There are several issues I have with the free market system
Why would those who become rich and economically powerful (even legitimatly so) work to do anything but to use that power unfairly against competition and secure their further dominance and monopoly? I mean in some extreme situations I could see a sort of coorporate communism arrising out of one coorporation dominating the market to such an extent that it IS the market for a nation.
How could a system that is based upon human ‘vices’ (maybe this presumption is arguable) produce ethical businessman? It seems the incentive much of the time is to cut corners.
And Id be very eager to hear your criticisms of the free market system.
As an aside, similar questions could be asked about regulators or other government officials. Why should they work for the public good, rather than their own personal advancement or lazyness?
Anyhow, one answer to #1 is that bigger isn’t necessarily better. That’s why large corporations frequently spin off subsidiaries. Also, we are living the the day of innovation. A company like Microsoft can grow to a giant from nothing. There will be new companies that supplant Microsoft.
An answer to #2 is reputation – a company’s reputation for quality and an indiviual’s reputation for integrity.
I don’t believe the free market system, as an ideal, is open to a lot of criticism. The problem as I see it is that the conditions necessary for a really free market seldom exist. A couple of them are; unrestricted access to markets by producers, unrestriced access to information by consumers as to the state of the market.
It seems to me that there is a tendency to head for the bottom in a market where price is the main determining factor. As an example, take automobile tires. Most people including me, do not have the technical means to determine which tire is the best buy. I.e. which tire gives the most miles/dollar spent. So the main determing factor for most of us is to buy the tire we can afford. Manufacturers can always make a tire for a cheaper price by reducing the quality of the materials put into it and so the tendency, if price is the main determinant, is for everyone to make cheaper and poorer tires. Hence the need for government interference in the form of quality standards for tires which the makers have to prove by test that their tires meet. This, of course, adds to the cost of the tire and is anti-free-market but is a necessary hinderance.
And lately I guess you would have to add the propensity of the owners of some business owners and managers to do the human thing and lie, cheat and steal. Even Adam Smith recognized and pointed out, and I paraphrase, that there has never a combination of sellers that didn’t work to the disadvantage of buyers.
I guess the answer might be that the free market system is fine but people won’t let it operate for very long.
#1. A market is only free when it is not controlled by a monopoly or cartel. Once that happens, the monopoly or cartel can effectively block all new competition.
And your friend made this declaration based upon what?
My econonmist friend declared that your econonmist friend is full of crap. (Actually, I am the one stating your friend is full of crap). The US is the leader in the free market world. Unless you can prove that regulated markets are out performing the US markets you do not have a case. (Yes, I know the US markets are regulated to a point. But the US markets are the least regulated in the world)
The two Ukranians and one Lithuanian that I work with, and their famailies back in the former USSR, do not feel it was the market which caused their problems, but rather the massive resource-hogging done by once government officials and the like. Not a very good cite, I realize, in fact not a cite at all, but I believe them and was wondering what you had to say about that, Henry.
We don’t need to be experts with tires in order to make a reasonable choice. There already exist non-government, non-producer entities that rate tires. As buyers we can look to them for expert advice. We also can talk with our friends and ask about the track record of their tires, or perhaps they are experts themselves. People do this all of the time. These are both examples of the market meeting the informational need of the buyer. If we want expert tire advice, we can get it without a tax.
Yes, we tend to buy what we can afford (not always!) but most of us (not all of us of course) can afford varying levels of tire quality, so we have choice right there. We all don’t need the most expensive tires on the market.
Manufacturers have an incentive to make the tires for a lower cost than their competitors (assuming they have competitors) because that typically means more profit for them. That does not, however, translate into an incentive to make them with poorer materials. Producers have an incentive to stay in business and thus they jeopardize their longevity if they simply make crappy tires. For the same reason, producers have an incentive to be factual about the quality of their tires. When businesses lie or make poor product, they end up paying a huge price. In a relatively short amount of time, buyers would figure out the tires are bad and stop buying them. The history of business is chocked full of companies that tried to cut corners and failed. In addition, our society has become more and more information driven, and it is becoming harder and harder for poor businesses to stay afloat because we all communicate with each other much faster and more broadly.
Without a tax yes, but not without cost. The non-government, non-producer, like Consumer’s Union, entities charge for their information. That is unless we cheat and read the magazine on the news stand. Of course, we can go to the library thus sharing the cost with lots of other readers. However, I think it is unrealistic to expect a large fraction of consumers to take this route.
Of course this is true if only one or two producers out of many put out shoddy stuff. And I didn’t mean to imply that the lowering of quality takes place all at once. Rather I think there is a tendency in that direction that is hard to resist. All of what you wrote is true as long as the free market exists. However, as I said in the beginning, the conditions necessary for a free market to exist are hard to maintain without coercion from society at large to keep producers from combining into monopolies to the detriment of consumers. Businessmen don’t want a free market for themselves, only for their suppliers.
Eternal vigilance is as much a price for the maintenace of a “free market” as it is for liberty.
What you seem to be forgetting is that there are disadvantages to company size as well as advantages. Bigger companies are harder to manage and are slower to respond to market forces. An example of this is IBM, they were so big that when they decided to enter the PC market they realized that to produce it inhouse would take too long so they had to contract out most of it. This led to smaller companies like Microsoft taking over that part of the business. History is replete with huge businesses who took too long to change and shrank out of existence.
The stereotype of the huge monopoly making gobs of money while screwing its customers is just about impossible without government help.
**December [\b]nailed your second objection. Its all about brand names.
Oh sure, the executives in charge are really worried about their reputations. The idea that a free market exists in this era of a global economy is a little naive. When large economic units get into trouble they are rarely supplanted by a bunch of small units, but rather are usually taken over by an even bigger conglomerate.
You guys are describing how the market is supposed to work in theory, but seldom does. I’ve noticed that the most “ivory” of the “ivory tower” theorisers are those who think that a “free market” will solve the forces that tend to undermine free markets.
I would wager that your conclusion is based on anecdote and biased by relying on news reports. When BigCorp goes bankrupt and its assets are bought by MegaCorp, it gets reported on the news. When BigCorp goes bankrupt and its customers migrate to SmallCorp, TeenyCorp, DecentSizeCorp, and PunyCorp, it doesn’t get reported.
Remember, when IBM started going downhill in the 80s, Microsoft was a pretty small corporation. No one reported that Microsoft was supplanting IBM, because no one was really aware it was happening.
It seems to be that IBM’s “downhill” slide might be a little exaggerated. They are pretty much out of the desk top computer business. However, I don’t think that Microsoft, which is a software producer, supplanted IBM which is a hardware manufacturer and service company. In fact, IBM desk top computers used the Microsoft DOS operating system.
I’ll repeat, I can’t find much wrong with the basic principles of the free market system with one exception. It is true that sooner or later the marketwill reach some equilibrium level if left alone . However, I think there are time delays which tend to lead to instabilities. For example, if commodity A is in short supply, that can’t be rectified immediately and the price goes way up. So a lot of people start growing A. When A again becomes available there is an awful lot of it all at once and the price goes way down. It seems to me that, like any feedback system that has time delays, some sort of compensation is needed to smooth out the instabilities.
Before what some people refer to as “creeping socialism” began in the US in the 1930’s, economic depressions and financial panics were a regular occurrence and they were pretty severe. We still have ups and downs but I think they are not as prolonged and severe as they were before. In addition, just as Las Vegas needs constant vigilance to prevent to much “tilting of the wheel,” some sort of regulations are needed to keep businesses honest. As I think was amply demonstrated over the last couple of years.
I repeat, the free market system is OK, but I don’t think business men will let it operate unless they are compelled to.
“Communism” is diferent from a monopoly or a cartel. Even a monopoly is not free to set prices to whatever level it chooses because at some point, people are unwilling or simply unable to afford a product. Companies also rarely act in a vacuume. The old J.P. Morgan/Rockafeller method of “vertical integration” (ie an oil company also makes the trucks, pumps, pipes, barrels, etc) isn’t really in vogue anymore since comapnies realized its often a lot cheaper to outsource their non-core businesses. So in other words, the monopoly is still dependent on a hundred other companies for their supplies.
Some markets, like cable TV or Windows operating systems tend to become “natural monopolies”. In other words, it’s more efficient to have one opperating system or cable company instead of 10 incompatible systems and 20 sets of cable lines running through the neighborhood.
Depends what you mean by “vices”. Any system created or used by humans is vulnurable to human vices. Not to rehash the Gordon Gecko “greed is good” speech from Wall Street but greed does tend to clarify ones goals. I’m not creating works of art here. I am trying to make as much as I can by selling you some product. I will try to make it as cheap as possible by cutting corners on quality and meterials until it is of just enough quality that you will buy it. I can’t simply cut corners indefinitely because at some point, people will not drive an unsafe car or but a crappy CD player. The pros are we end up with cheaper goods that use less resources. The cons are that the quality is often ‘satisfactory’, not great.
Ethics comes into play because when it comes to certain things, there is no way of telling how safe or unsafe a thing is until it fails. Thats why we have legislation.
The issue with “free markets” is that the economy, left to its own devices, is like a truck careening down the highway out of control. It keeps going in the same general direction but only as it bounces of the guardrails of ‘boom’ and ‘recession’. Sudden changes in the market can create labor shortages or high unemployement, both which are disruptive. The roll of government is to steer the economy so that there fewer sudden jolts.
Well, people will, in fact drive unsafe cars. We did for years because we didn’t know any better. And the car makers weren’t about to educate us. In the 1920’s-'30’s for example, if you drove a Model A Ford the fuel tank was in your lap. None of the cars had anything but ordinary plate glass in the windows, including the wind shield.
Later on in the 1950’s doors still came open at relatively low speed impacts and passengers flew out of them or were bounced around inside with no restraint system installed. It took a long time before people would even use the seat belts that were installed, and some people still don’t.
Every day all over the world, people drive cars with unsafe tires, brakes and lights.
This is true to a certain point, I suppose, but somewhat misleading, if by “compelled to” you mean via laws and regulations. Certainly a certain degree of oversight is required to keep everyone on the up and up, but that’s not what drives most employers to not be evil, cackling gargoyles looking to screw over everything that moves.
For one thing, people try to avoid buying crap. If I buy a product expecting it to perform a certain function, and it doesn’t, I won’t buy that product anymore - I’ll go elsewhere. Similarly, if the product is overpriced (relative to what I’m willing to spend), I’ll look for another, comparable product that’s cheaper. As such, companies are compelled, through a desire to not go out of business, to create products that are inexpensive and of high (enough) quality. The problem, of course, is when a company becomes so big that it can stifle competition through unfair means - this is where regulation is especially important. But as long as a company has to worry about competitors, we can be reasonable assured of getting good, cheap products.
The other concern, I suppose, is employers’ abuse of their employees. But this is also mediated by competition. If my boss decides that he’s going to half my pay and force me to sit on a cactus instead of an office chair, I won’t be sticking around long. In particularly high-demand fields, it’s not uncommon to see employers falling over themselves to smother employees with lavish gifts in order to keep them around - witness the dot-com explosion of the late 90’s, where 5-figure signing bonuses and free cars were frequent perks associated with accepting jobs in the tech sector. The video game industry was a terrific example of this - companies would install movie theaters and video arcades in the office place in attempts to make theirs the coolest place to work. I miss the 90’s…
Jeff
