From whence the faith in a free market?

Great Debates
1

In an attempt to not hijack Freejooky’s thread on a dual minimum wage any more than I already have, I’m starting a new thread.

My question is predicated on a few assumptions; if they are wrong, please let me know.

  1. A wholly free market would be an economy without watchdog/ testing groups run buy the government.
  2. The government would impose no restrictions, be they economic, environmental or labor-oriented.
  3. Such a government has (for all intents and purposes) never existed.

I don’t know a lot about economics, and am more comfortable dealing in concrete examples than in abstracts in this area. To that end, here’s an example, which you can pick up to help explain your views to me, or ignore completely if it isn’t ideal. :slight_smile:

As I have mentioned many a time, I’m a TA at Madison, though in my case the title ‘TA’ is a bit of a misnomer, since I actually plan and teach the entire class on my own. Our salary is not paid by the UW, but rather the state of WI: I’m a government employee. A few years ago, our ‘Democrat’ (I’m trying to avoid snark in the post, but Doyle is a fake Democrat to my mind) governor, Jim Doyle, announced that all state employees would be paying part of their health insurance premiums. Since the reputation of state employees is right up there with IRS agents and repo men, this was a popular move. It scared the crap out of me. This is the first time in my life I’ve had health insurance that actually covered anything, and that wouldn’t quadruple the rates for daring to fill a prescription. I was able to get my tonsils taken out and stop missing a few weeks of work/ school every year because of chronic infections. I no longer had to pay $100/ month for my depression meds. I am and was grateful for the insurance, and it was a part of the reason I chose to go to WI.

Anyway… our union balked. We had taken a steep pay cut (TA’s at WI make several thousand less/ year than those at our sister institutions) several years earlier in exchange for the free (not paying premiums) health care. The average TA salary is around $10,000/year, and since the state refused to tie the cost of the premiums to our wages, we were faced with paying 50,100,200/month in premiums (who knows?) The state explicitly told us the move to force all state employees to pay was political, not economic, as they proved by rejecting several of our offers that would have saved the state hundreds of thousands and still preserved no-premium health insurance. We (and about 2/3 of the other state employees) have been deadlocked for close to two years.

So, a few weeks ago, I get a chance to talk to one of the more outspoken conservatives on campus. He says we ought to have taken the state’s original offer (no raise first year - 2003, 1% second year - 2004, paying for premiums $9/month for singles, 23/ families -again, I have no financial problem with the $9/month, but rather the fact that the state would not put some sort of limit on raising it, and other universities have raised premiums well above $100/month). I say, Why on earth would I assume the state will do what’s in our interest? We have no guarantee that the state wouldn’t raise the premiums as much as they like; we haven’t gotten a raise in three years; they have told us the move was political, and they don’t really care if they saved money or not. Based on its history, I don’t feel like the state has been terribly generous with us. Why should I expect differntly in the future? His answer: the market will sort it all out. Me: Huh? Based on what? Isn’t this the same market that has been raising health insurance for everyone to astronomical levels? Isn’t this the same market that hasn’t even given me a cost-of-living raise in several years?

If under a somewhat-controlled market (the system in which we currently live) companies are still able to screw over the little guy, why would I believe they would do differently when those safeguards are removed? How would a free market make another Enron, or environmental pollution, or passing the rising insurance costs onto employees impossible?

2

Heh. My family is mostly state workers. It was pretty fun when they decided the best way to punish legislators for not passing a budget was to withold paychecks from all state employees.

3

aurelian: * How would a free market make another Enron, or environmental pollution, or passing the rising insurance costs onto employees impossible?*

AFAIK, nobody but the most die-hard extremist libertarians even attempt to argue that it could, at least in the real world. Markets work very well at many things, but real-life markets never work perfectly.

A so-called ideal free market assumes a lot of unrealistic conditions, such as perfect equality of information between parties in an economic transaction, completely internalized costs and benefits, low entry barriers to competition, and so forth.

Equality of information would prevent Enron-type scams, since the potential purchasers of a dishonest company’s stock would know it was dishonest and stay away from it. Completely internalized costs would prevent manufacturers from “externalizing” the costs of handling waste by dumping it into the environment. Maintaining lots of competition through low entry barriers would result in many insurance companies eagerly competing to offer the lowest possible rates.

Absent these ideal conditions, though—i.e., in real life—markets often produce sub-optimal outcomes, so some regulation is necessary. The $64,000 question is simply how much regulation will produce the best results.

AFAIK, no reputable economist is seriously trying to argue that the market is currently producing optimal outcomes when it comes to health-care costs. The question is simply how much and what type of additional regulation, if any, can improve the situation instead of making it worse.

4

Rational people typically don’t.

As Kimstu discussed below, “free” (known to economists as perfectly competitive) markets rest on several unreasonable assumptions. These assumptions are very convenient because it makes many economic problems analytically tractable. The results derived from theoretical perfect competitive markets can be applied and tested in the real world with certain modifications.

Just to lay out the groundwork a little more, a perfectly competitive market requires that all of the below be true:

[ul]
[li]There are many suppliers, each with an insigificant share of the market. This is usually called “no market power.”[/li][li]Consumers perceive that all products are essentially identical and can be subsituted for each other with no loss to the consumer. [/li][li]Consumers have perfect information about the price of goods sold by all sellers.[/li][li]All firms have equal access to resources and technology. [/li][li]There are no entry and exit barriers in the long run.[/li][li]There are no externalities in consumption and production. In other words, social and private costs and benefits are the same.[/li][/ul]

Most of the most interesting work in economics these days is demonstrating how rational, self-interested behavior in a reasonable competitive market yields results that are suboptimal. The problems lie not in the competitiveness or lack thereof of the market but in the frequently perverse structure of incentives that have been established for various and frequently interesting reasons.

5

Aurelian, people get screwed over even in a partially-regulated economy because of ignorance. Let me re-emphasize part of Kimstu’s post:

On top of this, it’s assumed that all parties involved are completely rational. (Heh.) As such, a true free market simply can’t exist. Equality of information, for example, would mean you not only know about all of a company’s activities, but also how much it costs them to produce a product they want to sell to you, how much it costs their competitors, and so on. This can’t be regulated; you can require publically-held companies to open their books to make sure no shenannigans are happening, but to require full disclosure of costs, plans, and so forth would eliminate the value of proprietary information. Legislation to accomplish this would be impossible to pass, and likely unconstitutional because it would violate the company’s due process rights.

So, to your first example (State of Wisconsin vs. TAA), an ideal free-market approach might look a little like this:

First, “low barriers to entry” eliminates restrictive trade practices. Exclusive dealings no longer exist, meaning that TAA membership and acceptance of the negotiated contract are voluntary; individual TAs are free to negotiate their own terms. Additionally, this assumption makes it easy for an individual to walk and find equivalent employment elsewhere.

Second, the state knows the worth of each TA on the local job market, and also the true costs of insuring every state employee and pensioner-- in other words, it can take a look inside the insurance company’s books and see how much is paid out for the various different age groups of insured.

Two major result would likely come of this. First is a reduction in the health care premiums requested by the insurers. A population of 24-year-olds will be vastly cheaper to insure than a population of 65-year-old retirees, for what should be obvious reasons.

The second major result would be a sliding scale of TA salaries based on market worth. Science, engineering, and business TAs would leave the TAA in droves to negotiate individual salaries significantly higher than were agreed to in the 2003 contract (the average starting salary for graduates in my department is between $45-50K, and a competitive TA wage would reflect this), while those in the humanities wouldn’t see much change, perhaps even a pay cut depending on the department.

6

I’m generally a pro-free market kind of guy, but not as knowledgeable as some others that might post here. I’ll try to offer a couple points where I can.

These are generally correct for most extreme free market positions. Most people, however, accept that some governmental action is necessary. The question is, as Kimstu said: how much? On your list above, pollution issues are the most likely to receive an endorsement for governmental action.

One thing I noticed in your post is that you seem to be mixing the issues of state action and market action. I’m going to disagree with the conservative mentioned in your post–I’m unfamiliar with claims that the market will fix bad political decisions. Market forces generally affect the government much less than they affect private enterprises. For example, private firms cannot force you to purchase their product, while a government, through taxes, can. Before anyone comments on this, I will note that this is needed for some things (national defense is an obvious one). This ability, as well as others, insulates the government from market forces that would have a much greater effect on private industry.

I think you understand pro-market positions a lot better than you think you do. These statements (especially the middle one) are things I would expect to hear from someone on the right side of the economic spectrum, IMHO. Pro-market people tend to look at events such as the one you describe, and cringe in fear of what would happen if politicians were put in charge of more of the economy.

No, in some important ways, it’s not. As I mentioned above, the government is insulated from the effects of market forces. The wages of government employees are determined by the government, an entity that does not have to fear losing market share. In this case, your wages are determined by what will get a politician more votes, and not by the market.

Regarding the costs of medical care, there are proposed free market solutions to this problem (many believe the problem with the medical system is too much regulation, driving up prices), but I am not very familiar with many of these ideas. I would prefer to leave this discussion to other posters, if you don’t mind.

No one reasonable is going to say that any of those things will be made impossible, only less harmful than they currently are.

One of the core beliefs of those on the economic right is that safeguards really are not. Safeguards, many believe, do not do what they were proposed to do, and in some cases, do exactly the opposite. Even the use of economic regulations can produce a problem: it gives large companies and industries the incentive to lobby the government. The idea behind the free market is that, when acting in a non-coercive atmosphere, the combined effects of everyone acting in their own best interest creates a situation where the maximum number of people prosper. But when regulation is introduced, large companies (those with the necessary connections and financial assets to effectively lobby the government) can push for regulations that will harm their competition. As the amount of regulation in the system grows, the chance that loopholes will appear increases, and those who have armies of lawyers and accountants are the ones most likely to find those loopholes. This creates a situation where the rich have the advantage (or more of an advantage than they would have had anyway) and the poor are hurt. This is the rationale for promoting free market (or more free than currently) policies.

I hope this helps you understand some of the ideas behind the belief in the market. I hope others will come along and elaborate or correct me where I made a mistake.

7

[raises hand]

Umm . . . Mr. aurelian – isn’t “from whence” redunant? :slight_smile:

[stays after class to clap erasers]

8

We have faith in the free market because we haven’t found anything better, and have seen a lot worse. But it needs something to ensure that it remains free.

9

Dr. Love is correct. To a certain extent, market forces act very differently on government than they do on private companies. The government acts almost like a monopoly for certain jobs. Even a monopoly an’t charge whatever it wants because at some point people simply can’t or won’t pay for a service or product no matter how much they need it. As an employee of the government, you basically have the choice of working for whatever wage they budget for you or to leave the market altogether. In the private sector, I can change jobs if I find a company willing to pay a higher wage.

The reason companies can’t “screw the little guy” is that they are competing against each other for labor. They don’t collude with each other and say “lets pay stockboys $5 an hour”. They pay as little as they can until they are unable to fill positions and have to increase wages. If they pay low enough wages, people leave the market and search for jobs in other industries or careers.

Therea are several reasons we want government interference in the market:
-Ensure that companies adequately represent the quality and safety of goods
-Prevent fraud, collusion or other activities that distort the market
-Smooth market fluctuations so that
-Provide a safety net so temporary setbacks don’t become permenant disasters

The basics of economics tells us that there’s no free lunch. If I increase a cost somewhere, it affects every other good or service that depends on the cost I increased. This is what most people fail to grasp. Market forces don’t depend on “generosity” or “fairness”. They are the sum of people’s wants and desires interacting with the availability of goods and services.

The market just meets the wants and needs of buyers and sellers most efficiently. It does not guarantee that EVERYONES wants and needs are met.

10

I would just like to make the point that it just might be those “somewhat-controls” which lead to some of the unfortunate outcomes you are complaining about. What if it is the government’s restriction on medical care which causes the shortage of doctors and therefore the ever increasing costs of medical care? What if it is the over generous liability limitations which governments allow to corporations which enable them to screw over the little guy? The “safeguards” you speak of work both ways. they limit the actions of corporations to some extent, but they limit the actions of everyone else as well. When a corporation says that it was following the law to the fullest extent of it ability, is able to prove it, and some unfortunate outcome still results, this carries a lot of weight when it is time to assess blame.

I’m just saying you might look in this direction for a different perspective.

11

<laughs> Quite possibly. My Spanish grammar is much better than my English. But, as I’m not yet a professor, I can admit I am not omniscient. :stuck_out_tongue:

Thanks for all the responses - I’ll be mulling over them while I work on next week’s presentation. One point strikes me (though my thoughts are not novel:
msmith537 said:

But, even without overt collusion, can’t other factors end up producing an analogous environment? In a run-down urban center, or a rural town, isn’t is possible that pay be lower because of other, more latent, less deliberate forces (lack of capital, isolation, porr educational opportunities, etc.)?

12

Come on, it makes perfect sense. I mean, has genetic engineering ever produced a plant or animal that was more suited to its role than natural selection?

Okay, bad example.

Has structured experimentation ever found an answer that eluded trial and error?

Darn.

It’s almost like learning the nature of a system and rationally manipulating it can yield results superior to those acheived by random fluctuation. Who woulda thunk?

13

Its a possibility, certainly. But unless you are going to introduce some form of coercion (forcibly keeping the workers in that run down area ala fuedalism, for instance) you will still have opportunitities for some. If nothing else, the opportunity to move to a more prosperous area. This alone should tend to drive the supply for the unskilled labor down and its price up.

More likely, however, is a similar problem by government interferance. When the government defines who can work in a certain field or how much they must be paid, or almost* any other interferance with the free choice of the participants, they create a situation where some participation is forced in some way. For instance, minimum wages can lead to the loss of very low wage jobs. That is, only the people with enough skills to earn the minimum wage will be able to get employment. Legally, that is. Those with less than this skill level will either be overpaid (and thus amongst the first to go during a layoff) or not hired at all.

Studies have shown that while overall unemployment rates do not rise when MW is increased, there is quite a bit of shuffling of income amongst the poorest workers.
*Note the inclusion of “almost”. I hold out hope that someone will eventually be able to demonstrate an interferance which does not interfere, so to speak. :wink:

14

Yes, a genetic engineer can make a superior plant or animal species. But scale that to an entire ecosystem. Can he design every plant, animal, and microbe to interact together more efficiently than millions of years of evolution or natural selection (or 5000 years of intelligent design;) )? Or does the introduction of a superior species ever have adverse effect on the balance of a stable ecosystem?

It’s the same with an economy. You can manipulate the market through various stimuli - interest rates, taxes, even setting price cielings and floors - but there are still rules that must be followed. Much like a functioning ecosystem, there is a delicate balance of millions of products and services and millions of buyers and sellers with their own needs and wants. It is far too complex a system to believe that you can simply design it like you suggest.

15

You’re asking an impossibility. In a free market all these things could happen (just as they happen now with strict government regulation – so I don’t really see this question as damning for the free market), but they would be addressed in various ways. Fraud is still punishable under a free market. If Enron committed fraud, they would be punished. Harming others is punishable under a free market. So if someone’s polution harmed you, then you could sue them. And I’m curious how passing rising insurance costs onto an employee is somehow comparable to the other two. Should the employer simply eat the cost of the rising insurance and go out of business? Then the employee has no insurance and no job. That’s not fair. Most employers have no choice but to pass along the costs of rising insurance. This is not a bad thing – it’s simply a fact of life.

16

If under an only somewhat-controlled market (the system in which we currently live) the government is still able to screw over the little guy, why would you believe they would do differently when the countervailing force of a competitive free market is removed?
In other words, what** Quartz** said.

17

There is no such thing as a free market, because free markets create winners and losers, and sooner or later the biggest winners use their money to influence government to regulated the market to ensure that they retain control of their wealth regardless of the fluctuations of the market, and to keep small competitors from becoming large ones, most especially by creating barriers to entry.

The free market, as has been stated, is a myth. All yhou can do is look at proposed regulations and see whose ox is gonna be gored. Free market advocates therefore are on the siide of the wealthy, since in the absence of compensating influences, the wealthy will tend to be the ones who benefit from the “free” market.

18

Actually, in a perfectly competitive market, equilibrium (in a simply defined economy with decreasing marginal return) is utterly stagnant. It “creates” no winners nor losers.

19

Not quite. Look at those who favor lowering trade barriers. Doing so in an area such as agriculture would hurt the wealthy agribusinesses and help the poor in developing areas. Simiarly, look at those who support erecting barriers to entry in a certain profession. Generally, they are the wealthy who have already gotten theirs and want to keep out those who would undersell them (as you stated in the first part of your post). Furthermore, many small businessmen have fought government regulations that unfairly restrict their ability to shine shoes, drive a cab, etc. These are not the “wealthy” fighting for a free market, but an average person who encounters governmental barriers to his desire to work for himself.

A freer market benefits everyone. Sure, the wealthy will do better if they are offering a superior product or service, but the non-wealthy will have a better chance of becoming wealthy and the consumer will benefit by lower prices that aren’t artificially propped up by government intervention.

20

You mean like minimum wage laws? Or rent control? Or subsidies to failing corporations and industries? Or socialized health care? Winners in a free market have no need for government regulations because they are reaping the benefits. It’s generally the losers who advocate tampering with market forces because the market prices are too high for them to purchase goods and services.