Saturday, August 20, 2011

What is a free market?

Throughout my blog, I often refer to a free market. What is a free market?

Wikipedia defines a free market thus:
A free market is a market free from state intervention. However, the term is also commonly used for markets in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts. It is the opposite of a controlled market, in which the state directly regulates how goods, services and labor may be used, priced, or distributed, rather than relying on the mechanism of supply and demand. Advocates of a free market traditionally consider the term to imply that the means of production is under private, and not state control or co-operative ownership.
In free market capitalism, a wannabe producer comes up with an idea for a product or service. He goes through the process of developing his idea, then marketing it. If people like it or need it and it is selling for a price consumers are willing to pay, they will buy it. If they don't like or they can't afford it or they think it is overpriced, they will not buy it. The sale is concluded only if the value the seller places on the product or service matches the value the buyer places on it.

There are occasions where cost of production alone is so high that the product or service is so high that most or all consumers will reject it. Good examples include most things in the so-called "green" industry and so-called "organic" farming. "Green" and "organic" products and services are almost always more expensive than non-green and non-organic products and services. Most consumers do not value the differences enough to pay the difference in cost -- especially when considering that "green" and "organic" products and services are typically inferior in quality and unavailable inn quantities sufficient to satisfy the demand existed.

In a free market, producers who do sell goods and services at a price consumers are willing to pay at a price from which they can earn a profit become more wealthy. As he attracts more customers, he hires employees to help him meet the growing demand. This is the only legal and ethical process by which wealth is created. Most of the wealthiest people in the nation achieved that status because they thrived in a free market. As they accumulated their personal wealth, they created millions of jobs. Many of their employees and investors also became very wealthy.

In a free market, producers who attempt to sell a product or service that is too expensive or which consumers don't want will go out of business. If a a producer gets too greedy, competitors will enter the market with similar or better competing products and services driving the price back down. This free-market competition protects the rights of the consumer.

Think about the last time you went to a store. When you checked out, what did the clerk say? Probably, "Thank you." Why? Because the clerk, as a representative of his employer, valued your money more than he valued the product or service he sold. Hence, he made a profit. What did you say in response? Probably, "Thank you." Why? Because you valued the product or service you acquired more than you valued the money you gave up. The free market is based on the values consumers and producers place on money, goods, and services.

In a free market, businesses that don't satisfy consumer expectations and otherwise poorly-run businesses lose market share due to high costs or poor quality. Businesses must serve their customers and use resources wisely. If they don't, they go into bankruptcy to reorganize and come out a better business or they simply go out of business.

Now, what happens when government gets involved?

Sometimes, government imposes an outright ban on certain goods or services. These bans are based on the values of politicians, judges, lobbyists, and bureaucrats -- not the values of consumers. Sometimes, these bans are wise, more often not. Examples of things that have been banned or will/might soon be banned from the free market or taxed out of existence:
Toilets that flush
▪ Pesticides that actually kill pests
Conventional light bulbs
▪ Coal and petroleum as a source of energy
▪ High-octane gasoline
Traditional ammunition
▪ Unpasteurized milk
▪ Herbicides that actually kill weeds
▪ French fries fried in lard (now you know why they don't taste as good as you remember)
Sometimes, government forces certain goods or services into the market. These actions are based on the values of politicians, judges, lobbyists, and bureaucrats -- not the values of consumers. Sometimes, these actions are wise, more often not. Examples of things that government has forced in to the market:
Ethanol (other bio-fuels coming soon)
Solar and wind power
▪ Safer toys and baby cribs
▪ Reduction in exhaust emissions and other pollutants
Detergents that no longer clean because phosphates are removed
▪ Electric and hybrid cars
▪ Smaller, more fuel-efficient vehicles that are less capable (ie smaller carrying capacity)
Low-flush toilets (because of these new toilets, sewers in some cities no longer have enough water to carry waste to its destination)
▪ Seat belts and crash helmets
▪ Safety and tempered glass
▪ Digital TV
▪ Compact fluorescent lights
▪ Car seats for infants and small children
▪ Lead-free paint
Some of these products were forced into the market by regulation and others through subsidies and other mechanisms addressed below. Consumers prefer a toilet that flushes and would continue to use them given the option. Therefore, the government banned them because the government didn't like the consumers' choice. Consumers with families prefer a large station wagon because it provides comfort for adults and room for children, pets, and luggage or other items. The government imposed fuel-economy standards because the government didn't like the consumers' choice. So, car manufacturers quit producing large, comfortable station wagons in order to meet government-mandated efficiency standards. The consumer response? Now they drive even less efficient, more expensive vehicles such as the Ford Expedition or Chevy Suburban -- trucks!

Other products are forced into the market through subsidies. Ethanol, for example is heavily subsidized by federal tax dollars. In fact, corn farmers say they make more money selling their crop to ethanol producers than to food producers because, with the subsidy, they make more money. Therefore, the taxpayer is basically helping to pay somebody else's fuel bill.

When looking at the price of solar or wind generation of electricity, it is a rare consumer who finds the cost reasonable when compared with the return on the investment. However, with state and federal rebates (and even many electric company rebates), the cost to the buyer is lowered enough to convince him to buy. Therefore, the taxpayer is basically helping to pay somebody else's electric bill.

Electric and hybrid cars have many characteristics that make them unsuitable for most people including limited range, cramped size, limited carrying capacity, and purchase price. However, when enticed with state and federal rebates totaling as much as $12,000 and up, some consumers are lured into the purchase. Therefore, the taxpayer is basically helping somebody else to buy a new car.

One aspect of a free market that seems to get bad press is price-gouging. When there are shortages in a particular product or service, those who need that good or service tend to bid up the price. While many shortages are caused by government regulation and central planning, other shortages are caused by war or natural disasters. For example, after a city has been destroyed by war or nature, there is a sharp increase in demand for food, water, construction materials, medicine, clothing, tents, generators, vehicles, construction equipment, and skilled labor. The demand drives up costs. Consumers respond by saying that the price increase is unfair. But, what the price increase does is attract producers of needed goods and equipment as well as skilled labor to the site of devastation thereby accelerating recovery. Only a free market can accomplish this movement of goods and services efficiently. Government involvement in disaster recovery is always a...disaster.

The government interferes with the free market by designating certain businesses as legal monopolies. This monopoly status eliminates the free market forces that drive innovation and consumer protection.

The government interferes with free market capitalism by establishing a minimum wage and, increasingly, minimum employee benefits. These added costs can make the cost of producing products so expensive that a business can no longer compete successfully -- especially against goods imported from nations without artificially high labor costs. Some businesses are reluctant to hire the additional staff necessary for expansion because they can't forecast labor costs in a fickle regulatory and tax environment.

Sometimes, governments prop up failing businesses instead of allowing them to reorganize through the bankruptcy courts or even close the doors. These bailouts are at the expense of the taxpayer. Therefore, the taxpayer is basically protecting the jobs of overpaid, incompetent employees and management.

Who decides to override the free market and purge some things from the market and force others in? Politicians, bureaucrats and lobbyists.

Central planning was a characteristic of the former Soviet Union. Central planners decided who would produce what at what price. The result was inferior goods and services that nobody wanted. When I was growing up back in the '50s and '60s here in the free market of the United States, we considered such central planning silly, inefficient, and unresponsive to the needs of the people. Yet, here we are. In spite of the failure of the Soviet Union do to, in large part, central planning we have allowed our government to plan our market for us.

All this is based on the arrogant assumption by America's elitist ruling class that we commoners can't make appropriate decisions on anything without the intrusion of the government.

The proper role of government is to protect the rights of the people. In the case of commerce, its role is nothing more than to protect the consumer from impediments to the free market and from harm such as fraud and gross negligence. Beyond that, the government needs to butt out!

Businesses that are controlled by, or propped up by government almost always receive increased government aid when they fail. Such businesses have incentives to waste resources. Consequently, the free market tends to be pro-social because it serves society, while state-controlled business tends to be anti-social, because it's wasteful and coercive.

The United States no longer has a true free market. Instead, we have a modified free market that is regulated and subsidized by central planners. We have, consequently, given up a significant portion of our liberty. Free-market advocates often have difficulty distinguishing between the principles of a free market and the advocacy of a free market. Saying one is pro-free-market is not the same as understanding and practicing the principles of a free market. The latter is not common among politicians or voters or even businessmen.

We gotta get smarter voters.

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