Debunking the Free Market
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24-11-2011, 06:35 AM
Debunking the Free Market
As a mid-westerner, I have many friends who in recent years have moved towards what I would characterize as hard-line libertarian political stances. While there are differences in their views, one commonality seems to be that the only legitimate purpose of national government is national defense, with the underlying assumption, stated or not, that unimpeded free-markets should be the goal for a free society.

I find this position to be overly simplistic, and have posted my reasons in other fora over the years. I am reposting a portion of my reasoning from these other discussions below. Before I do so, I should like to point out two things:

First, this is an argument against the extreme simplistic views of people I refer to as market-populists, not necessarily actual economist's theoretical musings. So if you have a more nuanced view in support of free-markets, feel free to explain your views in the comments, but refrain from attacking this post as a strawman argument just because your personal views have more thought behind them than the ones I am arguing against.

Secondly, please refrain from accusations of socialism, etc. This is a debunking, and should not be read as espousing any particular competing theory of economics. The fact is that I believe there is a lot of good in free markets, but that is not the same as thinking they are sufficient on their own to govern a society.

So without further adieu:

"At its core free-market theory is relatively simple. It is basically the scaling up of standard “micro-economic” principals of supply and demand to a national and/or international level. Free market supporters claim that an unimpeded market creates innovation through competition; allows the best, most fairly priced goods and services to thrive, while causing the inferior ones to retreat from the market; and is ultimately the best and sole necessary societal arbiter. Leaving aside the legitimacy of scaling up a theory of interpersonal exchange to a large inter-societal one, there are several underlying assumptions that market theory makes. I have listed what I see as the largest of these assumptions, but by no means all of them, below. In order for market theory to work in the way its proponents claims that it does:

"1. There must be equality of information between competitors. Let’s say that I run a company trying to build a better—nay, the best!—mousetrap. I spend much money, time and energy researching and developing my new mousetrap. There is no doubt that all my competitors will lose most of their market-share, if not go out of business all together because my new mousetrap is the best ever by orders of magnitude compared to anything currently available, and is competitively priced. The week before it hits the shelves, though, your company—my closest market rival—comes out with its own “mousetrap 3000” which looks suspiciously like the one my company developed. It turns out that instead of spending money on research and development, you hired an industrial spy and simply stole the ideas I paid to develop. I release my product anyway, and although it does well, it doesn’t do well enough to recoup my costs, and, since your company is recording nothing but profit, you can afford to lower the cost of your product and simply price me out of the market.
In this case, although my company provided the innovation, the better product, and should have, by all rights, gotten the benefit, the inequality of information between the two competitors upset the promise of the free market. How can this be corrected? Well, we have laws regulating what is legal, and if it can be proved that your company violated a law against industrial espionage, then there may be a fine or jail time for someone, but this would be due to the regulation of markets and the action of enforcement by an outside agency.

"2. Innovation is limited by risk/reward calculations. I actually agree that market competition is a good driver of innovation, however, the market as the sole societal engine also limits innovation through the risk/reward duality. Competition works well if the aim is to develop better products, or to develop new products and/or services to fill a well defined need or identifiable market niche. When the costs increase, the outcome of the R&D is less certain, or the time-frame becomes extremely long, the market on its own can no longer support the innovation. NASA’s Apollo missions of the 60’s and 70’s, for example, created much innovation in many fields, including (but not limited to) aerodynamics, fluid dynamics, and computer science (not to mention Tang!) Many of the innovations, products and scientific concepts have since found their way into the consumer market in a variety of different ways. But the moon missions were government funded scientific projects with no clearly defined economic goals. If the free market had been required to fund the missions, would they have happened? Possibly, but most likely not. Projects funded through private finance are generally expected to show a profit—and to be able to explain how that profit will be realized—before the holders of capital will agree to provide the funds. Not knowing whether anything marketable would come from the project coupled with its enormous expense and the fact that no one knew if it was even possible to achieve the stated non-commercial goals, would have made it a nearly impossible undertaking for private commerce.
The example given is not unique. Most of the basic scientific research—especially that on the cutting edge of the various fields—continues to be funded primarily by governmental, intergovernmental and non-profit agencies. There is no reasonable expectation of continued basic scientific research in physics, for example, in a society who relies on market funding for all R&D.

"3. Everything that has value must have value in terms of market units. This is fairly straight-forward as long as we limit the market’s control to economics. But if, as the populists claim,
the market is the only necessary engine of societal regulation, then we have to be able to express all values in terms of dollars and cents (or the legal tender of your country, whatever that may be.) This is absurd on its face. Imagine being a contestant on The Price is Right only instead of dinette sets and vacation packages you have to guess the dollar value of Love, Liberty, Faith, Beauty, and the like. Yet this is what a society governed only by the markets requires—if those ideals are to have any value at all. Even if we agree to this in principle, the values assigned will never reflect anything like the true value of these concepts, since the monetary value can never be tested in the market itself. I can never actually buy the love you feel for your family even if I am offering a fair price for it.
It is partially for this reason that corporate entities are described as amoral. They are not necessarily immoral, just indifferent to morality in their monetary practices precisely because morality cannot have a real, testable market value.

"4. Profit-takers, not third-parties, assume the risk of their investments. If you buy a CD (certificate of deposit) at your local bank, or open a basic savings account, you can expect a relatively low return on your investment. But you can also have a fairly high level of confidence that you won’t lose your initial deposit. If on the other hand, you take a wad of bills and buy some risky over-the-counter stock, your return will be much larger and faster if you don’t lose all the money you invested. The larger the risk you assume, the greater the potential reward. This is high-school economics 101. When scaled up to the macro-economic level, however, this is not a certainty without real, enforced regulation. Two large recent catastrophes were caused at least in part because corporate entities had found ways to take profit without assuming the full risk associated with that profit.
The BP oil spill in the Gulf of Mexico was due in part to the fact that BP was allowed to drill without much oversight, little enforcement of existing regulation, and little fear of having to assume all of the actual costs of an accident. The risk was passed to the public treasury and natural resources, with the profit still going to the corporation.
Likewise, the US mortgage crisis was primarily due to banks selling off their high-risk loans hidden in other “investment products” they then sold to other banks. In essence creating a giant combination hot-potato/shell game in which the corporation holding the note when the loans defaulted paid the bill on the risk initially assumed by someone else.
Again, as in number one above, unless you maintain some sort of Pollyanna-like attitude about the essential goodness of all players in the free market, the only way to correct this is through outside regulation and enforcement of those regulations by an outside agency.

"5. Popularity is the sole arbiter of taste. This principal, in combination with number 3 above, is why there would be no art as that term is commonly defined in a society governed solely by
free market principals. Markets can only define quality in terms of money. Imagine a world in which all live productions were “American Girl”, all paintings were commercial illustrations, all movies written for pre-pubescent males, all books penny-dreadfuls or bodice-rippers. Not to say that these things have no place, but they are at best entertainments, not art. Art is defined by personal vision, not popularity. Indeed, much of what is revered as great work in this century was reviled in the last. This country already devalues art to a great extent. I would not like to see the fate of the field in the US if we were to adopt the “pure markets” so espoused by the populists."

So there it is. If you are a supporter of national free-markets that has a response as to how your model can overcome these objections, please post! If you have a less extreme version of free-market capitalism that you espouse as a better solution, please post that as well. I am not an ideologue on economics or politics. I am just curious and hoping to find better solutions than the ones that are commonly thrown around in normal discourse.
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24-11-2011, 08:51 AM (This post was last modified: 24-11-2011 09:05 AM by mysticjbyrd.)
RE: Debunking the Free Market
Another thing to consider regarding innovation is that a lot of the times it doesn't necessarily make things better. You can have innovation that goes the wrong way, and the majority of cheap products sold in the US is a great example.

Instead of making products better, the majority of the innovation is actually directed at making products cheaper and more disposable.
For instance, lets say you go to the store to purchase a new mop, and you see three different mops on the shelf.
#1 Standard mop, with an ultra thin aluminum handle.
#2 Sponge mop, with an ultra thin aluminum handle, and a little sponge on the bottom.
#3 New Swiffer mops.

You buy one of each.

The first two mops have two serious design flaws.
First they don't work, lol. The small amount of surface area doesn't really allow it to hold or pick up much water/dirt.
Second, they break after a week. Once the extremely weak cylindrical handle gets a small dent in it, the entire handle loses all structural integrity and that small dent quickly breaks the handle in half.

The third mop is made slightly better, out of plastic mostly. BUT, it also requires these little pads that you attach to the bottom. The pads only clean a very small area on the floor before they are covered in dirt and all but stop working. So you have to constantly go to the store and purchase more of these pads just for the mop to work. Thus beginning an endless cycle of waste; buy pads, clean small area, trash dirty pad, buy more etc...


In all three cases, the new designs are indeed innovative, but they are also drastically inferior to a standard mop. In fact, its quite difficult to find a standard quality anything these days. These cheaper alternatives have all but removed the demand for quality products. So why do they do this? Simple, they make more money. Its far more profitable to sell 100 cheap mops at $3 each than 1 good mop at $30. As the Corporations get rich the environment picks up the tab. But in a free-market the environment is the last thing to worry about. After all god, did build this earth for us and I am sure he won't let anything bad happen, right?


A couple other things to consider,
Monopolies - Obvious outcome of a completely unregulated Free-Market, and Obviously bad for everyone involved. Bill gates aint getting a dime from me.
Profit & Products - In the US, the majority of the wealthy don't actually make anything.
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24-11-2011, 01:39 PM
RE: Debunking the Free Market
I don't see strawmen, I see some thinking going on. My solution is fringe - technocratic anarchy - in that AI is a key component. The problem I have with market viewpoints is money; it is assumed to have value when it has nothing of the sort. TA is a radical overhaul of the whole works, whereas a less radical compromise would be the abolishment of the Fed and the establishment of a new currency based upon the minimum wage.

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25-11-2011, 06:07 AM (This post was last modified: 25-11-2011 06:10 AM by BadKnees.)
RE: Debunking the Free Market
@houseofcantor: Thanks for the thoughts. I'm not sure I have a full grasp on what you are proposing here. Can you elaborate? It seems to me any anarchistic system would suffer from some of the same problems, especially the risk/reward limitations outlined above. I'm not sure how eliminating currency solves that. Currency is only a symbol of value, but there is real value being represented by it. It is that value an investor is risking in a capital project, and that risk is not going to disappear by simply eliminating the surrogate for value in a system.

@mysticjbyrd: Yeah, I would agree with this. Any ideas how best to solve these issues? Where do you stand--modify the existing system, tear it down, replace it with something else?
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25-11-2011, 07:51 AM (This post was last modified: 25-11-2011 07:56 AM by houseofcantor.)
RE: Debunking the Free Market
Real value?

And our GDP is overstated by 40% or more because they count our deficit spending, debt owed to private bankers, as “production.” That means that GDP is really a measurement of our money(ness), not of production. Below is a chart showing supposed GDP along with our national debt in grey, and below that all the current “Fed” measurements of money supply – note how all the money adds up to debt, since all our money is debt! Then notice how our national debt, which is now $15 trillion not the $14 trillion depicted there as they can’t update their charts fast enough to keep pace (so I extended the line to reflect that), is now outpacing our GDP: ~from the Economic Edge, link below.
[Image: GDP%2Bwith%2Bmoney%2Bsupply%2Band%2Bdebt.png]

(after wading through a half-hour of "conspiracy-theory" and agenda, here is Nathan's Economic Edge. The Fed is not "evil," it is merely entrenched and obsolete)

Ya know what really makes the world go 'round? Faith.

I'm no economic theorist; partly because I cannot baffle myself with that much bullshit, mostly because I know simple science is going to demystify complicated mathematics with a critical deceleration. Before globalization, it was easy to deceive the self into thinking that personal wealth was not a manifestation of enslavement; now it is too easy to demonstrate how somebody worked a year for my three hundred dollar TV set.

You want innovation. You want creativity and free exchange of ideas. You want constructive competition. The only way to do this is to assess the future at its source. The human mind. The hard and ruthless way is to put a price tag on a human life. The long view is to put a price tag on information.

Information is a function of entropy and will always increase.

The above is from the consideration of extant standards. Without an economic theory derived from the currency of information, there is no economic future that is the continuation of the technological present. There is global economic collapse.

My naive philosophy is based upon myself and observations of people in my environment. The common conception is that anarchy means chaos and lawlessness; yet is there a cop on the corner preventing left turn on red? Is there a government authority mandating proper line formation at the grocery? No. There are individuals of self-governance behaving in a civilized fashion. What is the purpose of government? Administration and paperwork; that is all it is in a modern, technological society. We could build an AI now from adaptive intelligence that would run the administrative function without cronyism and base contract awards solely on merit and past performance.

The problem is meme - there is a delusion of power associated with leadership and control - which is the very reason this country is a supposed democracy completely unable to field intelligent and rational candidates for public office. All we get is delusional megalomaniacs because the responsible want no part of that convoluted bureaucratic nightmare.

Which is enough ranting out of this unit. You might want to checkout the links on that blog for a more mainstream perspective. Wink

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25-11-2011, 05:11 PM
RE: Debunking the Free Market
(25-11-2011 07:51 AM)houseofcantor Wrote:  Real value?

Yes, obviously. Although the owner of the value may not be the holder of the currency, which is what I believe you are driving at?

Quote:And our GDP is overstated by 40% or more because they count our deficit spending, debt owed to private bankers, as “production.” That means that GDP is really a measurement of our money(ness), not of production. Below is a chart showing supposed GDP along with our national debt in grey, and below that all the current “Fed” measurements of money supply – note how all the money adds up to debt, since all our money is debt! Then notice how our national debt, which is now $15 trillion not the $14 trillion depicted there as they can’t update their charts fast enough to keep pace (so I extended the line to reflect that), is now outpacing our GDP: ~from the Economic Edge, link below.
...
(after wading through a half-hour of "conspiracy-theory" and agenda, here is Nathan's Economic Edge. The Fed is not "evil," it is merely entrenched and obsolete)

OK. I can agree that the Fed and the system of politically manipulated statistics that passes for economic information in the USA right now are not good for the economy or our realistic understanding of it, but these are specific flawed mechanisms of the current system, not systemic problems with capitalism per se.

Quote:Ya know what really makes the world go 'round? Faith.

Partly faith, partly fear. Which gets back to why economic statistics are so subject to manipulation in the first place.

Quote:I'm no economic theorist; partly because I cannot baffle myself with that much bullshit, mostly because I know simple science is going to demystify complicated mathematics with a critical deceleration. Before globalization, it was easy to deceive the self into thinking that personal wealth was not a manifestation of enslavement; now it is too easy to demonstrate how somebody worked a year for my three hundred dollar TV set.

You want innovation. You want creativity and free exchange of ideas. You want constructive competition. The only way to do this is to assess the future at its source. The human mind. The hard and ruthless way is to put a price tag on a human life. The long view is to put a price tag on information.

Information is a function of entropy and will always increase.

The above is from the consideration of extant standards. Without an economic theory derived from the currency of information, there is no economic future that is the continuation of the technological present. There is global economic collapse.

The problem with economics is not necessarily the judicious application of mathematics, but rather the reliance of many theories (especially Chicago-school style free-market types) on mathematics to the exclusion of everything else. A realistic economic theory must contain psychological elements, variables, and contingencies as well as mathematical ones to be of any real world use.

Quote:My naive philosophy is based upon myself and observations of people in my environment. The common conception is that anarchy means chaos and lawlessness; yet is there a cop on the corner preventing left turn on red? Is there a government authority mandating proper line formation at the grocery? No. There are individuals of self-governance behaving in a civilized fashion. What is the purpose of government? Administration and paperwork; that is all it is in a modern, technological society. We could build an AI now from adaptive intelligence that would run the administrative function without cronyism and base contract awards solely on merit and past performance.

Granted, let's say 95% of the members of a society follow the rules established by culture, government, etc. without having to be threatened with punitive measures. There is a small but not insignificant number of individuals who still will violate the rules and traditions of a society without that threat of punishment.

Let's take a more relevant example than running a red light. The majority of people in your hypothetical grocery already, before queing up, have decided to respect the property rights of the shop owner and not steal the goods they intend to buy. Without the legal repercussions of punishment, how long before the few people who--maybe even on philosophical grounds, after all, not everyone agrees in the principals of private property--steal from the shop owner causing the prices of everything in the shop to go up? How long will the well-intentioned members of the society accept being punished for the actions of others? The assumption that all members of any group are going to conform to the rules of the group simply because its for the best of the group seems extremely simplistic and naive.

I disagree as to your estimation of the role of government. That may be the way our dysfunctional system looks now, but it certainly wasn't what was intended or the best that is possible. Government is not necessarily just administrative. Ideally, it is the expression of the collective will of a society. We can use that mechanism to express our collective will about the importance of science, the arts, personal liberties, and societal responsibilities. We have spent almost two decades in America electing a majority of individuals who state upfront that they don't believe in a legitimate role for government. They have systematically dismantled the most efficient elements, de-fanged the most aggressive enforcement agencies and clogged the system with incompetent plutocratic appointments. Then they come to the people and say, "See? I told you it didn't work."

In some ways I think of government like fire. It is dangerous, but what makes it dangerous also makes it powerful and useful. We haven't abolished fire because occasionally someone's house or business burns down. I don't see why we should be so quick to simply throw away the idea of government just because we have examples of it not working well. The problem I have with anarchy (and libertarian utopian-ism in all its various forms) is that there is no mechanism to express the will of the collective in any form.

Quote:The problem is meme - there is a delusion of power associated with leadership and control - which is the very reason this country is a supposed democracy completely unable to field intelligent and rational candidates for public office. All we get is delusional megalomaniacs because the responsible want no part of that convoluted bureaucratic nightmare.

Which is enough ranting out of this unit. You might want to checkout the links on that blog for a more mainstream perspective. Wink

When someone is given leadership and control, it is not a delusion that they have power. It is a delusion to think that the governed are not culpable in their own governing. What is the problem is the loss of a sense of responsibility in the powerful. The political leaders are not beholden to the voter anymore because elections are systematically bought, and the politicians understand that their job is to do the bidding of their paymasters. I agree that the systemic corruption in the political system of the USA currently is rampant, untenable and must be dealt with. I don't know any thinking person who would disagree with that.

But there seems to be a bit of apples mixed in with the oranges here. I still don't see how anarchy of any type would be an improvement over representative government on a theoretical level, and I fail to understand how it relates to economics. Even if you are right that "information" will somehow become the basis for a future economic system, nothing I have seen here points to anything but a market system with a different form of tender.
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26-11-2011, 09:25 AM
RE: Debunking the Free Market
What seems to be happening here is a blurring of distinction between government and economics. This is normal and natural, after all, government developed (historically) along side economics and the two have been intertwined since their inception. However there are distinctions to be made. After all, not all market economies are republics or democracies, and socialist economic systems have been applied in democratic countries in the past.

The historical uniqueness of the USA (and perhaps the best reason not to be so quick to throw out the baby with the bath water here) is not in its markets or its government, but in the essential tension created between the two.

The concept of a capitalist republican democracy is in itself almost oxymoronic. We have a economy based on competitive success coupled with a government dedicated to principals of equality and personal liberty. The former ruthlessly eliminates weak competitors, the latter tries to insure the essential value of all its citizens.

It is the natural tension between these two opposite impulses that has made the US a great country in the past. When these forces are balanced against each other they serve to modify the most extreme impulses of the opposing force. Government can serve to regulate the most extreme reactions of an unregulated market, while capitalism keeps government from becoming too dictatorial or collectivist.

Societies are complex and require more than just simple economics to survive. As I was trying to indicate in the OP, not all of the important things in a society can be expressed in purely economic terms. Economic models are just that--models. They are by necessity less complex than the reality that they are attempting to elucidate or describe. To think that we can apply any such model to reality successfully, without any type of regulation on its operation, is to confuse the map with the territory.

To my mind it is the confluence of several influences that have propelled us into what is a severe imbalance in the forces mentioned above:
1. The dubious legal rulings giving the status of "personhood" to corporate entities. These rules in practice grant rights to corporations which by definition have greater resources to exercise those rights than an actual person. Additionally, the harshest punishments for wrong-doing available to our legal system--the denial of personal liberty--cannot be applied to a corporate entity that has no corporeal body.
2. The undeniable reality that the US is in decline as an economic superpower. This pushes corporate entities into a more desperate bid for survival as we enter a phase of economic change nationally that will not be comfortable for many of these entities.
3. The corrupting influence of capital in the democratic process. Here I would include not just the obvious influence of corporate monies in elections, but also the take-over by the corporations of the media, the influence of commercial banking on government regulating agencies, etc, etc.

The combination of these forces has led to the easy dissemination of corporate memes in the body politic. This is how we can have a society composed of individuals who hold convictions so directly opposed to their own best interests. Ideas such as the rich deserve to keep more of their income than the poor, that government's only legitimate role is national defense, or that any safety net designed to insure the basic survival of the most unfortunate members of society is un-American or un-democratic, or somehow is a violation of the personal liberties of the more fortunate.
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26-11-2011, 11:27 AM
RE: Debunking the Free Market
(26-11-2011 09:25 AM)BadKnees Wrote:  Societies are complex

Which doesn't mean complicated. Big Grin

Let's start at the beginning. Faith is sincerity, but it is also a function of identity. To say "I have faith" in the dollar is to invest "dollar" with my identity as a function of sincerity. (self-verifying mathematical terminology right there. Wink )

In this manner, I am; and everything I am not is economics. "Currency" is meant to be a medium of exchange, labor for service; but "philosophy" and "critical thinking" are also mediums of exchange.

...well, there ain't no one else debating you. I'm not criticizing your contentions in the least; more like, well, offering a medium of exchange. Big Grin

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29-11-2011, 03:25 PM (This post was last modified: 29-11-2011 03:38 PM by mysticjbyrd.)
RE: Debunking the Free Market
(25-11-2011 06:07 AM)BadKnees Wrote:  @mysticjbyrd: Yeah, I would agree with this. Any ideas how best to solve these issues? Where do you stand--modify the existing system, tear it down, replace it with something else?
They system can work, but it needs some serious govt changes, and way more regulations that it currently has.
The primary problem is that the corporations have basically taken full control over it.

Tax Wealthy
Increase minimum wage.
Institute a MAXIMUM wage. (People at the top are simply making way too much money, and they can't or won't control their greed)
Implement Trade Tariffs. (No more free trade, as it not only hurts the domestic country, but it also requires a large expenditure of oil that we can no longer afford.)
Fix the broken infrastructure. (Not only with this create a massive amount of jobs, but it is long overdue. Our current infrastructure was graded and found to be a D)
Support green technology, and remove our dependency on oil and coal. (More jobs, clean air/water, and a hope to at least slow climate change)
End Corporate slavery, especially across seas. (Corporations travel to poor countries, hire the local people, but only pay them enough to not starve to death)
Force Corporations to pay taxes on assets and gains across the world. (A massive tax loophole that costs the US billions upon billions each year.)
Amend the constitution to stop corporations from claiming to be people, and make it illegal for such entities to donate campaign money to elected officials. (If a corporation is a person, he is assuredly a psychopath.)
Implement a strict 1 child per couple policy.
Empower the EPA/FDA, etc... so they can actually do their job, like banning products found to be dangerous to humans and the environment.
Dismantle obviously corrupt corporations. (This country used to have and use that power.)
And just more regulations in general in the market place.


According to recent studies its been shown that countries with more regulations actually grow faster than countries with few regulations.
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29-11-2011, 03:43 PM
RE: Debunking the Free Market
A very real problem of the unregulated free market is that there are no protections.

The less-regulated market of the past gave us massive pollution, strike-breaking goons, sweat shops, child labor, and so on.

Who made businesses and the market our new gods?

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Science is not a subject, but a method.
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