a goal in itself, without accountability. One of the dangers of electricity is that if you touch it with your bare hands, it can adversely affect your health. Therefore, we protect against this tendency of government by … (checks and balances, strict democratic oversight, accountability to customers, positive incentives for performance, clear and published performance metrics, competitive outsourcing, …). We protect against this danger of electricity by … ---
**Author:** ![Leonard](https://avatars.discourse-cdn.com/v4/letter/l/a6a055/32.png) [@Leonard](https://boards.straightdope.com/u/Leonard)\ **Post date:** [November 1, 2004, 4:12pm UTC](https://boards.straightdope.com/t/free-market-how-would-it-work/270976/168 "2004-11-01T16:12:40Z")
> [@Frankenstein Monster](#): > > 🙂 > > To me, the similarities are this - one of the dangers of Government is that it seeks to preserve its own existence and to expand its influence as a goal in itself, without accountability. One of the dangers of electricity is that if you touch it with your bare hands, it can adversely affect your health. Therefore, we protect against this tendency of government by … (checks and balances, strict democratic oversight, accountability to customers, positive incentives for performance, clear and published performance metrics, competitive outsourcing, …). We protect against this danger of electricity by … Sounds like we don’t really disagree. Those are all good ways to help control govt. growth. I just think that we should keep it as small as possible because the larger it gets, the better it gets at expanding itself. I can’t come up with a perfect analogy, but I’ll make an attempt. Let’s say I’m standing in my front yard and 5% of it is on fire (assuming I don’t have a pasture for a front yard). I could easily contain it and prevent it from spreading. Now imagine if 95% of the yard was on fire. Even at the same rate of growth I think it’s pretty obvious that I couldn’t prevent it from spreading to the 5% that I’m standing on. Yeah, I know, crappy analogy. I don’t think a constant rate of growth is exactly applicable either, I think it’s a rising rate. But now we come to the better part of the analogy. At some point there is a % of the yard burning where the amount of growth is equal to my ability to control it. As long as it stays below this point, everything is under control. If I stop for a drink and the % of the yard on fire just barely edges over that point, it’s over. I can’t catch up. In both the fire analogy and the size of government, I don’t care to find that point of no return pragmatically. I don’t think we’re there, and I’d certainly like to keep it that way. Don’t read too much into that analogy, I’m not trying to say all goverment is bad by any means. ---
**Author:** ![Shalmanese](https://avatars.discourse-cdn.com/v4/letter/s/45deac/32.png) [@Shalmanese](https://boards.straightdope.com/u/Shalmanese)\ **Post date:** [November 1, 2004, 4:31pm UTC](https://boards.straightdope.com/t/free-market-how-would-it-work/270976/169 "2004-11-01T16:31:24Z")
> [@Shodan](#): > > The government decides, for example, that widgits cost too much, and therefore the poor who cannot afford a widgit are being arbitrarily denied their rights. Widgits cost two dollars apiece. So the government passes a law that henceforth, widgits will be sold for one dollar. Now the poor, who have a dollar to spend, can buy a widgit. > > Suppose there are two producers of widgits. Both produce equal numbers of widgits, but the cost of producing widgits varies with the producer. The more efficient producer can turn out widgits for 99 cents, and the less efficient can do it for $1.01. Now the less efficient have to go out of the widgit business, since they lose money every time they sell a widgit. Now the supply of widgits has been reduced by half, since the marginal producer has been driven out. The number of people who can get a widgit is now half what it was. The number of rich vs. poor who own a widgit is now more balanced, but on the whole, fewer people have widgits now than did before we passed the Widgit Fairness Act. > > Now the Acme Widgit Company, which is the only one remaining in business, notices that their profit margin on widgits is only a penny apiece. If they retool their machinery, however, they can go into the business of producing framistans, which returns $1.01 in profit per unit sold. So that is what they do. > > Now nobody has widgits. The law intending to make widgits more available to the poor has ended up ensuring that nobody has a widgit. > > This is the sort of regulation that would not be allowed in our theoretical free-market society. We can freely pass legislation to force people to abide by their contracts, or list the ingredients on the side of packages, or pay to clean up their mess. But we never try to claim that we know better than the market place knows what the supply is (or should be), what the demand is (or should be), or what the price is (or should be). > > If you see what I mean. > > Regards, > Shodan All you’ve demonstrated is that theres **one** instance where free markets work better. Say instead that we had 2 widget companies, widget company A uses $0.30 to produce widgets and $0.70 to promote how good their widgets are. company B uses $0.31 to produce widgets and $0.70 to promote how good THEIR widgets are and both sell for $2. The government has enough of this and nationalises the widget market, spends $0.40 making widgets, $0.10 in promoting them, sells them for $1 and makes just as much profit since twice as many widgets are being sold. Of course, a government institution could become fat and corrupt but it doesn’t neccesarily follow that it must become so. And the industry could streamline itself so that less promoted, better quality products become availble, but, again, it doesn’t neccesarily become so. The cost of competing is sometimes non-trivial and can overwhelm the inherent inefficiency of govt control many times over. While an argument could be made that **most** cases would be served better under the market, I don’t think the case could be made that **all cases** are served better under the market. ---
**Author:** ![Shodan](https://avatars.discourse-cdn.com/v4/letter/s/9f8e36/32.png) [@Shodan](https://boards.straightdope.com/u/Shodan)\ **Post date:** [November 1, 2004, 5:23pm UTC](https://boards.straightdope.com/t/free-market-how-would-it-work/270976/170 "2004-11-01T17:23:42Z")
> [@Shalmanese](#): > > All you’ve demonstrated is that theres **one** instance where free markets work better. And thereby, by extension, established this for all other comparable instances. Isn’t that how debate works? > [@Shalmanese](#): > > Say instead that we had 2 widget companies, widget company A uses $0.30 to produce widgets and $0.70 to promote how good their widgets are. company B uses $0.31 to produce widgets and $0.70 to promote how good THEIR widgets are and both sell for $2.\*\* The government has enough of this and nationalises the widget market, spends $0.40 making widgets, $0.10 in promoting them, sells them for $1 and makes just as much profit since twice as many widgets are being sold.\*\* The part I’ve bolded is the part where you are acting less efficiently. The government, if it decides it has “had enough of this”, is likely to be acting on false or incomplete information. The fact that no other private business has taken this course of action and thereby won market share from A and B **tends** to indicate that there are forces at work about which the government knows nothing. There is very likely some other factor that causes the rational actors in the marketplace to behave as they do. Perhaps, in order to sell enough widgits, you actually need to spend $0.30 in marketing, or you can’t sell enough. Perhaps not, perhaps this is just a business insight nobody has ever come up with before. What you need to believe if you think this is better than free markets is[ul][li] that government bureaucrats know more about how the widgit business should be run than those who depend on it for their livelihood [_]that the government bureaucrats involved are as dedicated as ordinary businessmen to squeezing every last use out of every penny they spend [_]that bureaucrats, when they are spending tax money, are better at managing risk than regular businessmen [_]that, unless the government acts, nobody will ever be motivated by the desire to get filthy rich to do what the government proposes to do [_]and that, of course, governments are perfectly willing to let outmoded or inefficient departments and bureaucracies shut down at the same rate that businesses go bankrupt.[/ul][/li] > [@Shalmanese](#): > > Of course, a government institution could become fat and corrupt but it doesn’t neccesarily follow that it must become so. And the industry could streamline itself so that less promoted, better quality products become availble, but, again, it doesn’t neccesarily become so. In places where the free market is allowed to operate, they either operate efficiently, or get driven out of business by those that do. And it is, in my view, far more likely that a business will be motivated to do so than a government risking nothing more than somebody else’s money. If a business runs out of money, it either borrows at the going rate of interest, or goes under. Governments are always subject to the temptation of simply grabbing more taxes. Any organization is subject to the temptation of sloth and greed. Those that are less in thrall to the discipline of the marketplace are far more likely to give in to those temptations. Regards, Shodan ---
**Author:** ![Frankenstein\_Monster](https://avatars.discourse-cdn.com/v4/letter/f/ccd318/32.png) [@Frankenstein\_Monster](https://boards.straightdope.com/u/Frankenstein_Monster)\ **Post date:** [November 1, 2004, 6:08pm UTC](https://boards.straightdope.com/t/free-market-how-would-it-work/270976/171 "2004-11-01T18:08:30Z")
> [@Leonard](#): > > At some point there is a % of the yard burning where the amount of growth is equal to my ability to control it. I like your analogy 🙂 Obviously, looking at current events right now, American central government has now reached the point (20%) where its growth is out of control. Republicans control the executive, legislature, many courts, state executives and legislatures, influential political appointments in the civil service… and yet since 2001 we have seen [large](http://lilt.ilstu.edu/gmklass/pos138/datadisplay/images/budget4.gif) [increases](http://lilt.ilstu.edu/gmklass/pos138/datadisplay/images/budget6.gif) in government growth, uncontrolled discretionary spending / pork, political discourse reduced to the one and only answer to every problem (education, terrorism, intelligence, you name it) being to spend more on it… In Finland, on the other hand, central government is well under control at 35% or so. Central and municipal bodies alike have no problems reaching agreement on sale of government companies, outsourcing/privatisation of government functions, and until recently, firing civil servants. [Pdf file](http://www.stat.fi/tk/hp/kui_kust_jmhiv.pdf), central government expense index in constant prices (1st page, rightmost column) shows expenses growing slower than GDP since beginning of '90s or so. (I am actually disappointed that it doesn’t show a decline.) (Comparative data in this [pdf file](http://unpan1.un.org/intradoc/groups/public/documents/un/unpan014044.pdf) found on [this page](http://www.unpan.org/statistical_database-publicsector.asp)) ---
**Author:** ![erislover](https://avatars.discourse-cdn.com/v4/letter/e/71e660/32.png) [@erislover](https://boards.straightdope.com/u/erislover)\ **Post date:** [November 1, 2004, 8:15pm UTC](https://boards.straightdope.com/t/free-market-how-would-it-work/270976/172 "2004-11-01T20:15:03Z")
> [@Leonard](#): > > Let’s say I’m standing in my front yard and 5% of it is on fire (assuming I don’t have a pasture for a front yard). I could easily contain it and prevent it from spreading. Now imagine if 95% of the yard was on fire. Even at the same rate of growth I think it’s pretty obvious that I couldn’t prevent it from spreading to the 5% that I’m standing on. Yeah, I know, crappy analogy. I don’t think a constant rate of growth is exactly applicable either, I think it’s a rising rate. All you need to suggest is that the rate of change of fire is directly proportional to how much has already burned. For example, consider a circular burn: the rate of change of growth could be directly proportional to the circumference. This would be an ever-escalating growth. But a different model might be like: the rate of change of growth is proportional to the difference between its absolute maximum size (100% of your yard) and its current size. This means the government grows rapidly at first, but as it gets bigger and bigger, there is less and less reason for it to grow more. There are a lot of different models you could use for growth. They’ll say more about how you think of the government than how the government “really” is. 😉 ---
**Author:** ![pervert](https://avatars.discourse-cdn.com/v4/letter/p/bbe5ce/32.png) [@pervert](https://boards.straightdope.com/u/pervert)\ **Post date:** [November 1, 2004, 8:31pm UTC](https://boards.straightdope.com/t/free-market-how-would-it-work/270976/173 "2004-11-01T20:31:01Z")
> [@Shalmanese](#): > > [Externalities](http://en.wikipedia.org/wiki/Externality) Thank you for the link. [Here is a good discussion of market forces which address some externalities](http://www.econlib.org/library/Enc/PublicGoodsandExternalities.html). > [@](#): > > Lighthouses are one of the most famous examples that economists give of public goods that cannot be privately provided. Economists have argued that if private lighthouse owners attempted to charge ship-owners for lighthouse services, a free-rider problem would result. Yet lighthouses off the coast of nineteenth-century England were privately owned. Lighthouse owners realized that they could not charge shipowners for their services. So they didn’t try to. Instead, they sold their service to the owners and merchants of the nearby port. Port merchants who did not pay the lighthouse owners to turn on the lights had trouble attracting ships to their port. As it turns out, one of the economics instructors’ most commonly used examples of a public good that cannot be privately provided is not a good example at all. [Here is one about “Free Market Environmentalism”.](http://www.econlib.org/library/Enc/EnvironmentalismFreeMarket.html) > [@](#): > > For markets to work in the environmental field, as in any other, rights to each important resource must be clearly defined, easily defended against invasion, and divestible (transferable) by owners on terms agreeable to buyer and seller. Well-functioning markets, in short, require “3-D” property rights. When the first two are present—clear definition and easy defense of one’s rights—no one is forced to accept pollution beyond the standard acceptable to the community. Each individual has a right against invasion of himself and his property, and the courts will defend that right. And when the third characteristic—divestibility—is present, each owner has an incentive to be a good steward: preservation of the owner’s wealth (the value of his or her property) depends on good stewardship. > [@](#): > > Environmental problems stem from the absence or incompleteness of these characteristics of property rights. When rights to resources are defined and easily defended against invasion, all individuals or corporations, whether potential polluters or potential victims, have an incentive to avoid pollution problems. When air or water pollution damages a privately owned asset, the owner whose wealth is threatened will gain by seeing that the threat is abated, in court if necessary. In England and Scotland, for example, unlike in the United States, the right to fish for sport and commerce is a privately owned, transferable right. This means that owners of fishing rights can obtain damages and injunctions against polluters of streams. Owners of these rights vigorously defend them, even though the owners are often small anglers’ clubs whose members have modest means. They have formed an association that is ready to go to court when their fishing rights are violated by polluters. Such suits were successful well before Earth Day and before pollution control became part of public policy. Once rights against pollution are established by precedent, as these were many years ago, going to court is seldom necessary. I won’t quote it, but this article has an interesting history of the famous Love Canal. I’ve heard it stated before, but never so succinctly. I am not trying to divest you of whatever belief you have about markets and the need for governemtn regulation of them. But I hope I have at least addressed the issue of externalities. That is I am not trying to claim that externalities are irrelevant or unimportant. But I hope at least that I have shown that some (though certainly not all) externalities can be addressed by increasing rather than decreasing property rights. > [@Gorsnak](#): > > You mean you haven’t read the previous posts in this thread? I’ve little inclination to repeat myself. No, I have not read every post in this thread. And no, I do not want you to repeat yourself. A simple link to the post of yours which best expressed the question you want me to answer would be fine. ---
**Author:** ![Leonard](https://avatars.discourse-cdn.com/v4/letter/l/a6a055/32.png) [@Leonard](https://boards.straightdope.com/u/Leonard)\ **Post date:** [November 1, 2004, 8:49pm UTC](https://boards.straightdope.com/t/free-market-how-would-it-work/270976/174 "2004-11-01T20:49:13Z")
> [@erislover](#): > > There are a lot of different models you could use for growth. They’ll say more about how you think of the government than how the government “really” is. 😉 Agreed. 🙂 > [@Leonard](#): > > I don’t think a constant rate of growth is exactly applicable either, I think it’s a rising rate. Looks like I’m libertarianish. ---
**Author:** ![pervert](https://avatars.discourse-cdn.com/v4/letter/p/bbe5ce/32.png) [@pervert](https://boards.straightdope.com/u/pervert)\ **Post date:** [November 1, 2004, 8:56pm UTC](https://boards.straightdope.com/t/free-market-how-would-it-work/270976/175 "2004-11-01T20:56:00Z")
You have asked some questions and complained that they have not been addressed. Allow me to try. Some of them at least. > [@Shalmanese](#): > > 1. Provide a plausibe scenario for the case where Intel knocks AMD and IBM out of the processor market and becomes a monopoly, a new entrant comes into the market and breaks this monopoly. How about the current situation. Intel is not a monopoly even if you count IBM and AMD as Intel. There are several other manufacturers of CPUs. There is even a recent newcomer to the CPU market, Transmetta. > [@](#): > > 1. Provide a mechanism for the free market to deal with positive and negative externalities or prove that such externalities do not exist. I addressed this in my last post. > [@](#): > > 1. Provide a reason why a rational, clear thinking CEO about to retire would not do as much as legally possible to pump up their stock price before selling out. I assume you are talking about the sorts of decisions which would hurt the long term viability of the company. a) Because he cannot sell the stock quickly enough to take advantage of really bad decisions. b) dividends are a long term benifit of stock ownership. They are only a benifit if the company continues to make a profit. [QUOTE] 5. Assume that CEO payment in certain industrys at the present stage is exorbiant, ie: above what marginal utility theory would suggest, and that we are in a ogliopolistic market place like investment banking, ie: you can’t just magically wish new companies out of thin air as a deus ex machina, provide a mechanism to adjust CEO compensation to be more in line with market rates.[/QUTOE]I would simply adjust market rates to be more in line with “marginal utility rates”. My first mechanism would be to make more stockholders aware of the problem. I have addressed this in more detail in other threads. But I feel that one of the biggest problems is that too many stockholders are simply members of mutual funds. They tend not to participate in stockholder functiions and thus reduce the role of stockhoders to oversee the actions of Boards and CEOs. I think that some sort of collective activity could partially alleviate this problem. > [@](#): > > 1. Provide a mechanism for dealing with what would be presumably legal but generally regarded as immoral co-ercion in the market place (small inventor in a basement invents a way to get 100Mpg from fresh water. Big Oil takes notice and wants to buy it off him but he refuses. He goes into production but mysteriously, everything starts going wrong, suppliers are late and their products are off spec, electricity is unreliable and theres constant streetwork meaning delivery trucks can’t get through. Even though his ideas are great, he is unable to produce a single widget and goes bankrupt) I’m not sure exactly that this mechanism needs to be described. What you listed are actiions which the market already biases against. The big oil companies could buy up all of the inventor’s suppliers’ supplies, but that would mean they had to become a monopoly in several markets. Unless you are actually suggesting that fraud (suppliers not meeting spec) or some other uses of force would not be illegal in a free market. In which case, I would simply reintroduce the free market you your scenario. > [@](#): > > 1. Provide a mechanism for fairly allocating space on a commons and punishment for those who do not keep to it(ie: Each television station broadcasts on it’s own defined band. During primetime, one TV station hires a group of thugs anonymously to spray random garbage through all the other spectrums so the only TV station with reception was theirs) Property rights do this quite well. Anyone operating broadcast equipment which trampled on the property of the TV station should (and is if I am not mistaken) subject to quite a bit of liability. Again, I have not intended to disuade you of any particular beliefs. I only intend to show that all of these issues can be addressed. ---
**Author:** ![Shalmanese](https://avatars.discourse-cdn.com/v4/letter/s/45deac/32.png) [@Shalmanese](https://boards.straightdope.com/u/Shalmanese)\ **Post date:** [November 1, 2004, 11:09pm UTC](https://boards.straightdope.com/t/free-market-how-would-it-work/270976/176 "2004-11-01T23:09:09Z")
> [@Shodan](#): > > And thereby, by extension, established this for all other comparable instances. Isn’t that how debate works? > The part I’ve bolded is the part where you are acting less efficiently. No, you made the claim that the free market was more efficient in **all** cases. Thus, my burden of proof is to show that if there is **one** case in which the free market is not the most efficient, then your claim is demolished. I don’t think anybody is claiming that government regulation is always more efficient, just that it is sometimes more efficient. Proving my specific example to not hold doesn’t invalidate my claim but proving my specific example to hold invalidates yours. > [@](#): > > The government, if it decides it has “had enough of this”, is likely to be acting on false or incomplete information. The fact that no other private business has taken this course of action and thereby won market share from A and B **tends** to indicate that there are forces at work about which the government knows nothing. There is very likely some other factor that causes the rational actors in the marketplace to behave as they do. Perhaps, in order to sell enough widgits, you actually need to spend $0.30 in marketing, or you can’t sell enough. Perhaps not, perhaps this is just a business insight nobody has ever come up with before. What you need to believe if you think this is better than free markets is[ul][li] that government bureaucrats know more about how the widgit business should be run than those who depend on it for their livelihood [_]that the government bureaucrats involved are as dedicated as ordinary businessmen to squeezing every last use out of every penny they spend [_]that bureaucrats, when they are spending tax money, are better at managing risk than regular businessmen [_]that, unless the government acts, nobody will ever be motivated by the desire to get filthy rich to do what the government proposes to do [_]and that, of course, governments are perfectly willing to let outmoded or inefficient departments and bureaucracies shut down at the same rate that businesses go bankrupt.[/ul][/li]In places where the free market is allowed to operate, they either operate efficiently, or get driven out of business by those that do. And it is, in my view, far more likely that a business will be motivated to do so than a government risking nothing more than somebody else’s money. If a business runs out of money, it either borrows at the going rate of interest, or goes under. Governments are always subject to the temptation of simply grabbing more taxes. Thats because governments have something ordinary businesses do not have. A government can just step in and say “Nobody is allowed to compete with me”, in effect, nationalising an industry. Now, in some cases, this would be a bad thing since there are no real economic benifits to doing so (although there might be social or ethical benifits). But in other cases, government monopolies might actually be a desiarable state since monopolies don’t have to spend any money on marketing. Take the cereal market for example, what we have is essentially the same 10 types of crunchy cardboard being marketed 100 different companies. So when you buy a $5 box of cereal off the shelf, your paying $0.50 for the cereal and $4.50 for the marketing that’s trying to convince you this cereal is better than all the other almost identical cereal boxes in the supermarket. This is a **structural** element of the cereal market, theres no inefficiency here for the free market to destroy. Now, say the government stepped in. It nationalises the cereal market, pares the range of cereal lines from 1000 to 10 and starts producing government cereal. Since theres only one brand of cereal, the government doesn’t bother spending any money on advertising, after all, everyone knows cereal EXISTS right? In terms of utility, theres very little difference to the average consumer since theres only really 10 types of cereal anyway. The government might even make 15 different cereals since it can afford to produce previously unprofitable ones, a net gain in utility from the consumers side. From the producers side, the government would have to be **ten times more inefficient** than the free market at making cereal for the free market to be preferable. If the government was merely 5 times as inefficient, then people would get more cereal for a cheaper price. While it’s easy to argue the government might always be more inefficient than the free market, I don’t see a way to argue that it could possibly be 10 times more inefficient for something as simple as ceral production. > [@](#): > > Any organization is subject to the temptation of sloth and greed. Those that are less in thrall to the discipline of the marketplace are far more likely to give in to those temptations. > > Regards, > Shodan Which begs the question, why is it that there exist **some** government institutions that WORK? USPS, for all it’s faults is still competitive with fedex, UCLA and UCB are much, much better than the majority of private universities. I’ve run out of examples since I’m not from the US but its clear that not ALL government agencies are dysfunctional, slothful money suckers. ---
**Author:** ![Shalmanese](https://avatars.discourse-cdn.com/v4/letter/s/45deac/32.png) [@Shalmanese](https://boards.straightdope.com/u/Shalmanese)\ **Post date:** [November 1, 2004, 11:20pm UTC](https://boards.straightdope.com/t/free-market-how-would-it-work/270976/177 "2004-11-01T23:20:59Z")
> [@pervert](#): > > Thank you for the link. [Here is a good discussion of market forces which address some externalities](http://www.econlib.org/library/Enc/PublicGoodsandExternalities.html). > > [Here is one about “Free Market Environmentalism”.](http://www.econlib.org/library/Enc/EnvironmentalismFreeMarket.html) > > I won’t quote it, but this article has an interesting history of the famous Love Canal. I’ve heard it stated before, but never so succinctly. > > I am not trying to divest you of whatever belief you have about markets and the need for governemtn regulation of them. But I hope I have at least addressed the issue of externalities. That is I am not trying to claim that externalities are irrelevant or unimportant. But I hope at least that I have shown that some (though certainly not all) externalities can be addressed by increasing rather than decreasing property rights. > > No, I have not read every post in this thread. And no, I do not want you to repeat yourself. A simple link to the post of yours which best expressed the question you want me to answer would be fine. That first article you linked basically provided a bunch of **technological** solutions to classic externalities that gave them excludability and, thus, made them not externalities anymore. The problem is, this doesn’t prove the market can solve the problem of externalities, it just proves it can sometimes turn them into non-externalities (internalities?). Even the article admits there are some externalities which there seems to be no current solution for. > [@](#): > > Property rights are a less effective solution for environmental problems involving the air, however, because rights to the air cannot be defined and enforced easily. It is hard to imagine, for instance, how market mechanisms alone could prevent depletion of the earth’s ozone layer. In such cases economists recognize the likely necessity of a regulatory or governmental solution. The problem is, what do we do with these externalities we cant internalise? Do we just sit and twiddle our thumbs until we come up with a solution or is it best for the government to step in for the time being? ---
**Author:** ![pervert](https://avatars.discourse-cdn.com/v4/letter/p/bbe5ce/32.png) [@pervert](https://boards.straightdope.com/u/pervert)\ **Post date:** [November 1, 2004, 11:35pm UTC](https://boards.straightdope.com/t/free-market-how-would-it-work/270976/178 "2004-11-01T23:35:16Z")
> [@Shalmanese](#): > > That first article you linked basically provided a bunch of **technological** solutions to classic externalities that gave them excludability and, thus, made them not externalities anymore. The problem is, this doesn’t prove the market can solve the problem of externalities, it just proves it can sometimes turn them into non-externalities (internalities?). Even the article admits there are some externalities which there seems to be no current solution for. Agreed. But it does address the issue you raised. Specifically, it questions whether some of the most commonly reffered to “externalities” are in fact external. This is the basis of my misunderstanding of the use of this term. I am at a loss to understand most of the examples of “externalities” because I see the “market” as all of us. It makes it difficult to see how anything can be external to that. However, I agree that more rigorous definitions need to be used. That’s why I asked for a definition which you very graciously provided. Thanks again BTW. > [@](#): > > The problem is, what do we do with these externalities we cant internalise? Do we just sit and twiddle our thumbs until we come up with a solution or is it best for the government to step in for the time being? Well, I would say the problem is how do we stop the government from “stepping in” once an issue is not longer external? If we had some method for assuring this I would be more ammenable to those issues which remain “external”. Also, it greatly depends on what you mean by “stepping in”. I think I can understand more thouroughly now how, for instance, global warming can be understood as a market externality. It seems that it is difficult to think of the atmosphere as being owned by anyone. How about this. We divide the amount of pollution to be acceptable in the atmosphere on a per person basis. Anyone wanting to exceed his allotment would need to a)ask everyone to agree to increase everyone’s allotment, or b)purchase other’s allotments. My point is that there are certainly more market based approaches than simply to ask the government to limit everyones ability to conduct various activities based on the pull of disperate advocacy groups. I’m willing to stipulate that the market will not automatically fix all human ills or provide all human wants. I’m even willing to stipulate that some government actions which many might think of as market interference might be necessary. I’d simply rather that we consider such actions as the rare exception rather than the rule, look for market based or at least market leaning solutions before others, and that we refrain from pre emptive solutions unless no other is possible. ---
**Author:** ![Shalmanese](https://avatars.discourse-cdn.com/v4/letter/s/45deac/32.png) [@Shalmanese](https://boards.straightdope.com/u/Shalmanese)\ **Post date:** [November 1, 2004, 11:36pm UTC](https://boards.straightdope.com/t/free-market-how-would-it-work/270976/179 "2004-11-01T23:36:10Z")
> [@pervert](#): > > You have asked some questions and complained that they have not been addressed. Allow me to try. Some of them at least. > How about the current situation. Intel is not a monopoly even if you count IBM and AMD as Intel. There are several other manufacturers of CPUs. There is even a recent newcomer to the CPU market, Transmetta. Well, the reason why Intel & co are not a monopoly now is because if there was any evidence on collusion or price fixing on their part, they would get stuck with a big fat fine from the government. As for transmeta, close, but still not on the money. They were smart enough to realise theres no way they can enter into the performance race so they are focusing on low power, efficient CPU’s, a market with slightly lower barriers to entry. As far as \>3ghz CPU’s go, those 3 are the only game in town. > [@](#): > > I assume you are talking about the sorts of decisions which would hurt the long term viability of the company. > > a) Because he cannot sell the stock quickly enough to take advantage of really bad decisions. > > b) dividends are a long term benifit of stock ownership. They are only a benifit if the company continues to make a profit. Fair enough, I had not considered a pay structure such that the CEO would be dependant on the financial performance of a company for some time after he quit. Question answered, thanks. > [@](#): > > I would simply adjust market rates to be more in line with “marginal utility rates”. My first mechanism would be to make more stockholders aware of the problem. I have addressed this in more detail in other threads. But I feel that one of the biggest problems is that too many stockholders are simply members of mutual funds. They tend not to participate in stockholder functiions and thus reduce the role of stockhoders to oversee the actions of Boards and CEOs. I think that some sort of collective activity could partially alleviate this problem. Yes, but the problem is why is this not happening now? I would argue the stock market is one of the freest markets yet it hasn’t found a solution to this problem. In short, your trying to make the problem go away by changing human nature, a theory which seems to have a rather unsuccessful history. > [@](#): > > I’m not sure exactly that this mechanism needs to be described. What you listed are actiions which the market already biases against. The big oil companies could buy up all of the inventor’s suppliers’ supplies, but that would mean they had to become a monopoly in several markets. Unless you are actually suggesting that fraud (suppliers not meeting spec) or some other uses of force would not be illegal in a free market. In which case, I would simply reintroduce the free market you your scenario. Well, they’re not neccesarily actions that are illegal, just morally dubious. Big Oil makes it “known” to all thier suppliers that if they do a deal with the new guy, they can expect things to be “difficult” with Big Oil. Big Oil manages to pull a couple of strings and ring in a couple of favours, the net effect being that the new guy simply can’t do business with anyone since nobody wants to displease Big Oil. It’s all purely voluntary of course in the same way that jumping off a cliff is voluntary; theoretically you could do it but nobody is crazy enough to. > [@](#): > > Property rights do this quite well. Anyone operating broadcast equipment which trampled on the property of the TV station should (and is if I am not mistaken) subject to quite a bit of liability. Okay, so the government sells the spectrum as property? and the government is in charge of enforcing the owners property rights? Probably not as free a market as I was envisioning of but it seems reasonable, question answered. Thanks. ---
**Author:** ![Shodan](https://avatars.discourse-cdn.com/v4/letter/s/9f8e36/32.png) [@Shodan](https://boards.straightdope.com/u/Shodan)\ **Post date:** [November 1, 2004, 11:36pm UTC](https://boards.straightdope.com/t/free-market-how-would-it-work/270976/180 "2004-11-01T23:36:51Z")
> [@Shalmanese](#): > > No, you made the claim that the free market was more efficient in **all** cases. No, I made the claim that the free market would **tend** toward greater efficiency in the long run. > [@Shalmanese](#): > > Thats because governments have something ordinary businesses do not have. A government can just step in and say “Nobody is allowed to compete with me”, in effect, nationalising an industry. Right - thus eliminating the discipline of the marketplace. The tendency toward efficiency is thereby removed. And, in the long run, the government will be less responsive, less flexible, and less efficient. > [@Shalmanese](#): > > But in other cases, government monopolies might actually be a desiarable state since monopolies don’t have to spend any money on marketing. I have already dealt with this. For your cereal example to work, you have to assume that nobody except the government can increase market share by spending less on marketing. This is patently false, as the success of house brands in grocery stores shows. > [@Shalmanese](#): > > So when you buy a $5 box of cereal off the shelf, your paying $0.50 for the cereal and $4.50 for the marketing that’s trying to convince you this cereal is better than all the other almost identical cereal boxes in the supermarket. This is a **structural** element of the cereal market, theres no inefficiency here for the free market to destroy. No, the inefficiency exists rather clearly - the companies involved are spending too much on marketing. They could increase their profits if they fired their ad agency. There is nothing structural about it. The first cereal company to have this insight can maximize its profits with a simple business decision. > [@Shalmanese](#): > > In terms of utility, theres very little difference to the average consumer since theres only really 10 types of cereal anyway. The government might even make 15 different cereals since it can afford to produce previously unprofitable ones, a net gain in utility from the consumers side. No, what you are assuming is that you, or the government, knows better than the consumer what they want, or what “really” exists. And all this quite apart from the information communicated almost instantaneously by the interplay of supply and demand as reflected in price. And it is not a net gain in utility to produce products for which there is no market. What you do if you try it is to take resources away from where they are being used efficienctly, and re-allocate to areas where utility is lower. Nobody wants cereal type 15. They do want cereal types 1 - 10. To take resources away from making types 1 - 10 and start producing type 15 is a decrease in marginal utility, not an increase. It would be equivalent to taking resources away from producing automobiles and re-allocating them to making buggy whips. This is a decrease in utility, because consumers have communicated the greater need for automobiles by driving up the price for them. > [@Shalmanese](#): > > Which begs the question, why is it that there exist **some** government institutions that WORK? USPS, for all it’s faults is still competitive with fedex, UCLA and UCB are much, much better than the majority of private universities. Perhaps you didn’t know that the functional monopoly on certain kinds of deliveries by the USPS is maintained by law. [FedEx is not allowed, in other words, to compete for letter mail delivery with USPS.](http://www.cato.org/pubs/policy_report/pr-so-po.html) Whether or not UCLA and UCB are better than any other private universities is, of course, a subjective decision. What you seem to want is to empower the government to decide this for everyone, and enforce that decision by law. Do you suggest that students would benefit if private universities were outlawed? And everyone went to a state school, or not to college at all? Regards, Shodan [Previous page](https://boards.straightdope.com/t/free-market-how-would-it-work/270976.md?page=8) [Next page](https://boards.straightdope.com/t/free-market-how-would-it-work/270976.md?page=10)