Thursday, 19 January 2012

The fallacy of the 'free market'

When taught economics, one of the first things you are told to accept is that there are so called ‘free markets’. These being ‘free’ in the sense that if untouched by state intervention they will produce efficient outcomes due to the laws of demand and supply and should not fail, most of the time anyway. However this is false. ‘Free markets’ do not actually exist.  Every market has some rules and boundaries that restrict the freedom of choice for consumers and suppliers. The term ‘free market’ is actually not an economic one but in fact a political one. It is used by politicians/organisations who want to introduce market liberalization (normally not on some countries but others i.e the IMF in Asia) and strip back, in many cases, much needed government intervention into certain markets.

Markets develop and change with time and so has the term ‘free market’ also been altered. Even though the actual definition of a ‘free market’ hasn’t changed from that of a market with no government interference whatsoever. Let’s take the example of the 1819 Cotton Factories Regulation  Act in Britain of regulating child labour. At the time the proposal cause massive controversy with opponents seeing it as undermining freedom of contracts and thus the very foundations of the free market. However today it is unimaginable to think that any promoter of the ‘free market’ would advocate for a return to child labour, even though a true believer in such a market would see it as right and just.  Another example is the stock market, one of the most thought ‘free market’ markets where anyone can buy and sell shares as they please. But even the stock market has a degree of government regulation. A person cannot just go to the steps of the stock exchanges in the City of London with shares and sell them. They would have to go through a round of checks and meet certain requirements to begin trading, which is natural practice around the world.

It is well known that the Conservative Party in Britain, and throughout the most of its history, has been an advocate of a small state and letting the markets be relatively ‘free’. With David Cameron saying only today that “I believe that open markets and free enterprise are the best imaginable force for improving human wealth and happiness". However it is also widely known that the Conservative party believes in tighter immigration laws. Both of these ideas however go completely against each other. To believe in a ‘free market’ is to believe in the free movement of labour as firms would demand the lowest cost of labour possible and at the present time this would come from overseas countries such as China, India and many Eastern European states, this would also lead to cheaper goods for consumers (which they would demand) thus leading to market efficiency. However then the Conservative pledge to limit immigration in Britain while also advocating for “open markets and free enterprise” doesn’t go hand in hand. Hypocrisy many would cry.

The belief that markets, if left to their own devices, produce efficiency would suggest that capital (money or assets) would flow to places where success of investment is greater. But as Joseph Stiglitz, Nobel Prize winner in Economics pointed out, that instead of capital flowing from Western Countries to the more prosperous economies such as the BRIC’s (Brazil, Russia, India and China) where the prospect of large profits was greater in the last decade or so. Capital in fact flowed in the opposite direction and the prosperous economies actually fuelled to the Western Countries, creating a culture of people living beyond their means and thus fuelling debt problems, which is now the big problem facing the West and the World. So as some economists and politicians claim that they are trying to defend the market from political interference by the government. They are lying. The government is always involved, in some way or another, in markets and those proclaimed as ‘defenders’ are as politically motivated as anyone else.

Author: Thomas Viegas


  1. Baby Economics. Probably covered in about lesson 3 of anyone studying economics at school never mind uni. It's called "market failure." First question of A-level is always "define market failure" the next is give examples...the standard ones you list are:

    Merit goods - things that are beneficial but under consumed if left to your own devices e.g. Healthcare - more likely to use if free (NHS) than if poor and cannot afford.

    Public Goods (street lamps etc)- things that aren't provided under a free market, due to fact that they are you cannot stop ppl using it for free and where one person using it doesn't stop another and therefore private sector doesn't typically supply.

    Monopolies - (e.g. BT back in the day) lack of competition means prices too high and consumption lower than it ought to be.

    ...There's other examples too like inequality and positive and negative externalities. To try and 'correct' all of the above you get government intervention (deregulation of industries to stop monopolies, use of taxes to pay for street lamps/nhs etc)- but this doesn't always work due to a cheeky little something called Goverment failure.

    We'll save that one for next weeks lesson though

    1. Thank you for your recap of 'baby' economics unfortunately it seems that you have missed the point of this blog. There is no such thing as a 'free' market, it does not exist. Something you're wrongly taught. Every market has some sort of regulation (however small or hard to see). But please if you have an example I would be more then pleased to hear it. Furthermore the government can failure, it would be nonsense to assume otherwise. Mainly due to the fact that humans are not completely rational (an assumption which I may say that the 'free' market is based on) and have in fact 'bounded' rationality. For more read some Herbert Simon.

  2. Also, your final point is very interesting:

    "The government is always involved, in some way or another, in markets and those proclaimed as ‘defenders’ are as politically motivated as anyone else."

    What a revelation you've made - politicians are politically motivated.

    1. If you would care to read what I actually wrote it was that economists and advocates of 'free markets' are politically motivated as well.

    2. In the final sentence, did you make the point that politicians (amongst others) are politically motivated?

  3. If you would care to read the context that it was in you would see that the 'defenders' of the 'free' market that I talked about were also economists, some economists I might add. Not just politicians can be politically motivated, a point which you seem to have missed or do not accept. Moreover these people proclaim that such a market exists do so for there benefits and leave the costs to others. Unfortunately some people buy into this myth, you seem to be one of them and for that I am very sorry for that.

  4. Oh dear TMR, you've gone off on a tangent there. If you look above, I asked a very simple question which you didn't answer because you'd either have to lie or sound silly.

    You made the point that politicians can be politically motivated, which isn't the most ground breaking idea you've ever had I dare say.

    Also, you need to learn the difference between there and their. Maybe go to English 101 after the Economics GCSE has been completed.

    I would suggest a little less conspiracy theory and a little more common sense in your thinking - true wisdom comes from knowing you know nothing.

  5. First of all, I believe I am still waiting for you to give an example of a 'free' market.

    Secondly you claim that I have stated the obvious yet your first post was one that I could have easily found on a website of economic definitions.

    Thirdly I have never professed my excellence in English but have clearly demonstrated independent thought. Something which I am afraid you clearly lack.

    If you think that claiming there is no such thing as a 'free' market is a conspiracy theory then you surely are discrediting the work of academics such as Joseph Stiglitz, Ha Joon-Chang and Noam Chomsky. Then again, you might be more esteemed than them. Then again, probably not.

    It has been said that 'the greatest enemy of knowledge is not ignorance, it is the illusion of knowledge'. An illusion which I am afraid you are under.