Image via WikipediaWhat about all those politicians who are screaming about the Free Market and letting the Market work? They wouldn't know the Free Market if it leaped out of a bowl of caviar and bit them in the face.
What is the "Free Market"?
The concept of the Free Market is that commerce, unfettered by regulation, will result in fair prices due to the forces of competition among buyers and sellers.
I will illustrate this using a simple example. You decide that you want to make a little money by collecting pretty seashells at the seashore and selling them to people in town. A few other people see you doing it and start doing the same thing. You will be limited in what you can charge because you know that your competitors will undercut your prices if you get too greedy. On the other hand, your price won't go too low because if a customer offers you less that you are willing to accept, you can go to another customer who will pay you more.
This situation encourages innovation. If you start bringing a backpack to the beach so that you can carry more shells, you will be able to sell more with a lower cost of production, increasing your profits and allowing you to sell at a lower price. Eventually, everyone will get a backpack, but then you might come up with another innovation. Besides price, this is the other major benefit to the Free Market.
This is a simple example, but it is illustrative of the Free Market. You will notice that there are a few things going on there.
Requirements for a Free Market
Low Barriers to Entry - Anyone could enter the market by going down to the beach to collect shells.
Consumer Information - Consumers know what the guy next to you is charging pretty quickly.
Fair Practices - Everyone is playing fair. No one is selling fake shells, intimidating competition, etc.
Property Rights - No one can just grab your shells and take them without paying for them.
No Regulation - The government is not involved in policing this at all, either with taxes or rules.
The Government's Role in the Free Market
These four things are all pretty important for a true Free Market to exist. Ironically, the only entity that is really in a position to make sure that most of these things occur is the government. The government can create educational and investment programs to encourage people to start new businesses. The government can regulate labeling and advertising to ensure that customers get what they think they are buying. The government can prevent anti-competitive practices that drive competitors out of the market. The government can enforce contacts and provide police to prevent outright theft of goods, and the government can produce and guarantee a currency which allows commerce to occur at all.
In other words, the Free Market can only properly function with considerable government assistance. This is not a bad thing. This is what the government is for.
What is a bad thing is when the usual political tug-of-war pulls the debate right past Free Market into absurdity.
Radical Left Wing View: The government must tightly control all industries, tax profits, and protect the interests of all people, bending every business' activity into the "public good".
Radical Right Wing View: The government must remove all regulations, privatize as many government functions as possible, and let the Market take care of things.
While regulation is necessary to preserve the proper functioning of the Free Market, those on the Left sometimes have trouble leaving well enough alone. They start with the regulation that keeps things fair, but then they smell the opportunity to "improve it," but creating regulations that mandate business behavior, such as price ceilings or floors, and other regulations requiring action. For example, requiring banks to give home loans to people who are not necessarily in a position to repay them. This rarely works as it should.
In fact, it usually leads to a backlash of deregulation, as all of the unreasonable regulations are removed. It doesn't stop there. They keep going, removing many regulations that were needed to keep the system functioning properly. Without proper regulation, competition diminishes; dirty tricks are used to eliminate competitors or competitors merge to cooperate; and the public suffers.
The Fallacy of Privatization
The greatest fallacy of all in this is the idea of "privatization." Right-wingers will say that private business is more efficient than government. This is partly true. Private business is more efficient at making itself money than government. In competition, this efficiency trickles down to the public. In monopoly, it does not. When a single company is given charge of a government function, such as Amtrak, or if that company can operate without fear of losing their contract, such as Blackwater, then the company serves its own interests and not those of the public: the interests that the government was formed to serve.
I will conclude as I began, expressing my deep and abiding belief in the Free Market, and my desire that perhaps, one day in the future, we might try implementing it to solve the problems in the American economy.
Free markets work brilliantly WHEN externalities have be minimized. The single biggest problem in our current system is that a company polluting a water supply doesn't see any of the resulting costs (financial, moral, etc) associated and has no incentive to account for them aside from escaping regulations that will always be out of date and ill-fitting. Transportation is artificially-cheap for example, which heavily-alters the economics of production that affects the entire global economy and is a significant part of the reason that China is in the position it is today or that New England farming is so sparse.
ReplyDeleteYour example of Amtrak is an example of something that should be treated as a public utility unless all other forms of passenger transportation were similarly privatized. Amtrak is trapped by the dual mandates to serve the public need and to be self-sustaining. Amtrak does not have the right to change or abandon a route without regulatory approval out of its control which makes self-sufifiency impossible. Compounding this is the fact that not a single form of large-scale passenger transportation anywhere in the world regardless of economic level operates without notable subsidy. It is financially-impossible to even come close to operating expenses with our current economic system. Amtrak has what you term a 'monopoly' because it is in fact a public utility - the market is wide open to private competition but no one has attempted this because there is no money to be made. The market is far from saturated, Amtrak's prices are well-above what the market demands, and there is absolutely no prohibition against any competitor - in fact a competitor would receive significant grants from several states as shown by the many different publicly-owned-privately-contracted commuter rail operations. Amtrak is not a monopoly, it is a government-mandated public service that was created specifically because the freight railroads were collectively loosing billions a year on passenger trains they were forced to keep running and a couple were bankrupted as a result. Had they been left completely to the free market, we would not have ANY intercity passenger service, as proven by the rest of the world.
See my post "my opinion on the ideal role of government regulation vs free market" for more of my thoughts on the matter:
http://www.traingeek.com/2009/08/my-opinions-on-ideal-role-of-government.html