Free Market Fallacy

On November 30, 2010, in Analysis, Articles, Commentary, by mkennedy

by Michael Kennedy


The Free Market. The ideological pinnacle of neo-liberalism, the idea which will give wealth to all, eliminate poverty, create every kind of good and service imaginable, cure disease, make the trains run on time, save the environment and bring unicorns back from extinction. It is touted as the economical panacea, the cure all for any social or economic woe which may come up. Supposedly, if we are to take its supporters at face value, the free market is the only moral way for people to earn wealth, the only successful financial ideology which can exist. Everything else is just godless socialism. Neo-liberalism, an ideology which puts the market above all, puts the market as the arbitrator of morality, as the determining factor of the future of society. It is essentially left wing liberalism or anarchism applied to money.

In 1776, Adam Smith, a Scottish economist published “The Wealth of Nations”, a book advocating the abolishment of government interference in matters of economic importance and advocated commerce and trade without barriers and without limitations (much in the same way the Liberals advocate movement of people without barriers of limitations). This ‘free market’ was to be controlled by the ‘invisible hand’, market forces which would keep unfettered trade, production and consumption in check. The ‘invisible hand’ would play the role which the government would have played in regulating the free market. Simply put, it supposedly works like this. Rather than have the government intervene on behalf of employees, setting minimum wages, minimum conditions and such, the ‘invisible hand’ of the free market would provide the same safety net. Supposedly, if there were no regulations regarding employment and employees were also as free in choosing where to work and negotiating conditions, then employers who offered sub-optimal conditions would find themselves unable to hire people, as people would be choosing to work with companies who offered better conditions. So the competition for labour between employers would see those who offered the poorest conditions unable to compete, and thereby having to raise the standard of their wage and benefits to attract the employees they desire. This is the ‘invisible hand’, an example of the mechanism by which neo-liberals believe their free markets would work. This is supposedly the force which will lift the 3rd world out of poverty, as jobs go overseas offering these unfortunate peasants jobs which may pay $2 an hour instead of $1. Capitalists regard this as the free market improving the condition of life for these people, completely overlooking the fact that a slightly less evil form of exploitation is still nevertheless exploitation.

Another example which they put forward might run like this. A company which produces products at a great cost to the environment, would lose custom due to people boycotting those product due to the environmental damage their production entails. If customers who had freedom to choose between competitors, then people who value the environment would not purchase their goods. This comes at a financial cost to the company, and they may find themselves in a position where spending extra for ‘greener’ production would result in greater profits from greater sales. Under neo-liberalism, a company would be free to buy pristine old growth forest, and raze it to the ground for profits. Their solution to those who argue that the environment should be protected, is that citizens who value that forest are also free (should be free) to pool their money to purchase it and protect it. Don’t like the fact that a refinery is going up next door and going to drop toxins next to the school? Just get the parents to pool their money together to buy the land! Neo-liberals actually put forward these exact arguments without any sense of irony, sarcasm or shame.

Neo-liberalism also advocates abolition of government sponsored programs, programs such as social security and public health care which are tax payer funded. Again, they advocate that market forces can produce all that is needed. Jobs abound (there is no need to be unemployed) and people would find capitalistic ventures by which they can make a business selling help to those who need it. The education system need not be public and tax payer funded, but those who desire to educate themselves or their children should pay, and those who don’t make use of those services shouldn’t have to. It is to many an appealing argument. Why should someone who doesn’t have a car, pay for roads? Why should someone who doesn’t have a child, pay for primary schools? I work hard, why should the fruits of my efforts, the money I earn, be taken and given those who don’t? Neo-liberalism pushes personal responsibility head of social welfare. Only personal responsibility exists, and according to neo-liberalism, one only goes without because of their failures, and any tax dollars used to help them is theft from the hard working and creative. It’s a seductive train of though which appeals to peoples sense of entitlement, to their perceived superiority and self righteousness. Like Liberalisms obsession with social rights which must be absolute, neo-liberalism takes the same attitude towards economic rights. The liberal catch cry “take your hands off my body” (in regards to abortion) could just as well be a neo-liberal catch cry of “take your hands off my wallet”.

The free market, the idea that an economy and society can work with no regulation and provide optimal results is the fundamental principle which drives neo-liberalism, a dominant ideology in today’s world. Free-marketism is based on a number of assumptions which as we will soon find out, are simply not true. We are given simply examples of two stone age people trading food for manufactured tools as the archetypal form of free trade, with the insinuation that free markets today work with similar simplicity.

This hypothetical example is easily debunked. One of the fundamental assumptions is that people trade on equal terms. As two people reach a deal, advocates of neo-liberal free markets say that both people would reach a consensus which maximises the individual advantage of the trade for both as far as is possible. For two children trading collector cards, this may be true, but is it true for all cases? Is the employee just as free to negotiate as the employer? Practical experience which we are all familiar with shows that this scenario is just a day dream, a non-existent hypothetical example that we are given as what is supposedly the norm. For someone who’s job has been lost, who has a mortgage and children who need to eat, the negotiation of a contract for a new term of employment is less than equal. Does the prospective employee have the freedom to argue against the clauses in the contract which not only demand “reasonable overtime” where required, but also states that it will be unpaid? For the job candidate, its take it or leave it. It’s take the job or foreclosure. It’s accept the conditions grudgingly, or walk away without means to feed the family and watch a solution to the supposed skills shortage take it instead, because they have lower standards. The fundamental principle which supposedly guides the ‘invisible hand’ from employers having to accept lower and lower standards is greatly flawed. Unequal trade abounds and it is only through the pressure of trade unions or government laws, that one party doesn’t have the opportunity to completely and utterly subjugate another through the leverage they find in being owners of property and means of income.

Another example is a young person competing against a baby boomer investor buying a house. Is there equality here? The boomer has had the advantage of free education, relatively higher wages and having sold another investment property which they subdivided at great profit. They can easily outbid the younger person because of different histories, different economic conditions and different periods of time they experienced them. They were paid more for perhaps doing the same job, due to different environmental conditions. They had less competition for work, less expenses to remain socially competitive. Even the simple fact that someone has had more time to save up money creates and inequality. The point is that two people putting equal work mentally and physically do not end up with the same financial earnings. Chance and environment play a role, but does this mean the person who ended up with less is less deserving of the same property? It’s hard to justify an answer of ‘yes’, but this is the reality of our society. It can be argued, that the younger person should just settle for less, but anyone with even basic knowledge of our housing market knows that even ‘entry level’ properties are out of their range. Does government restriction on the release of land make the issue worse? To a degree yes, and perhaps by ‘freeing’ the release of land according to free market ideals might solve this issue, but land developers would simply create the artificial shortage themselves, instead of the government, as it is profitable to do so, and that is exactly what they would do.

Economic interactions and the factors which influence the means by which people can acquire capital through their efforts are complex, seemingly random and never exactly repeatable. Free market economics simply doesn’t take this into account, and instead, neo-liberalism blames the individual for any shortfall, rather than recognising the complex external environment, technological and social shifts which can greatly influence peoples financial outcomes despite the same input. Seemingly simply properties, like ones history, date of birth and location can give them great leverage or disadvantage over others when trading goods or labour on the market. To ignore this fact is to turn a blind eye to the chaotic events which prevent fair trade to occur. Events beyond peoples control leads to some having the ability to exploit others, and neo-liberalism provides no means of recourse to those who are economically exploited or powerless, as it assumes that their fate is their own responsibility, and that it is within their means and within the means of the free market to lift them out.

The fallacy of the informed consumer.

Earlier we mentioned the example of the customer who chose to boycott or avoid a product based on the environmental practices of the company. It may be employment standards that a customer is concerned in, or something more directly related to the product, such as their quality control and for the example of companies which produce food, hygiene and cleaning standards. A customer may be able to make an informed choice, if all operations relating to the creation of the product were transparent and all information available. With the recent spill in the Gulf of Mexico from offshore oil drilling, someone may wish to use ‘market forces’ and their purchasing power to avoid buying fuel obtained from oil extracted from risky offshore drilling. Now, is the customer who is about to purchase petrol really able to determine which processing plant the fuel came from, from which shipment of oil? Is the customer seriously able to trace back the supply chain all the way back to the rig the crude oil was extracted from? A customer buying a sandwich is able to get the best deal, if they are able to compare every sandwich available for sale in the world. These might be extreme examples, but lets take more common examples. In a completely deregulated pharmaceutical market, how can you determine whether the paracetamol you are giving to your child was produced with quality high enough to avoid potentially harmful contamination? Are you as a customer, able to make this determination for yourself? For the invisible hand to guide companies towards social responsibility and sustainability, for the invisible hand to stop people from literally killing others and the earth for profits, not only must the population of ‘consumers’ be aware enough to realise what monetary value must be placed, but they must also know the complex web of interactions and processes which end up creating the product. Potentially possible but infeasible. People would end up spending their whole lives in research, in order to try and avoid business with those who could potentially harm or kill, or cause great social and environmental harm.

Witness the ‘cheap’ products from Chinese manufacture. The free market has led to manufacturing going offshore, but these goods can only be produced cheaply due to human exploitation and disregard for the environment. Practices which exist there would not be legal here in Australia, nor tolerated, but the distance of China, the lack of knowledge and information available of the true cost of manufacture means buyers here can’t make informed choices.

There is no complete freedom anyway.

Lastly, the rich corporate oligarchs who push neo-liberalism do not operate and CAN NOT OPERATE in a completely free, deregulated world. Corporations exists because of government law. Some form of state apparatus must exist for property rights, the very cornerstone of capitalism, to exist. Some form of law against theft must exist, and laws against fraud. Copyright law, which allows large record companies to operate cannot exist without state intervention and market regulation. In a true free market, an artist would not be able to ensure that they are the recipient of commercial sales of their work, but it is only because of government intervention that a music artist can ensure that the revenue stream from the sale of their art goes to them.

Without government intervention, the legal apparatus which enables trade to even exist, wouldn’t, and would leave behind a state of anarchy. Neo-liberalism never demands the removal of government, only the extraction of the state from affairs which affect the earnings of the wealthy, of those who have influence, of capitalists. When a government uses its power and funds to make a nation more appealing to investors, no free marketeer objects. When the government of the U.S. bailed out Wall Street due to their own mismanagement of an over financialised money market, neo-liberals did not object. Working class Libertarians who are also pro free market did, but quickly ditched the cause in favour of more dubious ones, such as rallying against science. Perhaps led to these causes by the very businesses which have hijacked the Tea Party and usurped the concern of Americans for the future of their country for their own purposes.

Complete government de-regulation would not allow neo-liberalism to exist. Bill Gates would be poor if not for government spending which developed computer technology or for government enforced copyright and patent law. How else can Microsoft make their money, without having monopoly over the sale of their own products? Hedge fund managers would be nothing if not for the legal structure which allows the financial entities that they trade to be recognised universally. Property developers need state sanctioned ownership of land to develop. So given that no neo-liberal truly argues zero government interference, from where do they draw the line where government regulation should stop? Why is government enforcement of property rights acceptable, but taxation not? On what moral basis?

The basis by which free markets have been portrayed has moral are flawed and do not seem to have originated as the conclusion from an objective study of humanity. Assumptions that parties can trade on equal terms, that the non monetary value of aspects of life such as clean air can be effectively factored in to consumption by consumers are simply absurd. Free market ideology suffers from the same fundamental form as anarchism. Without organised structure, the strong simply overpower the weak and there are no checks and balances on their actions. Nations and people exist or die on the whims of the oligarchs, the commons disappears and base human emotions such as fear and greed become primary social drivers. Look at our current economy as an example of what happens when fear and greed are its prime movers.

Opposing neo-liberalism doesn’t necessarily mean supporting a centrally controlled economy or extreme economic egalitarianism where everyone is equal, as many neo-liberals suggest. It is merely a recognition that existence is a constant compromise between freedom and co-operation. A prosperous society, which by definition encapsulates the ‘group’ category beyond the individual or his sole family, requires a balance between free enterprise, free trade, and state regulation and government projects. History has shown that the most prosperous period of the 20th century was not when neo-liberalism become dominant in the 1980’s, but when free enterprise and economic freedom was living alongside large government funded projects and regulation.

One doesn’t have to have unfettered free markets for a just and prosperous society. Economic dogmatism has caused much misery in the 20th century, and with the 2nd decade of the 21st century starting in the economic train wreck that is the remains of the Global Financial Crisis, a crisis which may be nothing more than the prelude, the welcoming fanfare to a larger economic catastrophe. Th economy and the social and legal structures which a nation create to put economic theory into practice must exist to serve the people, rather than being a structure, a God which the people must serve, worship and sacrifice for. The neo-liberal experiment cannot solve issues such as environmental degradation and the decline of the west and its catastrophic demographic shifts. Its solution to global warming is a carbon trading scheme, a scheme which is designed to simply create another commodity which can be used to create another asset bubble and traded for profit. A strong nation needs a strong economy, but an economy can only serve its purpose by being a servant to the people, which means that the people must retain mastery over it, an ideal at odds with neo-liberalism, where the people relinquish all control over it.

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