Free Market

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The discipline known as Welfare Economics studies the functioning of markets as measured by the benefits to participants, that is the welfare of the entire population. (It has nothing to do with Welfare programs for the poor.) The fundamental finding is that certain conditions, collectively called Perfect Competition, guarantee attainment of a market equilibrium that is a Pareto Optimum. In English, market equilibrium means that prices will adjust to levels at which there are willing buyers for everything that is offered for sale, and no more. Also in English, a Pareto optimum is a situation where nobody can get a better result unless somebody else ends up worse off.

To make those definitions even clearer, consider some simple examples.

  • In a Free Market equilibrium there will be no significant unemployment. We know that the labor market is highly regulated in some respects, both for and against the interests of workers, and that significant unemployment always exists in the real world, particularly among minorities.
  • Rent control is an example of economic benefit for some at the expense of others. On the opposite side, so is monopoly pricing provided by copyright and patent law.

Another consequence is that market prices will be as low as possible consistent with sellers not losing money on what they produce. This is obviously to the benefit of consumers.

The conditions for Perfect Competition include

  • Nobody has the economic power to set prices, rather than to take them from markets.
  • Everybody has complete economic and financial information.
  • Anybody can enter or leave any market segment anywhere, at any time.
  • Everybody has equal access to any production technology.
  • There is no market friction, that is, no extra transaction costs or middlemen.

Obviously, these conditions cannot hold completely, but the fact remains that the closer we get, the better markets will work for everyone, not just corporations able to get special favors from governments.

It is also clear that these preconditions for proper functioning of markets cannot be the results of market forces. If we are to have them at all, it is by other means. Governments can regulate markets to some extent, but can also be captured by those they are supposed to regulate. Public pressure is unreliable. Technology, particularly information and communication technology, sometimes supports these conditions, and when it does so it is untiring and incorruptible. In particular print publishing, telegraph and telephone, radio and TV, and now the Internet have each made a wider range of market information much more accessible at ever-lower cost. In the next generation, we may expect these benefits to extend to every developing country. For example, the fiber optic ring around Africa was completed in July, 2009, and six more cables were being planned or laid by that time. After all, it isn't a Free Market for you, if you aren't in it.

Market Fundamentalism is the absurd contention that markets always work perfectly in the absence of any regulation, specifically in the absence of any measures to enforce competition.

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