Free Market is no panecea
"Free Market" is often cited as a guiding light in our social and political processes. Moreover it has gained so much respect that it is hailed as a solution to all sort of problems. While I will certainly agree that capitalism is a much better economic model than is socialism, free market attitudes only apply to a very narrow set of problems and there is a distressing tendency in our politics and media to apply it incorrectly.
Free market attitudes apply very well to transactions between entities where all costs are internal and the market is atomistic.
Where the market is highly concentrated, the atomistic assumption does not apply and monopolistic (or monopsonistic) inefficiencies appear. For this reason we have Antitrust laws in the US to help prevent unacceptable levels of market concentration. Of course, the level of concentration which constitutes "unacceptable" is a very gray area and any concentration produces some level of inefficiency. Having said that, we have many markets in the US in which a high level of concentration exists and is allowed to continue to exist. One example of this can be seen in the record and movie industry. AOL has done an excellent job of demonstrating that a CD or DVD can be produced with media written on it and distributed widely and so cheaply that it behaves as junk mail: they give them away for free and I find a few of them a month in my mailbox… Having said that, it is obvious that cost to produce a CD/DVD is very low and some sources estimate it as less than a dollar. http://www.2near.com/edge/editorials/mp3.html. At the same time, to buy a music or movie CD/DVD costs $16 to $25. Even assuming that a particular artist gets as much two dollars per copy as royalties (which would be an incredibly high amount in the industry http://www.mbsolutions.com/biz/Info24.html), and that the store tacks on a few dollars as overhead, we are still left with the fact that the record companies are taking the lion's share. Why is there no "race to the bottom"? Why aren't we seeing competition to drive down the price of the and CD/DVD market? Whatever your answer to that question is, there remains the fact that the market is NOT behaving as a atomistic free market. We tolerate such markets in the US but whether we are considering media like CD/DVD, or phone service, or credit cards, or automobiles, such concentrated markets are common and atomistic free market assumptions only apply as an approximation and yield undesirable inefficiencies.
Where significant externalities apply to a transaction, free market attitudes also do not yield efficient solutions. A common example is use of fossil fuels for power. Whether the application is automobile power or power supplied to an electrical utility grid, fossil fuels create external costs not reflected in the costs born by the parties to the transaction. That is, generation of waste products require clean up costs. The individuals who decide on use of fossil fuels and spew the resultant wastes into the air and let them blow away do NOT bear the costs of clean up and so such cost are not part or their decision. Whatever that cost is, and whether it is great or small, it is external to the individual decision to use a fossil fuel for power and creates inefficient solutions where the sole guide is the free market.
My point is that free market solutions are NOT always applicable and we should be questioning any assumption that free market is the best guide in any given circumstances. To illustrate, do we want the free market to determine:
The cost of cocaine being sold in middle schools;
What the acceptable blood alcohol level of a driver should be;
Whether a given retarded person should be sterilized;
The speed at which people should drive in school zones;
How much pot commercial airline pilots should smoke on duty;
Whether your neighborhood is the right place for a casino, nuclear plant, or toxic waste dump;
The cost of the service of prostitutes across the street from a church;
Whether a given invalid should be "unplugged" from life support;
Whether a given woman should have an abortion…???
This list could go on and on but I have yet to find one person who will claim that such issues are appropriate for the free market to determine. Given that, there are myriad areas where the economics of the situation are not a desirable guide. We should be asking "Why is free market the right guide?" in ALL situations instead of just accepting it a priori.
Free market attitudes apply very well to transactions between entities where all costs are internal and the market is atomistic.
Where the market is highly concentrated, the atomistic assumption does not apply and monopolistic (or monopsonistic) inefficiencies appear. For this reason we have Antitrust laws in the US to help prevent unacceptable levels of market concentration. Of course, the level of concentration which constitutes "unacceptable" is a very gray area and any concentration produces some level of inefficiency. Having said that, we have many markets in the US in which a high level of concentration exists and is allowed to continue to exist. One example of this can be seen in the record and movie industry. AOL has done an excellent job of demonstrating that a CD or DVD can be produced with media written on it and distributed widely and so cheaply that it behaves as junk mail: they give them away for free and I find a few of them a month in my mailbox… Having said that, it is obvious that cost to produce a CD/DVD is very low and some sources estimate it as less than a dollar. http://www.2near.com/edge/editorials/mp3.html. At the same time, to buy a music or movie CD/DVD costs $16 to $25. Even assuming that a particular artist gets as much two dollars per copy as royalties (which would be an incredibly high amount in the industry http://www.mbsolutions.com/biz/Info24.html), and that the store tacks on a few dollars as overhead, we are still left with the fact that the record companies are taking the lion's share. Why is there no "race to the bottom"? Why aren't we seeing competition to drive down the price of the and CD/DVD market? Whatever your answer to that question is, there remains the fact that the market is NOT behaving as a atomistic free market. We tolerate such markets in the US but whether we are considering media like CD/DVD, or phone service, or credit cards, or automobiles, such concentrated markets are common and atomistic free market assumptions only apply as an approximation and yield undesirable inefficiencies.
Where significant externalities apply to a transaction, free market attitudes also do not yield efficient solutions. A common example is use of fossil fuels for power. Whether the application is automobile power or power supplied to an electrical utility grid, fossil fuels create external costs not reflected in the costs born by the parties to the transaction. That is, generation of waste products require clean up costs. The individuals who decide on use of fossil fuels and spew the resultant wastes into the air and let them blow away do NOT bear the costs of clean up and so such cost are not part or their decision. Whatever that cost is, and whether it is great or small, it is external to the individual decision to use a fossil fuel for power and creates inefficient solutions where the sole guide is the free market.
My point is that free market solutions are NOT always applicable and we should be questioning any assumption that free market is the best guide in any given circumstances. To illustrate, do we want the free market to determine:
The cost of cocaine being sold in middle schools;
What the acceptable blood alcohol level of a driver should be;
Whether a given retarded person should be sterilized;
The speed at which people should drive in school zones;
How much pot commercial airline pilots should smoke on duty;
Whether your neighborhood is the right place for a casino, nuclear plant, or toxic waste dump;
The cost of the service of prostitutes across the street from a church;
Whether a given invalid should be "unplugged" from life support;
Whether a given woman should have an abortion…???
This list could go on and on but I have yet to find one person who will claim that such issues are appropriate for the free market to determine. Given that, there are myriad areas where the economics of the situation are not a desirable guide. We should be asking "Why is free market the right guide?" in ALL situations instead of just accepting it a priori.
posted by Minotaur at 11:30 AM
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