Imagine, just for a moment, a world without a government to protect us, to compensate us when Shit Happens (we will come back to this in a moment, I'm sure).
In such a world, there would be no statutory regulation, no minimum wage, no closed shop unions, no vested interests that exist precisely because government enables it.
In this appalling world, markets would be truly free. And a free market is an interesting thing. People speak about the "free market" (which absolutely does not and cannot exist in a world which contains statutory regulations) as though it's some sort of evil monster that can "fail".
Such thoughts fundamentally and profoundly misunderstand what a free market is. A free market is merely the recording of prices for the exchange of goods and services when there are no legislated barriers to entry from either the supplier's side or the consumer's side.
It has no power, it is merely the recording of the price agreed when two parties freely agree to trade.
Let's assume (in the world without government) that you are walking along a beach on a hot, sunny day and you come across a lemonade stand. You have no idea how the lemonade is made, but you're hot and thirsty and the vendor wants a pound for a glass of cool lemonade. You buy it and drink it. He has a pound in his pocket, you are refreshed, both parties have gained from the transaction, both parties are happier than they were before.
That, ladies and gentlemen, is the absolute horror of the free market in action. The thing that socialists blame for the collapse of the world's economy.
Of course, it gets more complicated. I think I can make a better lemonade for the same money or even less. So the next sunny day, I make up a batch of lemonade and I go set up a stall next to him. I want to get customers to buy my lemonade (which I think is better) and so I sell it for 99p, or 95p or whatever. I still make a decent profit at this price, and because my lemonade is nicer, I sell out quickly and the other vendor is forced to either bugger off, or lower his price to 90p. He's still making a profit, and although my lemonade is better, he grabs back more market share. If I don't sell out my batch of lemonade, I am forced to cut my price so that my price is the same as or better than his, or so that the price difference is so small in my favour that people don't mind paying the difference for my lemonade and I sell out.
At the end of this round of horse trading, we stabilise at about 80p per glass for him and 81p per glass for me, because it costs us 50p to make it and neither of us is prepared to do it for less than 30p per glass profit. Someone else comes along and decides, he's prepared to do it for 25p per glass profit, or he has a source for cheaper ingredients and so the battle starts all over again.
At no point in this bloodthirsty, violent struggle has any of us lost out -- we are all still trading voluntarily, and more importantly, the people who walk on the beach are having their wants met for a lower and lower price. Everybody is still happy. At some point, one or more of the vendors may fold, or may go off somewhere else and the whole dynamic will change again. But everybody is still buying what they want for a price they're prepared to pay and the vendors are all still making enough money for it to be worth it for them.
After a while, a devious vendor appears. He starts casting aspersions on existing vendors, claiming that their lemonade made him ill. Or maybe it's true, who knows? We certainly don't! Anyway, he creates "The Guild of Lemonade Vendors", which mandates basic requirements for GLV-approved lemonade, which also means they can charge a higher price.
Customers can now choose from existing lemonades or lemonades that are pricier, may not taste as nice, but are "certified" as good. Vendors can choose to join the Guild (which will probably mean paying something which increases their costs and reduces their margin), create their own "Society of Lemonade Vendors" or remain unaligned and trade on their existing customer base and reputation.
Eventually, this horrific, brutal struggle to deprive the consumer of their hard-earned money will reach moments of stasis, where no-one sees any benefit in entering the market, but then everything will change again. The price of lemons (in itself a free market) could collapse, leading to cheaper lemonade for all or it could rise sharply, making lemonade more expensive.
But at no point does anyone stick a gun at the customer's head saying they have to buy lemonade. The customer may not have enough money on them, and the vendor may or may not be susceptible to haggling or a freebie to win over a repeat customer. It may not be warm enough that people will buy. So other "sweeteners" may be offered to get customers to buy, which may or may not work.
Shit Happens.
All the free market does is measure the prices at which people make mutually beneficial trades, completely removed from the burdens of externally-imposed constraints.
Terrifying, isn't it? And aren't people who believe in the free market heartless, unfeeling bastards?
26 comments:
Yep. That pretty much sums it up. Time to change the world...
It makes you wonder how socialists and other assorted leftys' view Ebay.
Aside from the basic framework of rules it's probably the freest market on the planet and purely because, as you have said, there are no barriers to entry.
Really good simple explanation. Maybe something for a children’s book? We need to start educating them young, as socialists do...
FamblyGuy:
Huh? To join ebay you need to live in certain countries, you need to have a PayPal and bank account (unless you spend all your earnings on ebay) and be willing to lose all your money the moment someone makes a complaint. Ebay is a free market as much as Sainsbury's.
Well written and delightfully twisted version of reality. If this was how things worked, I'd be in complete agreement with you. It isn't, though. In fact, what you've really done here is explain why so many people in America think "socialist" is an evil word; because they entirely misunderstand what it is.
I don't put a label on my views or beliefs; I'm sure you'd consider a couple of them 'socialist', although it's not a label I would apply to myself.
But the key thing you've twisted here is the purpose of regulation. Regulation is designed to protect consumers from unscrupulous business people, not let unscrupulous business people make money by warping a market. I admire how you've managed to make it look that way, but it's quite obviously not the case.
Keeping with your example, what if your third competitor came onto the market with a way to cut costs to such an extent that you couldn't compete with his prices. You'd go out of business and he'd thrive. Fine, because that's the free market in action, you might say.
However, the problem is that the cost-cutting measure he's discovered results in heavy amounts of carcinogens in his lemonade. He doesn't care, of course, because he makes lots of money and nobody notices until years later. And who can prove anything then? Besides, Caveat Emptor, right?
Additionally, if you really believe your hypothetical scenario, that someone with no market share could come along and form a union or trade body to restrict how you sell lemonade to their own advantage, that's quite a misunderstanding of what unions are for. FYI, they're there to protect workers from the power of unscrupulous employers by providing checks and balances through strength in numbers. Surely if you believe in a free market, then you must support people putting a value on their labour and using any leverage they can to maximise their profits? Isn't that just good negotiation? The kind of thing the free market is best at?
I believe in the free market. But I also believe in the damage human greed can do.
Power corrupts. Regulation merely seeks to prevent that. It does NOT seek to remove competition or distort markets.
As a post-script, this graphic may tell you everything you need to know about what's wrong with American right now. Trust me, there's very little that's 'free' about this market. It's entirely captured by powerful interests.
If you are the free market fan you claim to be, you should be entirely against what's going on right now: http://jaredbernsteinblog.com/wp-content/uploads/2011/07/sum_etal.png
"Regulation is designed to protect consumers from unscrupulous business people, not let unscrupulous business people make money by warping a market. I admire how you've managed to make it look that way, but it's quite obviously not the case."
Richard, you quite confuse the intent of something with the outcome. Yes, it's true that your hypothetical scenario could occur, but by the time regulation occurred to correct this, everyone involved would be dead anyway.
The fact of the matter is that information that lemonade could be carcinogenic is what would protect us from future damages like the scenario you outline.
Look at Bernie Madoff: in an extremely regulated market, he ran a good, old-fashioned Ponzi scheme. Completely illegal. Completely against the regulations he was compliant with. All he did was to find a way of complying with the regulation while still committing a criminal act. The only reasons no-one thought it was a Ponzi scheme were:
a) it's been so long that no-one recognised it
b) he was in a highly-regulated market which meant that casual investors thought they were safe
c) he was in such a complicated (because it is highly-regulated) market that no casual investor and many professionals could not see that his business might not be legal.
The fact that Tesco argues for minimum alcohol pricing, does that not convince you that the regulation they're aiming for increases their profits?
Regulation can also be lobbied and thus manipulated, so even in the unlikely event that the reason for the regulation is noble, the outcome never is, unless it's by accident. And even then, it's only temporary.
"FYI, they're there to protect workers from the power of unscrupulous employers by providing checks and balances through strength in numbers."
I'm quite down with voluntary unions. I firmly believe in freedom of association. But I said "closed shop" and that is something else entirely ;o)
"Trust me, there's very little that's 'free' about this market. It's entirely captured by powerful interests."
Yes, that is entirely my point. The reason the markets are not free is precisely because government interference makes them not free. Whether we're talking about America, Sweden or Zimbabwe.
Re your graph, I have to ask you whether you know who owns those businesses? :o)
The basic premise of regulation is a politician saying: 'I do not trust you to do your own job, so I am therefore going to employ someone to make sure that you do your job in the way I think it should be done.'
Which is all very well, unless the politician and/or the regulator is an asshole.
The horror! The horror! The genius of that! Like a diamond bullet in the forehead.
Actually, with regulation that requires random sampling of products, the carcinogens in his lemonade WOULD be picked up before they hit the market. That's what happens right now, in the real world.
One example: lead in children's paint. That particular scandal happened because China has a completely unregulated (or completely ineffectively regulated; take your pick) manufacturing sector. American and European manufacturers cannot use cheap paint containing lead in their children's toys because regulation prevents it. Trust me: if there was no regulation, some of them would. And I don't want to play lead-poisoning roulette every time I buy my kids a toy.
Regulation seeks to provide transparency. It's regulation that forces food manufacturers to put ingredients lists on their food. And, as you say, information is what protects us. The free market doesn't provide information unless it has to. If it wasn't for consumer protection regulation, ingredient, calorie, and other such information would not be available and producers could put anything they liked in their food and never have to tell anybody what it was.
I don't know about you, but I like to be an informed consumer making informed choices. A truly free market is where everyone has equal access to information. Ironically, that can't happen without regulation.
Bernie Madoff circumvented the laws, but it's flawed logic to say that makes the laws pointless. Just because murders happen, should we abandon laws that make it illegal? You'd find a hell of a lot more Bernie Madoff's out there if it wasn't illegal to do what he did. In fact, it's the transparency demanded by accountancy regulation that protects against people like Madoff. Maddof was a failure of ENFORCEMENT, not a failure of REGULATION.
Tesco have their own reasons for backing a minimum alcohol age. I don't know what they are. But just because they want to make money, doesn't mean having a minimum alcohol age isn't a good thing. Sometimes the interests of business and regulation overlap.
Take green energy, for instance. The green industry in America now actually employs more people than the oil and gas industry. Oil will peak soon. Dependence on foreign oil causes wars. And let's not even mention climate change and pollution. Point being, anyone sane can see that efficiency is good, whether it's energy efficiency or market efficiency. The only thing holding back the development of this much-needed sector is entrenched interests lobbying hard against it. THAT's market distortion right there. Looking at the economy as a whole, everyone would be better off if we poured resources into clean energy, but it's not happening.
Anyway, I can feel myself starting to waffle. My point is that, yes, you're absolutely right that information creates a free market. But you're wrong if you think an unregulated market has any incentive to provide that information. And it's not government interfering with businesses that has caused the credit crunch, not governments interfering with businesses that has distorted the free market. It's the opposite. It's the total capture of government by unregulated business.
Oh, one last thing, that graph. Yes, I know who owns most of those businesses: people who pay almost no taxes.
"Actually, with regulation that requires random sampling of products, the carcinogens in his lemonade WOULD be picked up before they hit the market. That's what happens right now, in the real world."
Right. So we already know what all the carcinogens in the world are already and they all sampled for in all products. Thanks for clarifying that for me. So I'll never get cancer or anything.
The fact of the matter is that there are plenty of cases where I might be quite happy to use lead paint, but I don't have the choice.
"Regulation seeks to provide transparency."
Have you actually read any regulation? Seriously?
"In fact, it's the transparency demanded by accountancy regulation that protects against people like Madoff."
Right. Well, clearly *THAT* is working like a charm!
"But you're wrong if you think an unregulated market has any incentive to provide that information."
Au contraire, if people won't buy something that doesn't have the information they want, there's an EXCELLENT incentive to provide that information. :o)
And you're wrong about who owns those businesses: via our pensions, we do.
More years ago than I care to remember I scripted a radio documentary series on markets, the kind held in the streets of some ancient towns.
One of the things we covered was the efforts of the authorities to control markets. Though forestalling the market (buying up all the supplies of a particular commodity before the trader got to town) was illegal, it was widespread. What happend was the local robber baron would place his agents at a toll gate and they would offer a low price for the goods, saying things like "ooh, so much of that stuff gone through today, youll be lucky to shift it. Tell you what, we'll do you a favour. Wouldn't want you to have to cart it all home again, or worse mett anyone down the road who does not want competition(I reserved that part for myself at the recording.) When traders said, "No, I'll take my chances," sure enough they met some ruffians just around the next bend who beat the crap out of them and took all their goods.
Which is not dissimilar to what happens now except the robber barons use the tax system rather than pikes and cudgels to steal the products of honest labour.
Ok, well it's been fun, but I can see that total belief in market anarchy is an unshakable article of faith for you, and nothing I say will make a difference. Unsurprising really, given the blog subject, so I suppose I only have myself to blame.
But honestly, if the best reply you have to my assertion that "Regulations help keep harmful substances out of our food" is a sarcastic remark about not having identified every carcinogen ever, then clearly logic isn't really relevant.
And seriously, if you really want to use lead paint, just to prove some kind of twisted point, I'm sure you can go ahead and find some. But what you CAN'T do is use it to paint toys and then sell those toys to my kids. If you can't see the difference, you shouldn't really be writing a blog talking about consumer rights or, in fact, economics at all. You have the right to your own personal freedoms, but children have the right to be free from unseen threats. Why is your freedom to do what you like more important than their freedom from harm?
Good luck holding all those businesses to account whom you own with your underfunded pension. Presumably you're writing your replies to my comments from the deck of the yacht you bought with your share of all those record profits that international, tax-havened corporations have been reaping since they destroyed the world economy!
"But honestly, if the best reply you have to my assertion that "Regulations help keep harmful substances out of our food" is a sarcastic remark about not having identified every carcinogen ever, then clearly logic isn't really relevant."
Well, the point is a valid one: people make assumptions about the content of what they ingest (or whatever) precisely because it's regulated. If there wasn't regulation behind everything, people would examine their food much more critically.
"But what you CAN'T do is use it to paint toys and then sell those toys to my kids."
Nor would I want to. But I might want to use them to paint a car that kids aren't likely to chew on. Or something else.
"Presumably you're writing your replies to my comments from the deck of the yacht you bought with your share of all those record profits that international, tax-havened corporations have been reaping since they destroyed the world economy!"
No, actually, I'm sitting in a normal English econobox house in a shitty town worrying about how I'm going to get through the month, because I'm paying more than half my lousy salary to government to piss away on shit on my behalf.
"Ok, well it's been fun, but I can see that total belief in market anarchy is an unshakable article of faith for you, and nothing I say will make a difference."
Whereas you, of course, have only the most effective of critical thinking skills, and certainly could not be described as having a "total belief" in government regulation as an "unshakeable article of faith".
Tell you what; the difference between faith and opinion is evidence, so why don't you demonstrate the evidence that's convinced you that no-one has any interest in the safety of the products they consume? You might have to find an interesting explanation for the existence of bodies like Underwriter's Laboratories.
Anonymous:
Yup, you need PayPal. You don't need a bank account, just a mechanism to take money from PayPal such as a pay as you go debit card. (They do exist, I know I had one at Uni).
The fact that you can't get Ebay in every country doesn't make it less of a free market environment, it just means it's not a global market.
People look at listings, judge whether or not the item the might bid on is 'good value' and bid accordingly. Most transactions are painless enough, those that aren't can be appealed and refunded.
Buyer is happy, Seller is happy and there are thousands of people in competition for custom which means that either items are cheaper or the vendor bolts on additional value to the sale, in whatever form that may take.
The closest thing to a free market that I experience on a daily basis.
Could it not be argued (being devils advocate for a moment) that the quality control board, or whatever, actually oils the wheels of a free market - because it ensures that customers can come into the market with utmost confidence in what they are buying...?
Of course, John, because the quality control boards are implicitly trustworthy and infallible. :o)
Ok a real life example of government "helping" the consumer here from Oz.
I run a rental business, before I cane along there was only one in town.
I obtained a large slice of the market by offering new goods (as opposed to often 2nd hand shoddy crap) at a slightly higher short term rental rate than my opposition.
Instead of paying say $20 per week over 3 years for crap goods, my customers are happier to pay $30 per week over 1 year for new goods.
Both our busineses are still running, They are advertising more and offering better deals than they used to because they now have competition.
The government here recently introduced a massive raft of consumer credit laws, making rental agreements closer to bank finance than a rental agreement. My master franchise has spent probably over $100,000 on compliance, and there is a raft of paperwork we now fill in to show our customers wont send themselves broke.
That ignores completely the FACT that it has never been in my interest to have people not paying for my goods. It hasnt reduced my risk, the customers risk, or changed the market.
My only fear for my business isnt my existing competition, or even governemnt regiulation. My only fear is a newer, better competitor. The government in its "wisdom" has made it much, much harder for any new competitor to start up.
Think about the squealing that goes on when new finance regulation in enacted, does the noise from the existing "big boys" seem a little contrived?
It should, the government is effecively cementing thier market for them by pricing out more competition before it starts.
I won't drink that lemonade unless the vendor can demonstrate it was made with sugar and not aspartame. The only reason millions of people and their children consume aspartame is because they believe that if it was dangerous the regulators would not allow it.
In fact not only do they consume it they do so believing that it is a healthier alternative to sugar. Well, how could it not be, when there are so many regulations in place protecting us all?
Control or oversight boards aren't infallible, but they tend to attract people interested in genuine scrutiny of things and they can be transparent. What's the alternative, companies that are sloppy and wind up injuring, killing and polluting? Then covering it up to stop the public finding out?
Why are you so idealistic when it comes to company behaviour?
I admire your faith in human nature but I don't think I can share it.
What happens when I find out that I could use another chemical that tastes nicer and is cheaper than lemons, but I know for a fact causes cancerous ebola AIDS in children. In a world without any regulatory body- without a body that can spank my bottom for giving children cancerous ebola AIDS- there's nothing to stop me. I'm making loads of money and if your kids get cancerous ebola AIDS then shit happens. No matter that I lied, you can't do nothing about it.
To have a genuinely free market there needs to be a mechanism to force people to be honest and punishment for those who aren't.
Of course we can't trust the regulators we have now to act as that mechanism, but that's not to say that regulation is wrong. That's just to say that politicians are corrupt thieving fuckers. Well, we knew that already.
David, how long do you think they'd get away with it?
And remember, the other side of an unregulated market is complete liability. If you harm someone, you are fully and personally accountable. :o)
"Take green energy, for instance. The green industry in America now actually employs more people than the oil and gas industry."
Studies have shown that for every "Green" job created in Spain, 2.2 jobs were lost in conventional industries. In Scotland this is nearer 4. So your statement is undoubtedly true, but not for the reasons you are hoping.
"Oil will peak soon."
That's been a favourite saying for donkeys years. But ignores the recent advances in exploration technology.
"Dependence on foreign oil causes wars."
Agreed on that one. However why are the Green movement here trying very hard to stop test drilling for shale gas in the UK? If we were able to make use of these huge deposits, Russia would not have the leverage it does now.
"And let's not even mention climate change and pollution."
Difficult to avoid - see below.
"Point being, anyone sane can see that efficiency is good, whether it's energy efficiency or market efficiency."
I wouldn't argue with that, except to say that it's impossible to have a sensible discussion about energy efficiency these days without instantly having it hijacked by bogus scare stories (Chris Luhneatic anyone?) demanding that we cut our "Carbon Footprint" by impossible amounts.
"The only thing holding back the development of this much-needed sector is entrenched interests lobbying hard against it. THAT's market distortion right there."
Many commentators have suggested that this lobbying is actually beneficial to the oil & gas sectors as they can get away with charging more for their products than would otherwise be the case.
"Looking at the economy as a whole, everyone would be better off if we poured resources into clean energy, but it's not happening."
And you don't think that is already happening??? Ever heard of Feed In Tariffs? On the contrary, if all the money stolen from us in the name of saving CO2 was poured into REAL alternatives such as Thorium we would all be far better off. But again the Green movement hate the idea of cheap, plentiful energy...
Post a Comment