Myth of the Free Market

The concept of the “free market” is being increasingly used by the Right as an argument for unregulated interest rates, reduction in taxes, free market health care, and deregulation of industry. Their central point is that we don’t want big government to interfere with company business, and the reason is that – in the end – the market will balance itself out naturally.

I would like to question this idealized notion of the “free market”.

A “free market” sounds like a good idea. It sounds good, and is ever-present in political speech. America is all about freedom. But what does “free market” mean? The ideal concept of free markets is the basis of capitalism – the idea that supply and demand will ultimately balance one another. The concept of the “free market” also reflects an idealized mathematical notion of how people behave, in that the emergent prices are a natural a “push and pull” of supply and demand. In economic theory this is called “perfect competition”, because it occurs only when there are a large number of customers and a large number of suppliers in a market for goods which are optional purchases. (http://en.wikipedia.org/wiki/Perfect_competition). In a perfectly competitive market, the ideals of a free market essentially exist. This was the economic theory of the 1960s to 1980s.

Whats happening now? The current trend in economics observes that big markets rarely operate in this perfect competition – because human beings are conscious of markets, they seek profits, they shut out competitors, and they corner markets. Consider any large industry, such as movie studios for example. In a “free market”, competitors would potentially appear to fill any niche, and the public would have access to a wide variety at a range of costs – the ideal of perfect competition. In reality, only six studios receive 90% of American film revenues. (http://en.wikipedia.org/wiki/Oligopoly#Examples). This means that you, as a consumer, are effectively not offered a choice. You get to see only the movies that big studios produce and distribute (newer markets, such as online viewing, replace this but their market share is minimal compared to the big six). How is this possible? These six studios work together, they corner the film market, and they control the distribution of their product to theatres. Just try as an independent film maker to get a film shown at a national theatre chain. In reality, due to corporations, most US markets are not “free markets”, they are oliopolies.

I am particularly interested in oliopolies of necessity goods, things which people need to survive such as housing, utilities, and health care. Specifically, what happens when an oliopoly market exists for a necessity good such as health care? By the way, the reason I focus on necessity goods is due to Elizabeth Warren’s Collapse of the Middle Class. All things being equal, the average American will cut costs in flexible items like food, clothing and appliances because these are adjustable. The things that cannot be cut are inflexible necessities such as health care, housing and basic utilities.

In any oliopoly, unlike a free market, a few companies control the majority of the market. This can be seen in music, film, wireless phones, publishing, banking, housing, and health care. The common industry trend in modern capitalism is not the “free market”, it is the oliopoly. When a few companies control a market, they can set the prices however they like. Without regulation, these few companies will work together to fix high prices, increasing profits for all of them. If the product is a necessity item, such as health care, the consumer has no choice but to purchase it (i.e. not free). Consider a hospital visit. Do you have a choice of which hospital you will be taken to? Usually not. Do you have a choice of the costs for that hospital? Usually not, since nearly all hospitals have exceptionally high costs (see my other article on The Hidden Costs of Health Care).

Thus, we must first accept that a “free market” is not the baseline reality of American capitalism today: it is an oliopoly over necessity goods. What happens when a country is driven by oliopoly markets that exists in multiple industries for these necessity goods?

Necessity goods are, by definition, things people cannot do without. Thus, the average consumer has no choice but to go into debt. Since the oliopoly markets (wealth companies) control the production of these necessity items, they can set high prices despite peoples’ inability to pay. We see this exact thing taking place right now. Inidividual Americans going into debt over housing, over health care, and over debt itself (credit cards).

We might then return to the original claim, that the “free market” will correct itself. Since we know that free markets are a myth, we must ask instead if oliopoly markets over necessity goods are self-correcting? That is, the Right claims that over time, the current markets will set the proper ratio of supply and demand, stabilizing prices. Although America is demonstrably not a free market, we can ask if the markets we do have – these oliopolies – are self-correcting?

Self-correction would mean that at some point in the future, prices return to acceptable levels. However, the definition of an oliopoly is that a few companies control the production and prices of necessary goods. Since they are necessary, the consumer demand is fixed at a high level, so these companies are guaranteed no drop in demand. As demand remains high, and competitors are shut out by the large controlling companies, prices can remain high.

The end result to the average consumer is that they are forced into debt. As the prices for necessity items remain high, this debt is likely to increase no matter how hard they work. Since the oliopoly companies have shut out competitors, it is difficult for the entrepreneur to create new business to compete with these. Thus, the individual consumer is in perpetual debt, never able to fully repay it, and locked into a labor situation where they must work to repay on-going debt. Perhaps they acquire a dream job, one that pays well enough to erase some of this debt, but it only continues so long as the job is available, and so long as there is no medical emergency, so long as both mother and father make a decent income, and so long as interest and mortgage rates don’t climb.

What is the best word to describe this situation? Clearly, it is not “free”. A more suitable word is slavery. Once described as possibly the only system capable of true freedom, a capitalist system which consists of oliopoloy markets over necessity goods is effectively a form of modern slavery. Our current system is a non-ideal capitalism in which the working class has no choice but to be perpetually in debt to the wealthy. While other freedoms may exist, such as civil rights, and free speech, which are hard won outcomes of the capitalist ideal, the current capitalist oliopoly is a type of debt-slavery. I say a type of slavery, what do i mean?

Consider the Britannica encyclopediae definition of slavery: “Slaves can be held against their will from the time of their capture, purchase or birth, and deprived of the right to leave, to refuse to work, or to demand wages.”

I am not arguing that debt is physical slavery. Americans are free to move around, free to change jobs, and free to refuse work. What the average American currently cannot escape is debt. The American dream of being an innovator, of rising on ones merits to pursue a dream, is increasingly difficult when the majority of ones’ time must be spent working a job so that debts can be repaid, and when large companies control the market on businesses one might wish to pursue. Interest rates on necessity items ensure that for many Americans this debt will rise over time. And this debt continues to rise as necessity goods are priced and controlled by a wealthy oliopoly. This is not physical slavery per se, it is debt-slavery.

Without control or regulation, health care will remain at a fixed high cost, since these companies have no reason to lower them, and there is no market-corrective mechanism to change their behavior. The concept of the “free market” is a myth carried over from the early days of captialism, and it no longer reflects the present situation. Currently, necessity-goods markets in capitalism are a mechanism for the wealthy to exert a form of debt slavery over the poor. Lets stop using the term “free market” when arguing against regulatory policies intended to help the American public. It’s going to be very difficult for our country as a whole to compete in international market if we continue to cripple the American middle class. For those who still hold to some market idealism, you are welcome to explain by what mechanism a hospital will be ‘naturally’ caused by the market to reduce its rates to less than $2000 per day?

One thought on “Myth of the Free Market

  1. Hi, RC. Support for free markets preceded the notion of perfect competition by a long time, Adam Smith argued for them contra mercantilism in The Wealth of Nations, published in 1776. The notion of perfect competition could be said to begin with the economic modeling of Leon Walras, who published relevant work in the 1870s. Arguably the most right-wing of economic schools, and the most in favor of free markets, the Austrian School, does not rely on such modeling at all.

    Considering your examples of oligopoly and few competitors, there is competition nevertheless, albeit limited, so there is competition and the respective markets are not less free. In the case of healthcare and housing of your examples, regulations are barriers to entry which reduce competition, including in the model of perfect competition.

    No amount of concentration of producers, not even a monopoly, can perpetually fix prices under a free market as you argue. Producers can only control the supply, not the demand. Even before trust busting laws were enacted in the United States and the few companies that had \\"corned the market\\" could form a monopoly or trust, these agreements would not last as individual members would secretly undercut each other.

    But even if a condition of monopoly by one company or a trust were to persist, as long as there were few burdensome regulations acting as barriers to entry and the absence of other protections of the company from competitors by the government through law or action, then new competitors outside of the trust could arise and offer consumers choice. The threat of \\\’oligopolies\\\’ being able to fix prices is not reasonable if actual price fixing agreements fail.

    Next you say that without appropriate control and regulation, oligarchy will lead to high prices in ncessary goods and therfore to debt. Regulations or controls to keep prices low prices, price controls, lead to shortages, not the meeting fo demand. This can be seen in Venezuela today or in 1973 by price controls instituted in response to the oil crisis, or in ancient Rome by the emperor Diocletian. In the forty centuries they have been tried, from Ancient Rome to the present, they haven\\\’t worked.
    As to how a hospital would have it\\\’s rates reduced, it probably won\\\’t. As people gain more purchasing power and require more medical care due to a higher average age demand will rise. But controlling the prices of such goods and services will only create shortages, and burdensome regulation will reduce competition and innovation. And if there is substantial burdens throughout the economy earnings and purchasing power will suffer slowed growth and thus less healthcare will be affordable to the average person.

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