(This is the long version. Click here to read the short version.)
Probably like many youngsters in the U.S., I grew up hearing adults extol the virtues of the “free market” and “capitalism” — I’m now convinced this was in reaction to our sworn enemies, the Communists. Yes, I was raised while the Iron Curtain was still in place, when we still had nuclear attack drills in elementary schools, and when World War III was always envisioned just around the corner.
We as a nation reacted to that in many ways, one of which was throwing all our faith into the ideas of free market economics and capitalism, most of us believing the terms were synonymous, and many of us — myself included — believing that these terms properly described American economics.
◊ Defining Terms
Though the two terms often overlap, they are not entirely the same.
Capitalism: “an economic system in which trade, industry, and the means of production are controlled by private owners with the goal of making profits in a market economy”.
Free market: “a market economy in which the forces of supply and demand are free of intervention by a government, price-setting monopolies, or other authority”.
◊ How The Free Market Works (In Theory)
I say “in theory” because I’m not convinced from history that an economy has ever existed without government intervention. (The U.S. has always had some form of mixed economy.)
Basically, the free market’s argument is summed up in an Ayn Rand quote: “Every government interference in the economy consists of giving an unearned benefit, extorted by force, to some men at the expense of others” (source). In other words, it’s not fair for the government to help or hinder the economy. Government “interference” is almost1 anything the government can do to affect the economy or business, including taxation, tariffs, breaking up monopolies, enforcing monopolies, investigating markets, “truth in advertising” laws, ending slavery, safety regulations, child labor laws, minimum wage requirements, health care requirements — any of this is messing with the Free Market, which would be better off if the government just got out of the way.
Everything is determined by supply and demand.
One of the tenets of free market capitalists is the famous: “The Market will correct itself.” As Rush Limbaugh says:
“You leave the market alone, it will fix itself. It may take some time, but it will. Businesses, out of necessity, correct their mistakes. Lenders, banks, correct their mistakes. Sometimes those mistakes are big; sometimes they’re huge; sometimes they are hurtful; sometimes they are devastating. But, they correct their mistakes.”
The idea is that a business doing something wrong will be bitten for it — by lowered profits. So they’ll quit doing the wrong thing in order to regain their profits. Take for example hand rails on stairs. Without them, an employee will occasionally fall to injury, which isn’t efficient — the company then has to train a new employee. Eventually, the company realizes it would be more efficient to have the hand rail on the stairs, and installs them. The cost of the hand rail is eventually offset by the lowered number of injuries and thus greater productivity.
On a long enough timeline, this is easy to believe. The men (usually men) running the companies eventually realize employees are more productive/efficient if they get a lunch break, so they start offering lunch breaks. They realize employees are more productive/efficient if hours-per-week don’t exceed a certain amount. And so on. On the product side: their product isn’t very good, so people quit buying it, which forces them to make a better product or get out of the market.
Proponents of the free market say its goals are: freedom (within the market), efficiency, greater productivity, improved goods and services, lower prices (these differ depending on whom you ask).
Critics say it’s clear that the only goal is pure profit, at any price.
Proponents say the free market is inherently fair, because those who’re best able to start, run, and profit from companies will eventually be the ones starting, running, and profiting from companies, while those who aren’t able to do so eventually settle to the ranks of labor. It all works itself out. The theory is that “Workers who are more productive and innovative earn a higher income than workers who are less productive and innovative” (source). The reason a CEO earns $20,000,000 a year while his janitor only earn $20,000 a year is because the CEO is a thousand times more productive than the janitor.
Critics say it’s inherently unfair because capital and wealth inevitably ends up in the hands of relatively few people who hoard it and exploit the workers who’ve provided that wealth. They don’t believe the CEO deserves a thousand times the wages of his employee.
◊ The Timeline Is Too Long
Though I grew up believing in the principle of supply-and-demand and that a free market will always work itself out, I started seeing some holes in it by the time I was in high school and read Upton Sinclair’s The Jungle. At about the same time, the U.S. was switching over to unleaded gasoline after 60 years of poisoning the entire populace with neurotoxins.
The first is a novel, though true to life, and exposed some of the horrible working conditions in U.S. plants, the plight of immigrant communities at the time, and how the market was tilted to favor a few over the many. Free market capitalists would say that given enough time, the market would have corrected itself to stop employing children, to raise wages for common laborers, to improve safety conditions at plants, and to make sure too many contaminants didn’t get in our food. Instead, the federal government responded to public pressure and passed the 1906 Meat Inspection Act and the Pure Food and Drug Act of 1906.
Would the market have corrected itself eventually? If so, how long would it have taken? How many lives would have been lost, or lived in squalor, while this process took place? For me, that timeline was too long. The government acted rightly, interfering in the market to make our food safer, though it wrongly funded these acts straight from the already-victimized taxpayers instead of from the profits of those who were violating basic human rights.
As for the leaded gasoline ban, it’s been known for millennia that lead is toxic. Civilized nations (and later the League of Nations) began banning lead paint for this reason as early at the 1890s. Unrestricted corporations in the U.S., however, continued to use lead in paint until the 1970s, sickening and killing untold numbers of people.
What’s worse, as the automobile caught on, tetraethyl lead (marketed as “ethyl” to avoid the negative connotation) became an important fuel additive — as an octane booster and anti-knocking agent. Despite early deaths in the TEL factories (the outcry was so bad they had to quit using it for a year), huge companies continued to tell the public what they knew was false: (1) TEL increased fuel economy, and (2) lead isn’t toxic.
Both were eventually proven incorrect (cars decreased in average fuel economy for decades after TEL’s introduction, and lead was known to be toxic the entire time), but it took the government to interfere in industry to save lives. Levels of lead are still raised in those of us who were around leaded-gas cars, and in the soil around any road that once supported those cars.
Would the market have eventually corrected this issue? Maybe, maybe not. But it went far too long purposefully hiding the issue and lobbying against TEL’s eventual ban. In a completely free market, we’d likely still be driving leaded-gas cars.
These are just two examples of many that could be cited, where the market — left to itself — did not correct a serious issue that’s more important than profits. Whether it would have or not, we’ll never know, but it did not happen soon enough.
To me, waiting for the market to correct itself is something like waiting for a forest fire to burn itself out. You know it will happen someday — whether from wind changes, eventual heavy rains, or after exhausting all available fuel — but letting it go can put houses or businesses in danger. Do you shrug away the coming plight of the potential victims, or do you act to protect them?
◊ What If My Goals Are Different Than The Market’s?
Though I speak only for myself, I assume that others agree with me that the market’s goals do not regularly coincide with society’s goals. This, to me, is an inherent problem with an unregulated free market. While individuals will disagree about basic morality and ethics, society as a whole has developed (and continues to develop) these concepts in a broad way, and in a way that disagrees with the market.
The market (supposedly) self-regulates its prices based on supply-and-demand, and also correct any inefficiencies that arise. But does it correct itself ethically or morally? It does not appear to.
Thus you end up with child labor, chemical spills (senator fights regulation, right after big spill), dangerous and collapsing factories with no change in sight, exploding fertilizer factories in Texas where no liability insurance is required, giant banks getting fines so tiny for laundering drug cartel money that they’re still doing it, miners dying needlessly, 38,000 people dying from Vioxx though the company knew it was harmful, and so on.
Some marketeers actually claim that the free market is virtuous and moral, and that any problems are actually due to government regulations “hindering” the market’s natural ability to be good. Yet in so many cases it’s plain to see that it was lack of regulation (or lack of enforcement) that was responsible.
◊ My Opinion Self-Corrected Over Time
There was no single incident, news story, conversation, or epiphany that led me to suddenly despise a completely free market. My brain doesn’t work that way. It began in the late 1980s with reading The Jungle and simultaneous news about lead in gas (as mentioned above), and continued from there — and continues today.
In college, I was among the first of my peers to own a cellular telephone. In those days, you bought the phone, and paid a monthly fee for access to the network, and paid a per-minute fee on every call, and paid roaming charges if you went out of town or even crossed the part of town that was covered by a different network, and paid normal long-distance fees (per-minute) if the call was to someone outside your immediate area. Though this is actually a case of the market (slowly) correcting itself as promised, I didn’t see it that way at the time; the experience helped turn me away from the high ideals of a free market.
After leaving college (1995), I wrote in my journal: “For the first time, I began to be truly bitter about capitalism.”
After college, I was poor for more than 10 years. This was the incubation period for me, when I saw a side of life I’d never seen while growing up in large homes in middle class suburbs. For five years in urban Arkansas and five years in rural Oklahoma, I saw families stuck in a cycle of poverty from which most of them can never escape, some of them with jobs and many without. I saw how difficult it was to get a job after you’ve been out of work for more than a few months. I watched college tuition prices skyrocket as wages stagnated — especially wages at the bottom. Most of the people I knew wouldn’t make it to college anyway because their public school educations were so lacking.
At my various jobs during this time, I noticed that raises were handed out according to how long someone had been employed, rather than how well they did at their job, which surprised me (because I’d always been told that the hardest workers were rewarded) and didn’t fit the model of the free market (because it rewarded inefficiency). I saw that the employees who were promoted to management were either just better at smooth-talking their bosses or best at their previous jobs, which also didn’t fit the free market model — it would be more efficient for a great worker to remain a worker (maybe with a raise) and a manager should be someone who’s good at management. And these companies, some of them national chains, had been run this way for decades.
I further noticed that prices are higher in poor neighborhoods, because I lived in one of the nation’s poorest neighborhoods (which I later learned was called Baring Cross, off Pike Avenue in North Little Rock). Histories of the area, like this one, often skip from the 1960s to the 2010, noting simply: “But the downturn continued. Pike Avenue at 18th Street, the heart of the business district with grocery stores, a movie theater and numerous businesses by the 1960s, was a shell of itself by the 1980s and ‘90s. Poverty and crime took a toll.”
The corner stores and other small, run-down shops often charged twice what you’d pay in a more affluent area of town, despite the residents there having less ability to pay and less ability to shop around — many of them were on foot. Even the medium-sized supermarket at the north end of the area charged more. You can’t afford a washer/dryer, so you use a laundromat. Our local self-service laundry place was called the “stab-o-rama” by my neighbors, but only because people often got stabbed there. There were no banks in the area, so anyone who did get a check (I’m sure many of them were from various government welfare programs) had to cash them at the check-cashing joints that sprung up everywhere, for a hefty fee. They paid bills with money orders instead of checks because — again, no banks in the area — and poor people have a hard time maintaining a checking account anyway, at least I did. No one has credit, so if you need a small loan you go to a “payday advance” shop, where you’re charged usurious rates (often north of 500%) and further worsen your credit.
Once, when I was at the Stab-o-Rama doing laundry, a woman walked through handing out applications for bus driver positions with the local public school district. When I asked about salary, it turned out to be less than I was making as a stocker at my grocery store, so I declined.
Because of these factors and others, crime was high in the area. People think I’m joking when I tell them gang members drove by firing automatic weapons on July 4th instead of shooting off firecrackers, but I was being serious. Anyone in the area with a car paid extra for a locking gas cap because someone would siphon your fuel in the middle of the night (or in my case, during the middle of the day) — and gas was only $1.10 per gallon back then. My tiny shack of a studio “apartment” was burglarized four times during the last three months I lived there. My sympathetic landlord didn’t even charge rent after the first two times and refunded my deposit in embarrassment when I moved away. Unlike most of the people who lived there, I actually had the ability to move away.
Those people, and the ones in my next couple of towns of residence, had been left behind by the free market. Most had no chance to get back in. Some government subsidies were scattered through the neighborhood, such as housing assistance, food stamps (on paper back then), unemployment checks (which only last six months), and so on. But for most, it was only enough to pay their bills and eat food on occasion — I once ate only ramen noodles for six months. It’s no wonder I was skinny. The money they received from the federal government did not help them out of their dire situations; if anything, it boosted the income of the wealthier folks who prey on the poor.
Receiving this welfare, in addition to not really helping, earned the ire of anyone whose taxes paid for it, and even today, you’ll see comments like the following on news stories about it: “I’m sick of these no accounts living out of my pocket and everyone else’s. The only thing they are entitled to is to get a frigging job. Loosers” (I copied and pasted that; it’s a direct quote).
Also during this time (1995-2005) were the infamous scandals involving Enron (2001) and MCI Worldcom (2002), not to mention others like Waste Management (1998), Tyco (2002), HealthSouth (2002), Freddie Mac (2003, 2006, 2008), AIG (2005), and others.
When I got married in 2006, I was still poor. My wife and I lived for several months on my pitiful salary (close to minimum wage at the time). She got a job just before her school loan payments started coming due, and we’ve risen on the income scale ever since. Now (2014), with a household of four and only one salary, I know I’m fortunate to be smack dab in the middle of the middle class (according to someone’s numbers).
But during that rise, there were more national events that further eroded my faith in the free market, perhaps the most effective of which was the 2007-08 housing market crisis. I’d known for years that house prices were inflated ridiculously in some places, because in my neck of the woods you could buy a perfectly decent house for $60,000 and a near-mansion for $200,000, while the same houses elsewhere sold for $300,000 to $800,000, or even higher in the silly-stupid markets of New York, Seattle, Toronto, and so on.
What I did not know until it hit the national news was that lenders had been pushing subprime mortgages for years, knowing these mortgages would never be paid off and instead making money from bundling the mortgages into mortgage-backed securities and selling them to investors. No one cared whether the mortgages were ever paid, because the MBSs were simply sold and re-sold, re-packaged and sold again. The money was made in the securities market, not by homeowners making payments with interest. It was a recipe for disaster that should have never been allowed; the market “corrected” itself, but at the expense of millions of ordinary citizens who were not complicit in the chicanery.
I was incredibly lucky that both interest rates and housing prices crashed not long before I was finally ready to buy my first house — so I got a historically low interest rate and a decent, brand-new house for a steal of a price — but I know that the majority of the country wasn’t in that same position, including many of my friends and relatives.
In a recent review on a book about the failures of capitalism, I noted that “I had already grown convinced of much of Chang’s viewpoint before reading the book.”
◊ What’s Ruined Supply-And-Demand
For me, three things have made the supply-and-demand principle not really work in modern society.
Supply-and-demand is actually a pretty decent way to determine prices for goods and services. A product isn’t very good? People will pay less for it or not buy it at all. Eventually, the company has to offer it for less money or improve the product. A product is really good? People will pay more for it. Overall, either high demand or low supply lead to higher prices, while low demand or great supply lead to lower prices.
1. Planned obsolescence is one thing that makes it not work. Products, especially technical products like computers, automobiles, refrigerators, TVs, aren’t made the same way for generations. In late 2012, I bought a Hewlett Packard Pavilion p7-1436s desktop computer. I like it and I’ve been happy with it, but if I ever want another one, I’m out of luck. They don’t make it any more. If a friend asks me which computer to buy, I can’t recommend the one I have because HP now has different models on the market. The motherboards are different, the drives have changed, the processor has been upgraded, and so on. For all I know, HP has changed suppliers, has new management at the factory, or has changed standards in order to maximize profits. It’s the same with your phone, your toaster, your microwave oven, your coffee-maker, BluRay player, camera, etc.
It’s very rare these days that a company makes a product with the intention of not changing it significantly every few years. So there’s not enough time for the price to “settle” according to supply-and-demand principles.
There are various types of planned obsolescence, including style, limited lifetime, systemic, and programmed, all of which we see in our market today. Any and all of these types artificially increases demand, therefore the supply/demand chart isn’t accurate.
2. Brand Recognition and Brand Loyalty have also affected the honesty of supply-and-demand. Companies have cultivated the idea of brand loyalty over generations, usually through (3.) marketing campaigns, again creating artificial demand for their products. This is especially true considering how much misinformation is intentionally disseminated through advertising. Having watched an estimated 1.6 million commercials in my life (source), I’m convinced that advertisers simply cannot be completely honest, even when they intend to be.
Even simple things like the way a burger looks on TV contribute to this dishonesty, but it usually includes the way people behave in ads, the kinds of people (young, attractive, successful people, usually), background activity, and most often the words on screen or the words of the voiceover.
For example, the loud voiceover says something like: “Everyone’s approved, regardless of credit!” while the fine print on the screen’s bottom says not everyone’s approved, or that people with worse credit will have significantly higher interest rates. The voiceover says the new battery “lasts 50% longer that the competition!” while the fine print says it was being compared to a battery made by the same company.
Proof of how brand recognition and marketing has worked is how many people buy name brand medications, when the generic drugs are required by federal law to contain the exact same ingredients and work exactly the same way. For other products like foods: people insist on buying the name brands they recognize (from commercials) despite knowing that store brands often taste the same or better and that the store brands are equally nutritious (on average).
◊ The Free Market Is Peopled By People
If the market were made up of machines that performed the same way every time, it probably would be fair. These machines could be programmed to act fairly, to not cheat, and so on.
But the market is filled with humans, most of us flawed in some or many ways. In an unhindered (free) market, business owners have shown repeatedly that they were willing to discriminate based on race, gender, age, religion, and other characteristics, throughout many generations. Even after the government began banning such practices, they continued. Real estate agents continue to show less properties to black or Asian customers than they do to white customers of equal financial ability, and for years steered minority buyers into different neighborhoods than their preferred white customers. Banks regularly turned down loan requests from high-income blacks more often than those from low-income whites, and charged higher interest rates to equally qualified minority borrowers than they charged to whites.
Without government “intervention” like the Civil Rights Act, or the Americans With Disabilities Act and others, businesses would still be refusing service to people of color (or forcing them to enter through the back or to sit in segregated areas) and people in wheelchairs would still not have ramps.
◊ No Need For A Rebuttal
Feel free to post opposing opinions or explanations in the comments below; I always welcome informed discourse and even outright “I wonder…” type comments. However, there is no need for a serious rebuttal since I’m not attempting here to convince anyone else of my views. I am simply recording my own journey for my own purposes.
I’m aware that just about everything I’ve presented here is anecdotal evidence, and it’s meant to be that way. I envision anyone who’s had training in economics will chortle so hard after reading this that thousand-dollar bills will fall out of their pockets. That’s fine too; maybe I’ll find one of those bills and put it away for my kids’ college education. However, all you economics “experts” should be aware that you can’t convince me based on your experthood; there are other experts who disagree with you.
None of this has made me a Marxist or Socialist, though I don’t think there’s anything inherently evil about those ideas. But much like free market capitalism, they don’t work very well in real life.
I believe people should receive different amounts on their paychecks depending on how much work they’ve done (and how much potential they have), and people who successfully run giant corporations should be paid much more than people who sweep floors in those corporations (but maybe they shouldn’t be paid hundreds of millions of dollars for shortchanging employees and customers or for breaking laws meant to protect people).
But I do think “whatever the market will bear” is often unfair to the people at the bottom, who usually have little choice in the matter. I think bankers who defraud us of billions should go to jail sooner (and for much longer) than the guy with a quarter-ounce of marijuana in his pocket. I think the government should break up more monopolies instead of helping enforce their strangleholds. Companies should have to bear the cost of their environmental infractions, instead of simply deferring those costs to future generations or to overseas workforces.
1 “Almost”, because many free marketeers do admit that some level of government activity is necessary for the market to stay “free”, including “an enforced right to own and to exchange property, an enforcement of contracts, and laws that forbid the use of force, fraud, and theft… Both the market system and the people who trade in the market need protection from the kinds of actions that hinder or prevent free exchange. This requires the existence of a government.”