I believe I was the person who raised the issue in the first place so I feel
I must respond. Free markets are a good thing, the concept behind them is
very good and they have provided us with all these wonders of Technology,
which, despite how you may have interpreted my original post, I
wholeheartedly support. However A genuine free market is nigh on impossible
to achieve in the context we use it today. Let me prove this.
To begin. Adam Smiths Invisible hand, the concept underlying the so called
free market, is reliant on 4 assumptions to maintain allocative efficiency
(Pareto Optimality), this results in the demand and supply concepts, that is
the allocation of resources goes to the people who require them the most,
or, more correctly, the people who get the most amount of marginal utility
from them - money is the common mediator. This is a simple concept to
understand, if Joe Bloggs would be willing to pay 100 dollars for a widget
and Jane Doe was willing to pay only 80 dollars and only one unit was
produced, then the firm producing the widget would sell to Joe. The
summation of entire demographs individual demands gives rise to the market
demand for that particular product. Right this is what the free market
should achieve, but there are the 4 assumptions to deal with first.
Assumption 1 - Perfect Information; Perfect information assumes that
everyone has access to the same information about a particular product, this
also assumes that people are able to digest the information given to them in
order to make the best possible decision. This includes both firms and
individuals. It also assumes that both parties are able to know about the
existence of more profitable enterprise or cheaper product.
Assumption 2 - Firms sell a standardized product. In a perfectly
competitive environment the product sold by one firm is assumed to be a
perfect substitute for the product sold by any other. This results in
whoever can supply the particular product at the cheapest price will be able
to supply the entire market, and anyone who sells at a higher price will
supply nothing.
Assumption 3 - Firms are price takers; This means that the individual firm
treats the market price of the product as given. More specifically it must
believe that the market price will not be affected by how much output it
produces. This condition is only likely to be satisfied when there are a
massive number of players in the market, all producing an imperceptable
fraction of the total industry output.
Assumption 4 - Factors of production are perfectly mobile in the long run
One implication of this condition is that if a firm percieves a profitable
business oportunity at a given time and location, it will the able to ire
the factors of prduction it needs in order to take advantage of it.
Similarly if its current venture no longer appears attractive in relation to
alternative business ventures, it is free to discharge its factors of
production, which will then move to industries where opportunities are
stronger. This also alludes to the fact that firms have free entry and exit
to a market, that is they cna change from one market to another without
suffering any costs.
Obviously these assumptions can in almost every situation not be achieved
and as such monopoplies, duopolies, oligopolies, monoplistic practices and
the sharemarket all exist because of the failings of these assumptions to be
adhered to, for what ever reason. Taxes are a perversion of this, all taxes
result in a loss of consumer and producer surplus leading to a dead weight
loss, or loss of social welfare.
This is the reason why I dont agree with the current manifestation of a free
market - it quite simply does not exist. Any price support, import
tarriffs, price ceilings, all have an adverse effect on the allocative
efficiency of the market and render it not free. Also the enormous amount
of power the mega companies hold is in itself stifling an enormous amount of
business which according to supply and demand functions, would be best
served by many more players. Advertising is a perversion of the free market
as not everyone has the same advertising expenditure - this issue I believe
is a big one. Let me put it to you this way, would a monopolistic firm
producing lightbulbs ever make a lightbulb that lasted for a lifetime? Of
course not and this is the problem we face. America is often jumping up and
down saying that markets should be open and yet they are one of the worst
offenders for keeping theirs closed, there are many many price supports,
import levies and taxes to prevent foreign competiton. I live in New
Zealand which has one of the freest markets in the world. It is an almost
textbook example of how to achieve a free market and yet it has still
produced unplanned problems. The key problem is that of agency theory
meeting social capital. That is the fact that people have a self interest
standard of rationality so they take things whether this be paperclips,
paper or time off to look after a sick friend. This leads to massive
problems in a way that would probably be best shown with chaos theory, the
efficiency of firms is reduced and the free market once again stumbles. It
amazes me how such a fragile system has not been superceeded in 100+ years,
untill I look at the big picture. If we changed this system to a one where
people made decisions based on an understanding of quality, then a free
market could very well exist, more than that a completely new system would
probably be born as the consumers would be informed enough as to not buy a
hell of a lot of products that are currently available. What would happen
then, well many of the biggest companies would lose a lot of money and all
these "rich" people would no longer be, this reason alone thwarts many
efforts of true social evolution. As these are the same people who pull the
strings so to speak, I cant see this happening ny time soon.
A solution IS available but i believe that we are all to old for it to
matter to us. What needs to be done is to concentrate on the young, and
prevent them from getting this mass market disease that we suffer. The
education system must be altered so that the young will grow up making far
better decisions thatn we ever did, their values have to be different, teach
them quality. If this doesnt happen a far more radical change must occur
to prevent us from amusing ourselves to death. The problem with
revolutionary change is that it results in huge amounts of friction between
the old way and the new way (ie between the new way and the current holders
of power) I suggest for all to read The Third Wave by Alvin Toffler, I
think you may then start to see my reasoning in a different light.
ANY IDEAS THAT PEOPLE HAVE ON IMPLIMENTING THIS FUNDAMENTAL CHANGE OR IDEAS
THAT GIVE FURTHER SOCIAL UNDERSTANDING OF QUALITY P L E A S E LET ME KNOW,
THIS IS WHAT I AM GOING TO DO FOR MY THESIS IN BOTH SOCIOLOGY AND ECONOMICS
PS The other day on the news I saw a guy from africa (Im embarrased to say I
cant remember which country) get thrown off a bridge, about 30ft high, by
2-3 members of the military dictatorship. The guy landed in shallow water
and tried to scramble on to a river bank, the military people than opend
fire on him from above, apparantly about 2million people have died in such
terrible circumstances - this was on for around a minute - minute 1/2,
After this was the preview of the preview of lord of the rings at Cannes,
where a young man dressed in a Tux was throwing flower petals onto a red
carpet, this was on for around 3 minutes. Nothing is wrong with this "free"
market?
enjoy, evolve
david wilkinson
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