Home > Political Economy > Why Free-Market Economics is a Fraud

Why Free-Market Economics is a Fraud

from Ian Fletcher

If there’s one thing everyone in America knows, it’s that free-market economics is true and free markets are best. 

After all, we’re not communists, are we? They starved and lost the Cold War because they believed otherwise. And their watered-down European cousins the socialists? More of the same, only less so. Even liberals get this nowadays. All hail the free market! 

Trouble is, things “everyone” knows are often wrong. And this is no exception.

It’s time to start getting honest about a very simple fact: Nobody, but nobody, really believes in free markets. That’s right. Not the Republican Party, not the libertarians, not the Wall Street Journal, nobody. 

Here’s why: a truly free market is a perfectly competitive market. Which means that whatever you have to sell in that market, so does your competition. Which means price war. Which means your price gets driven down. Which means little or no profit for you. 

Oops! 

Naturally, businesses flee perfectly competitive markets like the plague. In fact, the fine art of doing so is a big part of what they teach in business schools.

That’s why businesses use strategies like product differentiation, so their competition is no longer selling the exact same product they are. That’s why they use strategies like branding, so their buyers don’t think the products are the same.

Businesses will, in fact, do almost anything to get out of the hell of pure head-to-head competition. 

They don’t do it because they’re crooked; they do it because they have an intrinsic economic incentive to. Always. 

This is part of the innate essence of capitalism. It is not a flaw or a defect.  It is part of what makes the whole system go. It is part of what makes capitalism capitalism. 

People are the same way. Consider your own career. Why do you get paid more than the minimum wage? (I’m hoping you do.) Probably because you have some skill that everybody else doesn’t have. So you don’t have to bid against every unemployed person in your area to hold your job. Just a few of them. Which pushes your wage above the legal minimum. 

That skill of yours is what economists call a “barrier to entry”—entry into the market for your job, that is. And if you’re anything other than a damn fool, you’ll cherish it like your very life. 

I sure do. 

Now let’s consider the other side of the equation. We’ve looked at free markets in things you sell. Now let’s consider free markets in things you buy. 

Here everything gets turned around. If I’m buying something, I want the freest possible market in that product. 

I don’t, to take an example recently on my mind, want there to be only one market for live Christmas trees in my town. I want there to be two (or more), and right next to each other so I can easily comparison shop. And I want to shop for more-easily shippable goods on the Internet, if possible, where I can potentially find the lowest price in the entire world. 

I want, in other words, every seller’s nightmare. Which every smart seller will use every legal trick in the book to avoid. 

As a result, nobody with any wits about them really believes in free markets. People believe in them when it’s in their interest, but not when it’s the other way around. 

This is a systemic, structural condition, so anyone who tells you they believe in “free markets” is either lying, stupid, or hasn’t thought the whole concept through properly. 

The latter category is quite common. Many people do their thinking about political ideology in an entirely different—and dreamily disconnected—mental space than they use for managing real life. 

Frankly, everyone I’ve ever met gets the truth well enough in practice, in their own personal life or in how they run their business, so I just don’t believe anymore that anyone does believe in free markets. 

Like any rational person, I’m open to counter-examples if anyone can show me any. But I’ve been asking around for a while on this, and haven’t come up with much. 

This is not just an esoteric point, still less yet one more example of the familiar fact that people are hypocrites in politics. 

Here’s why it matters. The political players in America today who claim to support free markets don’t. They support free markets in the things their backers buy, but maximum barriers to entry in the things their backers sell. 

For example, one of the great unnoticed achievements of the Republicans (and their Democrat collaborators) from Reagan onward has been to gut U.S. antitrust law. Having a monopoly, or a cozy oligopoly with friendly rivals, is one of the best barriers to entry around. 

As recently documented in Barry Lynn’s fine book Cornered: the New Monopoly Capitalism and the Economics of Destruction, American industry is now concentrated as it hasn’t been since before the era of Teddy Roosevelt and his trustbusters. (There’s a different kind of Republican for you, by the way. These truths are not liberal or conservative.) 

Most Americans don’t realize this has happened because, unlike in the old days of Standard Oil, oligopolies today are cunning about masking their existence. 

To take just one example, America’s eyeglass frame industry is now dominated by the conglomerate Luxottica. That’s why frames are so expensive. And any company, like Oakley the sunglass maker, that tries to break into the market? They find themselves shut out of a Luxottica-controlled distribution system. And retailers are now afraid to receive distribution from anyone else, lest they be cut off. 

It’s a remarkably well-oiled scheme, and it has its parallels in many other industries. But the average consumer has no idea about this, because the range of brands, if not suppliers, in optical shops remains diverse. 

We’re fat, dumb and happy.  We’ve been fooled.  But behind the smiling mask of a hundred labels smirks a single monopolist.

But aren’t there laws against this sort of thing? 

Well, there sure used to be, enforced by unsung lawyers and bureaucrats (horrors!) at the Justice and Commerce Departments. Whom nobody considered very glamorous, but who were doing the rest of us a big favor. Talk about forgotten wisdom! 

Consider some other examples: 

  • Tyson in chicken
  • Smithfield in ham
  • Menu Foods in pet food
  • Frito-Lay in chips
  • InBev and MillerCoors in beer
  • PepsiCo, Coca-Cola, and Nestlé in bottled water
  • Dickinson in medical devices
  • Microsoft in operating systems
  • Iron ore (three companies)
  • Aluminum
  • Cement
  • Railroads
  • Banking 

The number of problems caused by letting monopoly power—whose key consequence is known as “pricing power”—is astonishing. 

For one thing, this is a huge part of what ails American farmers. Family farmers are caught between the agribusiness monopolies who push up the price of their inputs (feed, seed, fertilizer etc.) and the agribusiness monopolies who push down the price of their outputs. (The economists’ term for the latter is “monopsony,” with an “s,” but it works the same way as monopoly.) 

It’s the perfect racket. 

And it’s no surprise that on the other side of the equation, “free” market politicians are very diligent in imposing genuinely free markets where this suits the interests of the multinational “American” corporations that fatten their campaign coffers. 

This is done, of course, as a matter of high principle and sophisticated economic rationality.  It’s remarkably easy to make wonderful after-dinner speeches about free markets. 

Let’s start with labor. Post-Nixon Republicans have genuinely supported just about every policy designed to weaken the pricing power of labor. This starts with weakening unions and letting the inflation-adjusted minimum wage fall, but it doesn’t end there. 

You think Ronald Reagan got in 1986, and George W. Bush wanted in 2007, amnesties for illegal immigrants because they were nice, compassionate people? To ask the question is to answer it. Whatever the ultimate merits of amnesty as policy, for them it was about cheap labor, plain and simple. 

The reality is that the past prosperity of America has never been based on pure free markets—starting with the fact that we had the highest average income in the world in 1776 because the colonies had structurally tight labor markets due to the open frontier. (Europeans and other Old World peoples were trapped by the iron law of wages because they had nowhere to go.)

 Free, or nearly free, markets do have their rightful place in many parts of the economy, and it would be foolish to sabotage them. But in other areas—above all, in labor markets—our prosperity was based on pricing power. 

A number of areas other than labor also worked better thanks to a healthy dose of pricing power. Try advanced technology, for a start. The patent system, which is not natural, is a fairly recent invention, and does not de facto exist even today in much of the world, is one. Innovation doesn’t come cheap, and without pricing power for innovators, few companies could afford it. 

Even the existence of scale economies, which are intrinsic to modern, large-scale, capital-intensive industry, implies markets that are less than free. Why? Because scale economies intrinsically imply a small  number of large producers and thus give rise to oligopoly, with the consequences mentioned earlier. 

This is why most other industrialized nations aren’t romantics about free markets, are honest about their frequent nonexistence, and focus their policies on taming the negative effects of oligopoly while capturing the positive ones. They understand, for one thing, that big corporations are necessary but often pirates, and focus on making them share their loot with their crews.   

We, on the other hand, live in a state of denial about the piracy. 

So the next time someone tells you to believe in “free” markets, just tell them you’ll believe as soon as they do. 

When pigs fly.

  1. Avner Offer
    December 18, 2011 at 1:07 pm

    Chicago abandoned free markets some time in the 1950s, and has become a supporter of monopoly. See Pitofsky, R. and Oxford University Press. (2008). How the Chicago School Overshot the Mark The Effect of Conservative Economic Analysis on U.S. Antitrust. New York, Oxford University Press.

  2. December 18, 2011 at 1:13 pm

    I make this basic argument fairly often, but clearly not often enough. Often enough would be 24/7. Good to see it laid out like this.

    Among other things, Michael Perelman’s _Railroading Economics_ does a very good job focusing on the role of fixed costs in heightening this contradiction, which was a central fact of the railroad industry in the 19th Century.

  3. s h a r o n
    December 18, 2011 at 1:37 pm

    I’d be interested in opinions on the Wikipedia entry on “free market”.

  4. December 18, 2011 at 1:58 pm

    I believe firmly in the free market. But there is no free market unless land is free at the margin – ie it needs a tax of 100% on the rental value of land. Then you get a free market. Otherwise it is a sham.

  5. December 18, 2011 at 3:00 pm

    competition vs/and monopoly/oligopoly are as dialectially united and mutually reinforcing as are agglomeration vs/and decentralization over time and space, production vs/and realization of surplus value, economic concentration and economic centralization…

    Competition among relatve equals in a relatively competitive market, exogenous shocks, coupled and magnified by endogenous mechanisms and processes. produces anti-competition as some competitors get lucky, are more ruthless than other competitors, etc leading to monopolistic competition and eventually oligopoly as big fish swallow, merge with, outright destroy competitors; but then anti-competition begets more competition at bigger levels withmuch bigger stakes in wars between behemoths.

    People entering a new location and turning it into a “place” agglomerate together over time and space for security, minimizing various costs including information and trancactions cost until, in relative terms, or relative prices or relative ROIs (what capitalism and competition are all about where do you stand in relative (to other competitors) terms and wealth and power which is ultimately what capitalism is all about or as the slogan of the Medici Family put it: “money to acquire power; power to protect money.

    When I get one of those meme and quote mongers with stuff like “Don’t you think we should just let free markets be free?” I answer can you give me the definition of a free market according the the guiding theory you are employing (neoclassical economics) and also can you tell me the 7 basic things that markets do, how or the mechanisms through which they do what they do, and the order in which they do them? I tell them if they cannot answer the basics of their own paradigm, then “opportunity cost” considerations dictate they are not worth one more second of my time or attention.

    A free market under capitalism is like a virgin working in a brothel; she will either case to be a virgin soon, or if allowed to remain a virgin it will only because either bothering with her is not cost effective, or she can’t play at being a virgin while no longer being so, or she can remain a virgin only if she has value to the brothel owners for doing so (like a bait and switch, use her to draw in customers at a place everyone thinks is full of virgins and then pass off another woman who can “pass” with some of the kind of good acting found in many relationships in and outside of marriage.

  6. Trent
    December 18, 2011 at 3:57 pm

    Your argument fell apart when you said “a truly free market is a perfectly competitive market”. That claim is simply not true, and you don’t really come close to justifying it. You’re conflating competition with free markets when really they are distinct concepts.

    If a company manages to earn some monopoly power – good for them! – even though it probably isn’t great for the consumer (in terms of price). Of course low barriers to entry and weaker incumbent firms deliver more market dynamism and (generally) better outcomes for consumers, but this is unrelated to the concept of “free markets”, unless the government is enforcing the monopoly. In this sense you are correct that often political hacks are hypocritical when they claim to support free markets but are all to happy to wilt to pressure from special interest groups (whether it is “the right” supporting businesses that back them or do-gooders on “the left” who like to subsidise their own pet projects (e.g. Solydra!). In a free market a number of companies fight for market share and power without government intervention. A fair fight without government picking winners, simple.

    You’re also neglecting the fact that things don’t happen in a vacuum of time. History matters. If some company may have done well to earn greater market power in the past this does not have any implication on how “free” the market is. Again, a caveat applies when the market power derives from government meddling.

    The fact that some people say they are for free markets at dinner parties while rationally seeking to earn market power at the office is no contradiction. Similarly, if people are for free markets and enjoy the benefits of highly competitive markets they are not being consistent in their beliefs; these are two different concepts.

    I know this is “real world” economics, but a bit of ECON101 wouldn’t hurt. Though I do agree that when it comes to the crunch very few people, myself included, are for truly free markets. But all the evidence tells us what direction we should be moving in at the margin.

    • December 18, 2011 at 11:20 pm

      “a caveat applies when the market power derives from government meddling.”

      Can you give any examples of when market power DOESN’T derive from government meddling?

      • December 18, 2011 at 11:30 pm

        All property rights derive from government because government is the administrator of law, (which may not necessarily be the same thing as justice!)

      • Trent
        December 19, 2011 at 3:23 am

        I don’t count defence as “meddling” but I take the point that ultimately anything anyone ever does with property (including their own body; and presumedly in the market and in their personal lives) is possible only under the good grace of our governmental overlords and the bold forces of good watching over and protecting us. Yes, property rights are ultimately defended by the state, when it comes down to it. But I’m not an anarchist.

        Of course, in voluntary exchange where both parties are happy and their is no need for Our Protectors to step in, technically there is no government meddling. So an example is every transaction made in the global economy where a consumer has paid over the perfectly competitive price for a product (with some level of monopoly markup) in voluntary, mutually beneficial exchange. There might have only been a few trillion examples this year; easy to overlook.

      • Trent
        December 19, 2011 at 3:26 am

        Ugh.. *there* not *their*

    • Matt
      June 26, 2015 at 7:54 am

      I agree. “Free market” would mean a market without substantial barriers to entry in my view. This does not necessarily imply perfect competition. Monopolistically competitive markets are characterized by low barriers to entry, so I would argue that monopolistically competitive markets are “free markets”. As you said, the author is conflating the concept of a “free market” with the concept of perfect competition, which are two distinct concepts.

      The author is essentially saying that firms do not like competition….. Well duh!

  7. December 18, 2011 at 4:24 pm

    Where monopoly privilege exists then the free market is not free. The most important monopoly privilege is land monopoly, followed a long way behind by privileges arising from patents and intellectural property rights.

    Such monopolies can only survive with government protection eg land titles are upheld and protected by government. If there is any good practical reason for allowing the monopoly to exist, then the monopoly holder should pay the full value of the monopoly ie its rental value.

    What exactly is ECON101? Room 101 was the room in Orwell’s 1984 where victims were tortured by the worst fear.

  8. Trent
    December 18, 2011 at 4:42 pm

    If there are monopoly rents to be earned from land then they should be reflected in its value/purchase price. If someone owns land then they have already paid their due. Otherwise, rent is higher in more valuable locations, but this is accrued to the property owner.

    ECON101 is the course code commonly given to the most elementary class in an economics curriculum. In such a class students are often taught the difference between market power and market intervention, as well as the concept of property rights.

    • December 18, 2011 at 4:54 pm

      “If someone owns land then they have already paid their due.”

      Yes but they have not paid their due to those through whom its value arises, which is a slight problem. If I steal something and sell it, then the next owner is the purchaser of stolen property even though they have paid its value. It does not cease to be stolen just because it has been sold on.

      Moreover, the value of land has to be continually sustained by the presence and activities of the community. The value of what has been sold on is the expectation that the community will remain and protect the land title and provide infrastructure.

      I don’t know what this ECON101 teaches about property rights but the very term “property” is a confusion, since it comprises both chattels which are the product of human labour, and land, which is the product of no man’s labour. If ECON101 teaches Locke’s doctrine on the source of land ownership it could not be more wrong.

      • December 18, 2011 at 11:56 pm

        I have long held the opinion that a little bit of economics (ECON101?) is a dangerous thing. But I went through a whole degree course without any discussion of the role which land plays in the economy. I wonder how many on this forum can give a useful definition of land and its special attributes.

  9. December 18, 2011 at 4:53 pm

    “If there’s one thing everyone in America knows, it’s that free-market economics is true and free markets are best.” Only libertarians understand and agree with free-market economics, and they are about one percent of the population, and of these, 90 percent don’t really understand the free market, so that leaves about one tenth of one percent of Americans who even know what is a genuinely free market. Every widely-used economics textbook presents the doctrine of market failure. So how can everyone know free-market economics is true, when all the mainstream books say it is not true?

  10. December 18, 2011 at 4:58 pm

    “a truly free market is a perfectly competitive market.” False. A truly free market means that all acts are voluntary, with no legal restriction or imposed cost on peaceful and honest human action. “Perfect competition” is a technical term in economics applying only to industries with a uniform product and many producers, such as wheat if there are no governmental controls. That applies to relatively few products. Monopolistic competition, with non-uniform products (e.g. various brands and varieties) can also be in a free market.

  11. Lyn Eynon
    December 18, 2011 at 6:17 pm

    ‘Free markets’ do not exist outside textbooks. Even there they exist only because authors take for granted concepts, such as property rights, that are socially and historically constructed and politically contentious. Even where governments do not ‘pick winners’ market success depends on the legal and political environment. Think of the intellectual property disputes around copyright or patents but land, labour and company law all impact on who succeeds or fails and the resulting distribution of wealth and income. Nor are macroeconomic policies neutral in their effects. So the idea of ‘a fair fight’ makes no sense.

    Recognising this is essential for understanding how the real world economy works. Outcomes are strongly influenced by the rules of the game and those who get to set those rules do well, which is why so much money goes into political campaigns and lobbying. Monopolies can indeed result from government preference but the natural tendency of business is itself to curtail competition unless stopped from doing so.

    Defending ‘free markets’ all too often hides the rich and powerful who set the context in which markets operate. Invisible hands indeed but we would do better to make them visible in the interests of informed debate on law and policy.

  12. GeorgeNYC
    December 18, 2011 at 8:37 pm

    Ugh. “free” markets. It is such an ideologically loaded term these days. Much like religion, the last shred of useful insight has long since been lost as its terms have been used to justify all forms of oppression.

  13. Alice
    December 20, 2011 at 11:33 am

    Free markets will never exist because labour is not free (to go where it wants to work).
    We have nothing approximating free markets and given the markets we have which have been considerably freed from “our protectors” (peronally I druther the protection of our protectors than the freedom of large monopolies to do irreparable damage while they condut their businesses.Some people here seem to object to “our protectors”. Im not one of them.

    There is also the suggestion that the problem with “our protectors” is that they arent too successful at picking winners. There are many private firms out there that arent too good at picking winners either. The government is no worse than private firms at picking losers.
    I hear the response already – og yes but if a private firm cant pick winners it will be forced out of business. Not nevessarily and not every project the government invests in is a dud either.

    There is no inherent pro busines bias to being good at pricking winners.

    What businesses flee from is not perfect competition – they are feeling from and will fight against the inability to control their price and will fight hard to have some market power so as to be able to influence the price. Firms spend millions just to get some power over the price.

    So if so many firms invest considerable sums to get price control then what we really dont have is this thing that neoclasicists assume as all powerful “the flexible price mechanism.”
    The price mechanism can be very sticky and making labour more flexible doesnt necessarily correct price stickiness and may make the price mechanism even more sticky – especially if the firm gets even more profit and market influence.

    Dont suppose we will all wake up and realise it one day, when labour is so flexible it cant sustain its own consumption, when firms are whinging that nothing is “winning”. Who will come crying for the government to “fix this” then? Will it be the same people who dont like “our protectors”?

  14. December 26, 2011 at 5:16 am

    Dear Friends, Most of the arguments and comments expressed above, re: economics theory are about what happens downstream of where the action is and isn’t.

    The title “Cornered: the New Monopoly Capitalism and the Economics of Destruction” makes a pretty fair definition of Plutonomy, the world game of plutocrats.

    Any theoretical rhetoric that ignores the full spectrum of causes, principles, governing dynamics, contributing factors, and contributing circumstances that give rise to the socioeconomic interactions we call “the world” is simply a bunch of ineffectual noise.

    Want to chew on something challenging? Try the new Fundamental Theory of Economics & Natural Values at > EcotectureNOW.wordpress.com/unmoney mm-greenbook.blogspot.com

    • December 26, 2011 at 9:06 am

      The troubles begin with land enclosure. Everyone needs land for everything they do.

  15. antonio
    January 28, 2012 at 6:07 am

    No, no, no, no. You see, this is todays big problem, everyone wants to be the next Gandhi, Martin Luther King, in other words, the savior. Life is just perfect, our Gouvrnments are doing a good job, they have great plans for you future. I’m tired of listening to these few people who are trying to destroy it with their own illusionary theories. I say to everyone, trust in our leaders, encourage them, whether your a Democratic or Republican, because if not, you will big excluded from society, and end up nowhere. So my dear friends, get with the program, and all will be fine.

  16. inspector fu
    January 28, 2012 at 12:48 pm

    What a ridiculously long post about nothing.

  17. Jorge
    January 28, 2012 at 5:02 pm

    You are conflating free markets with markets distorted by the government.

    • January 28, 2012 at 6:30 pm

      Markets are never free unless land is free.

  18. February 26, 2014 at 8:48 am
    • henry1941
      February 26, 2014 at 8:55 am

      It ignores the role of credit created by the banks. It is true to say that banks can not cause an inflationary increase in the money supply but they can and do create damaging credit-fuelled land price bubbles, usually wrapped up as “assets” and securities of one sort or another. So the bankers, if not greedy, have certainly been stupid. Unfortunately, they have not had to face the consequences of their stupidity, and it also takes two: one should not forget the stupid borrowers.

      • February 26, 2014 at 1:42 pm

        No my friend. You have got it all wrong. They are always governments through their central banks that inflate the economy. By inflating the economy, you get more taxes (for a while) and you tax people with inflation. You need to read this “The case against the Fed”

        http://mises.org/books/fed.pdf

        and “What has government done to our money”

        http://mises.org/books/whathasgovernmentdone.pdf

        which are both written by the great teacher Murray Rothbard

      • henry1941
        February 26, 2014 at 10:04 pm

        Rothbard is re-telling an old story, perfectly true as far as it goes, but it has nothing to do with the credit-fuelled land price bubble/bust that burst in 2008.

  19. db
    July 8, 2014 at 9:46 pm

    Innovation is the way business gets ahead in a free market. By the way “free market” does not mean “perfect market”

  20. JC
    August 28, 2014 at 5:12 am

    Great article. So many of the big proponents of “free market economics” are full of BS and, in reality, hate real competition.

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