Fallacies of the free market

Recently I read a piece by Newt Gingrich about letting the market solve the healthcare problem. He said, “We must offer a positive alternative where healthcare becomes more accessible and of higher quality at lower cost. That is what normal markets produce. Think computers and cellphones, where government bureaucrats have zero involvement in design and pricing.” I’m no economist, but evidently I understand economics better than Newt and a lot of free-market advocates.

Price and Demand
The regular interaction of price and demand (demand should react inversely to price, and price should follow demand up and down) is invalid in the healthcare market. No matter how high prices go for healthcare, demand does not decrease. This is called “inelasticity of demand.” Why doesn’t demand react the way it’s supposed to? Because we aren’t dealing with “computers and cellphones”; we’re dealing with our health and our lives. People don’t say, “I’ll wait until next year for the the current chemo technology; the older it is, the cheaper it gets.” Or “I’m fine with my dialysis [landline]; I don’t think I need a kidney [cellphone] right now.” Or “Maybe my anatomy-savvy [computer-savvy] brother can reconnect my Achilles tendon [wireless router].” We are willing to pay hundreds of thousands of dollars to not only preserve our lives, but also to make our quality of life good. This invalidates the textbook relationship between price and demand. I think Newt knows this and is being disingenuous. If he doesn’t know it, no one should be listening to him anyway.

Slavery – the Ultimate in Economies of Scale
The Market has no conscience or soul. It does not shy away from evil, abuse, or exploitation. One of the most obvious cases for this is the concept of slavery. Why did our Founders guarantee the continuation, even the propagation of slavery in the Constitution? Because the South said they wouldn’t ratify it if slavery were not protected. Didn’t the North find this unacceptable? Well, the South made a very convincing point that Northern shippers (including the ship-building, merchant, seamen, and harbor industries, primarily from the North) would also be hurt if the agrarian economy of the South were stunted by prohibiting slavery. This was convincing enough to get our Founding generation to formally and officially condone a principle that the majority personally felt was immoral.

Slavery is ingenious, from the perspective of the market. Higher productivity with lower costs is the dream of every profit-oriented enterprise. This is what capitalists have been killing themselves to achieve since the beginning of time. And slavery is the perfect solution. The problem is that it’s despicable, immoral and inhuman. But the market doesn’t care. This is why I wince when people say, “Let the market decide.”

It’s June 1, 1941 – Where’s YOUR money?
Germany has conquered Czechoslovakia, Poland, Holland, Belgium, Norway, Vichy France, Yugoslavia, Greece, Hungary, and Romania. They have invaded Denmark, Luxembourg, the Netherlands and North Africa, and have begun bombing the UK. The USSR has conquered Finland, Lithuania, Latvia, and Estonia. Italy has invaded Egypt and British Solmaliland, and Japan, while maintaining a loose hold on China, is sweeping unhindered across the Pacific.

Where does the market go? Where are stock prices on British and Canadian investments? The market is betting on the Axis. From our hindsight, we can say what WE would have done, but the market doesn’t have a memory; it is a function of fear of or greed for the future. It does not know right from wrong or stand up for principles; it follows after money relentlessly and without deviation.

Importing the Autobahn
One of President Eisenhower’s great accomplishments was the interstate freeway system, an idea born from his observation of Hitler’s Autobahn. Could “the market” have produced this? I don’t think so. Not even Halliburton could have done this (and would we have wanted it? “[I]n April 2008, the Government Accountability Office issued a report after having looked into 95 major defense systems, concluding that the projects had surpassed their original budgets by a total of $295 billion and were delivered, on average almost two years late” (ABC News, March 4, 2009)?). How would the market have made revenue on this; toll booths? That kind of defeats the purpose of a FREEway, (meaning libre, not gratis) doesn’t it? What has been the ROI in the interstate freeway system? I think it has been worth my tax money, but it would have been hard to sell the business plan in 1952.

Competition from GM to Wal-Mart
Every market tends toward two to three major players with several smaller players exploiting niches. Think Delta, United, and American; or GM, Ford, and Toyota; Wal-Mart and Target; Nike and Adidas. Your argument will be that GM has been knocked off its pedestal by upstart Toyota. True, but will Wal-Mart make the same mistakes? Can anyone foresee Wal-Mart writing its own ruin by being too generous to its employees? Can we foresee Wal-Mart ignoring long-term trends (fuel efficiency) in favor of short-term gains (the SUV boom)? I can’t. And if someone comes along that can out-Wal-Mart Wal-Mart, doesn’t that seem extremely frightening?

This market tendency limits our affordable selection and ruins local economies. We can either get crappy jeans from Wal-Mart or Target, or get good ones from a specialty store that must pay more to compete, and therefore must charge more for its products. These businesses absorb local economies, then, when the local economy has collapsed because Wal-Mart has driven out all the local businesses, it closes its doors because there’s no longer volume to sustain the store.

The market is powerful, but it’s only good when we make it good. And that requires oversight, sometimes called regulation (gasp!).

6 Comments

Mike W. says:

Just a couple of quick comments:

1) Slavery is a violation of the free market. Is it part of a “market”? Absolutely, but it is contrary to the “free” part of the free market. To use the existence of slavery as an argument against the free market is to set up a straw man.

2) You are right that medical care is very difficult to provide in a free market because most of the time there is little “choice” involved in the pursuance of health care that is present in the rest of our economic decisions. From my perspective (the anatomy-savvy brother) the amount of regulation and control that is exerted on the system and providers increases the cost and limits efficiency. We could save tons of money if physicians were allowed to practice medicine in the manner that was free from external controls and mandates.

3) Your last statement that oversight and regulation will fix the evilness in the market is hopeful, but I don’t know that it bears out. Transparency is the only oversight and regulation that will assist in preventing the abuses. Other regulations will just allow for different abuses. Although businessmen are money hungry, those who impose regulations are power and control hungry to the same degree and it just transfers the potential for abuse to a different set of individuals.

Centrist says:

Mike, slavery and other exploitive practices result from a too-free market. Unless regulations against abuses are put in place, a free market becomes an exploitive market, always at the expense of the worker and the consumer (have you ever read “The Jungle”?).

I heard somewhere that nearl 40% of malpractice suits are against less than 5% of doctors. So regulation is targeted at that 5%. But how do we preempt the 5% if regulations are not in place? Getting bad medical care is not non-cooperative suffering, it’s just being victimized.

I agree that transparency is essential to a free market. In fact COMPLETE transparency (and complete information) would create a truly anti-abusive free market. The problem is that we don’t have these things, and we won’t get them just by asking the market participants to play nice.

The monied right-wing has done a spectacular job at tying “the free market” to “capitalism,” thereby convincing the masses that because we have a capitalistic system, we have a free market. This is not true. The kind of capitalism we have is exploitive, secretive, and anti-free market because it engenders UNFAIR regulation, galvanizing the power of the powerful and denying access to the weak. But if we go against the free market or capitalism, we fall into the other economic semantic trap set by the right wing—that capitalism is the opposite of communism/socialism, and suddenly we’re anti-American.

What I’m saying is the market needs some regulation to keep it accessible and non-abusive. It should have as little regulation as possible to do the job, but a “free market” only works when there is no external (political) power involved. We know this is not, and may never be, the case.

Mike W. says:

Centrist,

You state: “but a “free market” only works when there is no external (political) power involved”.

This is true. I agree whole-heartedly. And this doesn’t occur. However, even if the market tends towards an “un-free” state, the citizens still have the option to go in another direction if there is enough competition and choices available. The problem with regulation is, that instead of trusting businessmen to be honest and forthcoming and not seeking their own self-interest (which we know doesn’t always happen), we expect those who make the regulations (with all the corporate and other special interest lobby influence) to be honest, forthcoming, and not interested in increasing their own power and influence (which we know hardly ever happens).

As much as the liberal economic types want us to believe it, they aren’t free from bias and inculcate their own form of economics into the regulation.

If people are left to make choices in a market where the only regulation is transparency, then the ability of corporate and class-warfare special interests to influence the market disappears and freedom and prosperity prevail. We live in a world in which information travels so quickly that any company that isn’t keeping its nose clean will be out of business within days of violating fundamental principles of decency that society agrees on.

Re: health care–all I can say is that would guess that waste because of regulation and litigation double or triple health care costs. If the regulation and litigation costs were removed, we could easily afford health care for all Americans.

Mike W. says:

Another HUGE problem with regulation in the economy is that it lessens competition. Those, like Wal-Mart, GM, Ford, etc. who thrive off market share, are more than happy to have the regulation. It makes it that much harder for a new entity to compete when they have to meet all the know regulations even before they get off the ground. It is competition that increases wages and lowers prices. Regulation stifles that aspect of the market.

Centrist says:

Mike, good point. I think one problem is that we convince ourselves that our representatives represent us and therefore are looking out for our interests. But our not looking at what they are doing produces the same effect as not being able to see what the corporations are doing–we don’t know what’s going on. So it’s our own fault that regulation doesn’t work.

Mike W. says:

Even more important that whether the regulation is working is the question: “what is the purpose of the regulation?” Although I don’t trust the politicians much (because they are most often status-seeking schmucks), I trust those who give them the information whereon they make law and policy even less. All lobbyists have their agenda, often hiding it from the politician; it is the agenda of those pushing the regulation that needs to be called into question as much or more so than the actions of the legislator.

This is the biggest problem: we have legislators making laws they don’t even read or understand. The parties and the lobbyists run the political machine on both sides and there is no way to check them at this point in time.

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