Theoretically, a free market is an economy which is only regulated by "market forces", i.e. Supply and Demand. Competition between businesses is expected to self-regulate the pricing and quality of goods and services within a free market.

In reality, however, totally free markets breed an incredibly destructive "race to the bottom" in which all involved attempt to amass the most capital and resources at the expense of everyone else.

Modern neoliberal capitalists extoll the virtues of free markets while conveniently ignoring the fact that no such thing exists. All "free markets" today are propped up with massive government subsidies such as corporate welfare and radical tax-relief for the wealthy. This is simply because a true free market will eventually collapse under the weight of the boundless greed of those involved.

While the poor, lower-middle and middle classes are subjected to the market discipline of Supply and Demand, the upper classes are eternally given a helping hand by that wonderful guardian of power and priviledge, the State. It is entirely common and expected that the costs of big business will be socialized (via tax subsidies, land grants, EPA cleanup of environmental damage, etc.) while all profits are privatized.

A free market is a free flow of goods and services and full utilization of resources unfettered by regulation or monopoly. It has been and is often touted as the most beneficial economic system. Usually the works of Adam Smith are cited as supporting this notion, although Adam Smith only laid out the properties of completely free markets, and never actually advocated them in their extreme. The belief in the necessity of free markets is a basic tenet of Neoliberal economic theory.

The reason completely free markets are not a beneficial economic system is that the full utilization of resources and lack of regulation, while good for abstract bottom line markers such as Gross Domestic Product, leads to inevitable negative consequences for the quality of human life.

Proponents of free markets fall into two camps. True proponents are Market Fascists, not recognizing the needs of human society beyond producing and consuming, and many other proponents only support market freedom insofar as it benefits their bottom line, but then advocate for government largesse in support of them and regulation detrimental to their competition.

This essay was submitted by my wife, Elke, for her Open University course.

Describe the neoclassical view of the free-market system. How do externalities occur in a free market? Why might some types of transport cause externalities?

Increased travel activity, various literature, and reports in the media, raise awareness about how global inequality currently creates two categories of nations. One consists of rich, sophisticated, civilised, industrialised countries with advanced political and healthcare systems, corporate culture, consumerism and financial institutions attempting to dominate people’s lives on a global scale. Poor “Third World” nations form the second category, deeply indebted to the world’s leading financial institutions and with populations exploited and prone to dangers of environmental problems and disasters along with starvation and diseases eradicated in industrialised nations.

The field of economics provides the basis for an investigation into causes for this inequality, looking first at basic workings of markets before obtaining the description of the neoclassical theory of the free-market system. This shall lead to answering the question of how externalities occur and a change of focus to reasons why some types of travel cause externalities.

Markets are places of exchange, where economic agents (buyers and sellers) meet to exchange goods or services for money at prices expressed as a monetary value. Barter – the exchange of goods for goods – is possible, but less practiced nowadays. Trading, generally regulated by rules and conventions, involves interaction of economic agents. Marketplaces vary from the local fruit stall with face-to-face interaction of buyer and seller to Internet trade, where there is no personal contact, or global markets for oil or copper.

The neoclassical view of markets emerged with Adam Smith and his book “The Wealth of Nations”, in which he explained the workings of an “invisible hand” that coordinates actions of economic agents driven by self-interest to the good of everyone – without people’s knowledge and intervention. This mainstream school of economics clarifies conditions which determine well-working markets and their benefits. One benefit is the allocation of – ideally privately owned – resources with the help of price mechanisms to satisfy human wants most effectively through a market with ideal conditions. All wants can be satisfied through consumption of goods and services. Customers buy according to their taste and firms produce the currently most profitable commodities. These choices made by economic agents, each following their own interests without considering consequences of actions, result in a balanced production of goods and services.

Price mechanisms ensure market efficiency and coordinate all agents’ actions and help shape their decisions and price-setting. One price, e.g. the world price for coffee, holds all necessary information on customers placing values on goods and producers’ resources and technology involved in production. Consumers calculate how much they are willing or able to pay. Producers decide what and how much should be produced. Only the most efficient producers – the ones able to offer goods and services at lowest prices to consumers due to low production costs – survive in markets with fierce competition. Inefficient companies drop out or change to producing more profitable items. An example to show the workings of price mechanisms is banana production. If there is a bad banana harvest in Honduras (or destroyed crops like in the aftermath of Hurricane Mitch), producers see a good reason (and critics an excuse) to raise banana prices. Higher prices result in less banana sales due to consumers opting for other fruit, people checking whether there are any cheaper bananas from other regions and buying those, or people without concerns on spending money simply paying more. Producers raise the prices until they reach a good balance between customers and producers.

Workings of markets and price mechanisms seem straightforward and positive, but don’t come without unintended or unconsidered consequences, which can also be well-known and willingly included in producing goods and profits. Michael Jacobs (1991) talks about an “invisible elbow” of market forces, able to cause general ruin, as a counterpart to Adam Smith’s “invisible hand”, bringing wealth and prosperity. Another term for “invisible elbow” is externalities. How do they occur?

Externalities refer to differences between private costs and benefits (incurred by economic agents involved in a market transaction) and social costs and benefits (incurred by other social agents not involved in a market transaction, along with private costs and benefits), which means economic agents can’t enjoy the full benefits, but also won’t pay the full costs of their actions. Externalities can be positive (flowers growing in one’s garden giving pleasure to neighbours and passers-by) or negative (environmental damage or destruction as a by-product of resource extraction, deforestation or chemicals production) and are usually not experienced by people who create them. Both producers and consumers are involved in creating externalities. Customers are interested in saving money by buying desired items at lowest prices without wondering whether their choice contributes to a low-wage exploitation culture or air or water pollution in another country. Producers are concerned about the creation of huge profits while investing as little money and resources as possible, moving their production wherever they find no or basic environmental and work regulations. Markets don’t consider wants of future generations or public goods, like air or water, and exclude people with no or little money available.

Looking at how transport causes externalities, it can be said that all types of travel using fossil fuels cause externalities in the form of air pollution – and annually increasing personal travel suggests implications on the earth’s climate for future generations. This applies both to private modes like cars, vans/lorries, motorcycles/mopeds as well as public transport like buses and especially planes. Manufacturing transport vehicles in low-cost production countries affect their people’s lives and environment. Trams or railways involve no fossil fuels (if engines are not diesel-powered) and are seen as environmentally friendly, but this depends on the electricity source to power the vehicles. Electricity generated by oil or coal power plants worsens air pollution like vehicles running on fossil fuels, and nuclear power plants are not proven to be without effects on the health of people living near them. Walking and cycling seem healthy ways to travel, giving people exercise to keep heart and body fit. However, it is not necessarily healthy to breathe in all the air pollution from private and public transport vehicles, and there are higher risks of involvement in accidents, especially for cyclists, if drivers of bigger vehicles don’t pay enough attention or if cyclists are careless.

The insight provided into the workings of free markets and externalities they cause for people and environment on a global scale contributes to knowledge about what creates inequalities, and food for thought to encourage changes to the free-market system with chances and benefits spreading from wealthy people and those in power to those people currently facing exclusion and disadvantages.

Copyright Elke Wallace, 2003

Hinchcliffe, S. and Woodward, K. (eds) (2000), DD100 An Introduction to the Social Sciences: Understanding Social Change, Book 2, The Natural and the Social: Uncertainty, Risk, Change, London, Routledge/The Open University
Goldblatt, D., The Open University (2000) DD100 An Introduction to the Social Sciences: Understanding Social Change, Workbook 2, Milton Keynes, The Open University

One of the problems with the United States is that we don't have a free market, or rather we don't have free markets. There is a great deal of things that are free. such as weekly newspapers, and water from public drinking fountains, and sometimes rides on public transportation. But markets? Those are hella expensive. A market is one of the most expensive things you can buy. Land, structures, special equipment to hold your wares...buying a market is going to cost you in the high five figures, at least, and renting a market, even a modest one, is going to probably be your largest operating cost. Markets are not at all free.

For those of you who think I am being facetious, I am not at all. Much as in Free Software, the two different meanings of free are not always differentiated, and there are plenty of people who would not question the notion that legal regulation of the market is the only barrier to entry. In the real world (in this country), the largest barrier to entry to market is having a physical location in which to sell your products. As I have discussed, the price of capital is the major cost of selling, with the price of the good itself almost negligible. The major barrier to entry to market is that the small amount of profit that someone can make from selling goods makes it very difficult to pay for overhead.

Classical economic theory is based on traditional Anglo-Saxon philosophy, which views the world as a set of discrete entities working against a background that they can't change. What this translates into in economic terms is that the activities of producers and sellers, both large and small, don't effect the market, both in the abstract or real senses. In the real world, however, as a concrete example, the choicest places to sell your wares are limited. Having a good location to sell your products is not just a good, it is a pathway that allows people to access that good. The distinction is perhaps not made well enough in Anglo-Saxon based economic philosophies.

With all that theory being said, I wish to make a concrete example of what I am talking about. When I lived in Tainan, I noticed people selling lemons and other citrus fruits on the sidewalks for the equivalent of around 50 cents to a dollar a pound, US. From an American perspective, I at first assumed these people were down on their luck and would harass me to buy. I didn't notice such behavior, and actually, a few days later, when returning from 7-11 with some tea and Toberlone, I felt guilty at not trying to contribute to the local economy and tried to buy a lemon. They just laughed and said I could take it for free. Of course, towards me this was politeness towards guests, but on the whole, a merchant working out of a stall doesn't have to sell very agressively. They have no rent to pay, and thus they can sell the goods for close to their production costs.

It was not just produce for sale, either. In the way to class in the morning, I would pass vendors selling model airplanes and used books, sweaters, socks for children as well as (this was Tainan, after all) a large variety of food items. All of these things at costs even lower than was standard in Taiwan.

In the United States, there are all sorts of barriers to market, apart from the high cost of real estate caused by a cycle of capital inflation. In Portland a group of restaraunts has been trying to shut down cart vendors, claiming they offer unfair competition. It could be argued on any number of social, economic and political levels that the entry to market is blocked by a an old boys network in business and government. Some of this makes sense, in that there should be basic health, safety and environmental standards for businesess. After all, it does get a little annoying when you can't walk down the sidewalk without having to weave around some man's generator, truck and collection of cheap oil paintings. However, this should be balanced with people's rights to go into business for themselves without having to pay extortionary market entrance fees to the holders of capital.

Your body is your own, but your water belongs to the tribe. As a republic, you may or may not be guaranteed a living, but you should be given the opportunity to have the access (physical and otherwise) to use the land to expedite your buying and selling as neccesary.

The meaning of the term "free market" is very different from laissez-faire capitalism, which is what politicians usually mean when they talk about "free markets". As I understand it, a market is the sum of sales/purchases of a given type of product or service, and a market is free if the market price is completely defined by the laws of supply and demand. In order to accomplish this, several conditions must be met:

  • there must be enough buyers and sellers that no single buyer or seller can influence the market price
  • competition must be based purely on price
  • everyone must know all of the prices (i.e. what everyone's asking and paying)
  • there must not be any barriers to entering or leaving the market
  • transaction costs (i.e. fees for buying and selling) must be zero

Free markets should also be as efficient as possible. In labor markets, this should lead to full employment*. In the real world, there are two big problems preventing markets from achieving efficient outcomes. First, some markets either can't or shouldn't meet the above conditions for one reason or another (eg shipping companies, VLSI chip production, fighter jet production, hospitals, etc.).

Second, companies actively look for ways to break the free market. In fact, this pretty much defines the American way of doing business. Just look at sex in advertising, product differentiation, intellectual property law, mortgage broker fees, firms that are too big to fail, unpublished bargains, cellphone contracts, brand promotion, fees for closing bank accounts, software bundling, embrace and extend, etc.

One might ask (as at least one person has) why one should discuss free markets if they're too ideal to describe much of the real world. I think there are two good answers for this. The first is that term "free market" is constantly misused in political discourse. If more people realized what that term meant, they might be more inclined to challenge what politicians say about them. However, another good reason to discuss free markets is to provoke a discussion about how one might create free and nearly free markets, whether one might wish to do so and what it might require.

* Note: My link to the Wikipedia page on the Keynesian Revolution distinguishes Keynesian's ideas from the neoclassical theory of employment by its position on government intervention, which I'm (conveniently) avoiding.

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