What Makes the Free Market so Great?

1. Competition
Competition spurs innovation and efficiency. Innovation and efficiency exert a net real (if not necessarily nominal) price-lowering pressure on any market sector in which they are allowed to flourish. This means that, as a result of innovation and efficiency, real prices (as measured as a proportion of income) decrease over time. Innovation also brings new products onto the market that would not have existed if not for competition.

Flaws:
Though competition spurs the creation of new and innovative technologies, the adoption of these technologies is often lumpy. Many considerations beyond just "this products is better at doing what I need to do" go into a purchasing decision: branding, learning curves, and simple adoption reticence all hamper new technologies as they enter into the market.

2. Choice
A free market creates more choices to chose from. Consumers are able to more accurately meet their needs as they see them when they are offered a plurality of choices.

Flaws:
Choices are necessarily limited by the products offered by the firms that create them. Though novel products are produced, it takes research and development to put those products into production. In many cases, the initial capital investment to bring a new product to market requires a huge initial capital outlay to buy the necessary capital goods. This limits the capacity of small businesses to enter into the market, since they don't wield the leverage available to larger companies. Additionally, huge initial capital outlay to create new products is almost always financed by debt and subject to risk.

3. Pricing
A free market naturally adjusts price levels based on demand. The less outside influence that enters into a pricing decision, the more accurately the price will reflect the actual supply.

Flaws:
Prices are sticky and objective. Though the value of a good to a consumer may fluctuate depending on any number of factors, the nominal price of goods tends to be more stable over the long run than the demand for those goods. Prices adjust only according to the interests of the producing firm as informed by sales (which in turn reflect the interests of the consumer); frequently repricing goods makes accurate accounting and accurate planning more difficult and to a degree that outweighs the potential gains in sales.

4. Class Mobility
A free market offers the same opportunities under the law to everyone in a society. The rules and the playing field are such that anyone can become wealthy if they invest the time and effort into doing so.

Flaws:
Not everyone starts out with the same competitive advantages. Socioeconomic factors in particular contribute to generational poverty and disenfranchisement. Those who are already wealthy have no direct incentive to contribute to socioeconomically disadvantaged groups; they can simply move away if they don't want to deal with the consequences (typically crime), an option typically unavailable to those trapped in the cycle of generational poverty.

Final Thoughts:

My criticisms of the free market aren't meant to spur a discussion about how to work around them; they are simply a concession to reality. I will say, however, that without intervention both sides of the coin will increase; intervention might be able to mitigate some of the negative effects while leaving the positive effects intact. If that is a possibility, then it is a possibility I am willing to consider.

B-Ran wrote:1. Competition
Competition spurs innovation and efficiency. Innovation and efficiency exert a net real (if not necessarily nominal) price-lowering pressure on any market sector in which they are allowed to flourish. This means that, as a result of innovation and efficiency, real prices (as measured as a proportion of income) decrease over time. Innovation also brings new products onto the market that would not have existed if not for competition.

Flaws:
Though competition spurs the creation of new and innovative technologies, the adoption of these technologies is often lumpy. Many considerations beyond just "this products is better at doing what I need to do" go into a purchasing decision: branding, learning curves, and simple adoption reticence all hamper new technologies as they enter into the market.

I think a better "flaw" of competition is that there are losers. Some businesses fail. That makes more sense to me as a "flaw", even though there is not a better alternative.

B-Ran wrote:2. Choice
A free market creates more choices to chose from. Consumers are able to more accurately meet their needs as they see them when they are offered a plurality of choices.

Flaws:
Choices are necessarily limited by the products offered by the firms that create them. Though novel products are produced, it takes research and development to put those products into production. In many cases, the initial capital investment to bring a new product to market requires a huge initial capital outlay to buy the necessary capital goods. This limits the capacity of small businesses to enter into the market, since they don't wield the leverage available to larger companies. Additionally, huge initial capital outlay to create new products is almost always financed by debt and subject to risk.

I do not find these "flaws" to be accurate flaws of the free market. I find these flaws to be part of reality, period. Regardless of the amount of economic freedom, creating new products will often take a significant capital outlay. This is just part of reality. To create a car efficiently, you have to not only have capital, but allocate the capital in an efficient structure. This is not something due to change based on the amount of economic freedom. Instead, economic freedom makes figuring out the most efficient capital structure possible. Without it, figuring out the most efficient way to meet people's needs is impossible.

B-Ran wrote:3. Pricing
A free market naturally adjusts price levels based on demand. The less outside influence that enters into a pricing decision, the more accurately the price will reflect the actual supply.

Flaws:
Prices are sticky and objective. Though the value of a good to a consumer may fluctuate depending on any number of factors, the nominal price of goods tends to be more stable over the long run than the demand for those goods. Prices adjust only according to the interests of the producing firm as informed by sales (which in turn reflect the interests of the consumer); frequently repricing goods makes accurate accounting and accurate planning more difficult and to a degree that outweighs the potential gains in sales.

I do not find your flaws to be very problematic.

Let's talk about this more. I have a problem with anything that would not let an owner of something sell it for whatever price they determine. Unless I am missing something, you would have to mess with this right in order to change how things are priced.

B-Ran wrote:4. Class Mobility
A free market offers the same opportunities under the law to everyone in a society. The rules and the playing field are such that anyone can become wealthy if they invest the time and effort into doing so.

Flaws:
Not everyone starts out with the same competitive advantages. Socioeconomic factors in particular contribute to generational poverty and disenfranchisement. Those who are already wealthy have no direct incentive to contribute to socioeconomically disadvantaged groups; they can simply move away if they don't want to deal with the consequences (typically crime), an option typically unavailable to those trapped in the cycle of generational poverty.

I find that this flaw is not a flaw at all. People do not inherently deserve wealth. For the people that are born into it, there has been someone who has given them that wealth. In order to fix this, you would have to somehow limit how much parents can give to their kids, etc. I find it an advantage of the free market that you can give your kids things. If you improve 50% of people's lives, it might make it unequal, but it is better than improving no one's life.

I do not agree that those who are already wealthy have no direct incentive to contribute to socioeconomically disadvantaged groups. In a free market economy, there is money to be made. One example of how this works is Wal-Mart. Wal-Mart has been a huge chain for years. When Wal-Mart expands, why do they expand? They don't need to expand... they were very profitable before the latest expansion. They expanded because there is opportunity for profit. Wal-Mart doesn't hire rich people to run their cash registers. Wal-Mart doesn't hire young professionals to be their greeters. In fact, most of Wal-Mart's shoppers aren't the rich. Wal-Mart is traditionally shopped by the lower class and middle class. Wal-Mart offers job opportunities and superior shopping opportunities to those in the community. This is one example of a rich entity having incentive to help the poor.

B-Ran wrote:Final Thoughts:

My criticisms of the free market aren't meant to spur a discussion about how to work around them; they are simply a concession to reality. I will say, however, that without intervention both sides of the coin will increase; intervention might be able to mitigate some of the negative effects while leaving the positive effects intact. If that is a possibility, then it is a possibility I am willing to consider.

I agree that many of these flaws are concessions to reality. I would argue that all of the flaws that you mentioned would be made bad or worse with government intervention, including the flaws that you mentioned in "class mobility". I know you aren't disagreeing, but I felt this was an important topic. Thank you for starting it.

Yeah, totally. Really, the "flaws" are what some people would point out as negatives to the free market. But the fact is, there will be negatives to anything that we try and do. From my point of view, the neighborhood effects of maximizing the benefits of capitalism while minimizing the negative aspects might (and I say "might" with a lot of "might") be worth it.

B-Ran wrote:Yeah, totally. Really, the "flaws" are what some people would point out as negatives to the free market. But the fact is, there will be negatives to anything that we try and do. From my point of view, the neighborhood effects of maximizing the benefits of capitalism while minimizing the negative aspects might (and I say "might" with a lot of "might") be worth it.

Yeah, I would be open to hearing ideas. So far, no sort of intervention that I have heard of can bend the laws of nature or have net positive effects.