Reason for a New Age

Issues of the Free Market

Posted by publius2point0 on 2010/02/14


As I stated at the beginning of my earlier overview of the free market, there is no reason to assume that a perfect solution for best bettering the life of humanity has been achieved. To toss it away because it is not perfect, however, would certainly be folly. Assuming that there must be a solution which doesn’t require some amount of compromise is likely an unrealistic expectation. But just like we must, for example, compromise our desire to be an actor and instead work where at whatever our second or third choice is because the market isn’t large enough for us to enter, we must also expect the ideal of the free market to be compromised, if it is not achieving its key aim.

The following list are simply some of the larger issues that can clog up or even break the free market. I do not expect it to be exhaustive.

Monopoly

In my overview of the free market, I gave the example of Damon and his machine that he is selling. As the sole provider of a machine that can increase production in the entirety of the universe, he becomes quite free to charge just as much for his product as he believes he can force someone to pay.

The result is that Damon becomes very very rich, and also that everyone else goes into debt. All profit that they earn from their use of Damon’s machine ends up getting funneled back into the central bank, while as they live quite stingily. We would much rather that they not be stingy, and in fact feel quite free to incur new debt as soon as possible. The market ideal would be that no one had to pay anything more than the actual cost of production. If Damon wanted to build a second machine, we would rather than he go into debt to do so than used profit from his old machine to finance it.

We also do not want to give Damon a significantly greater economic power than anyone else. He might hire the most talented minds but then simply have them goof off all day as this is cheaper than having them do R&D and more profitable than letting a competitor hire them and introduce a rival product. He might form deals with retailers that forbid them from selling the competitor’s products. Or he might simply bribe government officials to continuously hassle and delay the competitor. From out standpoint, the more even a position Damon has to battle from with his competitors, the more effort he must put into making his product as good as it can be and the less chance he has to act to rival products. So again, our ideal would be that he take on debt to advance rather than charging profit.

But of course we know that people are greedy and don’t exert themselves unless they can personally profit from their labor. Regardless of what the theoretical ideal might be, it is the real world in which we must work, and so we must allow Damon to profit and become rich.

The alternate solution, then, is to at least make sure that Damon does have competitors or to otherwise make sure that he is not abusing his position.

False Advertising & Trademark

If you watch old episodes of Mission: Impossible, you’ll see several instances of some shady organization manufacturing identically labeled pharmaceuticals–which are actually not medicine at all, just corn starch or whatever–and selling them as the real thing. A modern equivalent of this might be the various cases of China selling cellphone batteries that are actually of shoddy manufacture and either don’t work or destroy your phone, or the more explosive phenomenon where they used chemical waste to bulk out dog food.

A customer can’t be expected to know what’s in a product, whether it’s safe, whether it’s been properly manufactured, nor whether it’s a legitimate product that does exactly what it says on the box. But for every product that he purchases where he discovers that it does not live up to expectations or is even harmful, he loses confidence in the market, and he ceases buying.

To examine what happens when people stop buying, consider that Damon has just invented his machine and prepared 80 units to be sold. Without buyers, he is in terrible debt. Most of the money in the market is based on Damon’s debt, and hence is worthless since it isn’t backed by physical wealth. The end result being that everyone runs around shouting that the sky is falling and generally bad things happen.

Standards

This isn’t a failing of the market, this is a solution that is related to both false advertising and monopolies (and also to the role of infrastructure in economic growth). It is a weapon that tends to be forgotten, in modern day.

A simple example of a standard is building codes. These are the various regulations crafted by local government to make sure that a building is safe, according to prevalence of whatever regional hazards there are. Since these are mandated and enforced by the government, a person may go to any contractor he wishes and be certain that he will get a building which performs up to at least a certain minimum. He has buyer confidence, and so we are safe from issues of false advertising. It also means that wires of certain gauges and manufacture are more prevalent. The market can become more efficient because it knows precisely what is wanted, and it can give exactly that.

Another example would be laws which state that a person must always be able to transfer his phone number from one provider to another. While, theoretically, there’s nothing stopping people from switching providers, we have a strong enough desire to keep our contact info unchanged that we do end up staying with our provider so as to keep it. This gives them a veritable monopoly on subscribers. Given a friendly entry plan, a company can afterward raise your prices more or less freely because you are stuck with them. But by the government simply saying that phone numbers are part of a public pool that is independent of organization–by establishing that standard, the market was improved.

Personally, I would rather have seen greater standardization of OS structure when Microsoft was taken to court for monopolistic tendencies than to have them fined or forced to cripple their products.

The only issue with standardization is that it can also hold back inventiveness since this always moves away from the standard. One must make sure that a standards organization is able to be freely interacted with, decently speedy with its answers and revisions, and good at making sure that rules can be wisely expanded and deprecated.

Patents & Copyright

Say that Damon takes on debt to produce his machine. He sells the first one to Elaine. She looks it over, determines how it works, and begins to produce a copy of it. She might have to take on some debt to manufacture the product, but she did at least skip over the R&D process which saves money. Hence, Elaine is able to charge less for her product, and ends up with all of the business, leaving Damon destitute and in debt.

One could simplistically argue that society got the product for a lower cost, but the end result of such a process as this is simply that Damon has no incentive to create his product in the first place, and even if he proceeds to do so anyways, society ends up paying for Damon’s R&D and both of their manufacturing costs after Damon’s debt eventually gets passed on to the rest of society to deal with–since he cannot pay it.

The Race to the Bottom

When there is competition, one is in the unenviable position that he must stay competitive. The alternative is shutting down your business and laying off all of your workers.

A simplistic argument would be that this is alright since the better product won and we don’t need the old one; we are better to free the workers up to move on to successful companies. In truth, though, it’s more often a loss for society. Firstly, you have several months where those workers are simply not working at all–looking for a new job–and of course you are out a competitor, possibly leaving a monopoly behind.

And of course, most CEOs don’t think in such macroeconomic terms. They want to win. They don’t want to have to fire people. CEOs also have investors and stock holders all telling them to do whatever it takes to win.

What this means is that if, say, the farmer across the street hires illegal immigrants to work for half the wage, as soon as he starts to charge half as much for his produce, you are stuck hiring illegal immigrants or shutting down the farm. If your competitor releases toxic waste into the local river, saving 10% of his budget, you are forced to release toxic waste as well.

From a market standpoint, this is all and well. There was a way to increase efficiency, and the market became more efficient. But that’s a paper and pencil world, without the greater ramifications of the real world. Sometimes this is quite possibly an economic good, for instance off-shoring factory work to China because it helps to lead a large section of the population of the world into modernity. But just as often it is not. Ultimately, it’s not a decision that can be left to the least scrupulous member of the market. It needs to be something that is monitored and made to correspond with the better interest of humanity.

The Push for Immediate Results

In my estimation, at least, there is much too great a focus on immediate results among our race. Anything further out than a year or two is really beyond our ability to take seriously. Whatever is happening today, on the other hand, is of vital importance.

An intelligent leader of a corporation might not suffer this particular handicap, having perfect ability to see the direction he would like to take the company over the next several decades, and why doing so would be a certain winner. His investors, and particularly his stock holders, however, are more likely to be interested in what the business will be doing this quarter, not in the next decade. Being somewhat the puppet of the stockholders, the CEO is forced to think quarter to quarter, with nary the time nor ability to think of more long-range goals.

Of course, one could also argue that this trait of humanity’s is based on practical reality. Left to speculate too far ahead, we might end up like Leonardo da Vinci, doodling amazing and fanciful things that are nevertheless impractical for our times.

Arguing the other side, one could say that you need the freedom to be fanciful if you want to do meaningful R&D, which is ultimately the primary apparatus for social good of the free market.

There is almost certainly an ideal ratio in one direction or the other. Achieving that is something that would be an issue for government.

Positive Feedback

See the section on Self-Fulfilling Prophecies here.

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