Ulysses and the Sirens by Herbert James Draper

Every generation seems to have its own siren calls — irresistibly seductive promises of better fortunes, that render even the most level-headed thinkers incapable of rational thought and moral scrutiny. Whatever the country you call home, it has probably weathered such temptations in the not-so-distant history, if it isn’t doing so currently.

One recent trend I’ve noticed is people’s increasing fascination towards The Free Market — by this I mean the unhindered, unbridled, unhinged market — and growing concern with the State. While a Government that overstays its welcome is always a good reason for concern, I feel history has provided examples and lessons plenty for us to draw from. A Market run amok, however — more insidious and opaque — can equally erode the pillars of our communities asymptomatically until the inevitable, septicemic, collapse.

The rules of the game

For those that believe the State is inherently evil and the Market inherently good, meaning the State’s level of intervention in the market should always be minimized to the best of our abilities, this text will only frustrate the mind and anger the heart. I will not argue this position; for to say the State is bad and the Market good is ideological. One does not argue with axioms and dogma. But if the reader feels inclined to always favor the Market out of more empirical considerations, all I hope is to elicit reasonable doubt against the case of its unmitigated liberalization. If the reader is inclined to interpret any criticism of the Free Market as an implicit endorsement of Marxism or any other command-economy paradigms, they should spare themselves the frustration of readings any further.

Here is my position: both the State and the Market are pieces of social technology. Like any technology, these two can be developed, perfected, abused, or forgotten. The State is our means of distributing power and of delegating the responsibilities of decision making and supervision, while the Market is our means of distributing resources and services. We need these because the intricacies of life by far surpass our capabilities of emergent self-organization. Throughout history, these chains of distributions have mingled and intertwined, with power concentrating in one or the other, and sometimes in both. For the author, neither are a priori good or bad. It is every community’s responsibility to deploy them in a reasonable fashion, and to face the challenges they pose. State power can be imposed, inherited, or freely elected. The Market can be centrally planned, dictated by a cartel, or be as free as the birds in the sky. Whatever the case, I think both can safely and reasonably be qualified as “bad” when, in the detriment of the many, they start to function in the favor of the very few.

There are two main points I wish to make. So let us put our wetsuits on and dive in.

The free market is already severely constrained

In the midst of all our struggles to make the world a better place, whatever our ideological preferences, it is easy to forget how regulated the market already is. Sure, today we might argue about minimum wages, price floors and ceilings, government furlough schemes, corporate bailouts, progressive taxation, or the Dodd-Frank Act. But there are already countless systems in place that constrain our markets, which are ubiquitous to such an extent, that we forget they are essentially state interventions.

For example, producers of foodstuff must provide all the ingredients, in detail, on all packaging, along with the nutritional values. Today, this might seem like a trivial fact, but for the longest time this wasn’t the case. In a truly free market, this is nonsense. It makes producers partially divulge their recipes, and forces them to spend money and time on creating additional labeling and packaging. We have grown so accustomed to this fact, that we take it for granted. But we have collectively decided — most of us, anyway — that this should be mandatory for the sake of consumer protection.

Another example is provided by the real estate sector. Any building, be it a house, an apartment complex, an office building, or a hospital, must adhere to strict guidelines concerning its land use, materials, design, architecture, and utilities. This ensures that, to the best of our current collective knowledge, the building is durable and safe, and a good investment for work or living. Through taxes, we fund agencies that oversee the enforcement of these regulations.

Such examples are countless, and could fill an entire book. I believe anyone, perhaps with the exception of the most radical libertarians, would be wary of doing away with these mechanisms of consumer protection. Sure, they might not seem like state interventions to the accustomed eye, but they definitely are. As products and services diversify (and complexify) it is very likely we will settle on further regulations and restrictions whenever we feel consumers might be cheated or deceived.

Once you put your economist hat on, you start noticing all the ways in which our markets are regulated, often in benign or beneficial ways, and you realize it’s nothing to be scared of.

The free market is the most efficient, except for when it isn’t

The main argument for The Free Market (beyond the dogmatic one) is that it represents the most efficient mechanism to distribute the resources in the community. In a market, buyers and sellers can meet and exchange goods and services, using an established, mutually trusted currency. Trade, along with the development of modern banking and credit, has completely transformed our societies. At the most rudimentary level, it allows one community to exchange the resources that are most available to it for others that are scarce. These can be a function of geography — oil, salt, gold, freshwater, corn, rice, oranges, or watermelons — or a function of history and culture — paper, gunpowder, car parts, electronics, or cheap labor. The markets are a marvelous thing.

In any Economics 101 course, one learns of the mechanisms of supply and demand, price elasticities, normal and inferior goods, etc. Basic economic theory shows how market interventions prevent the demand and supply to meet at the best price, so interventions are considered undesirable. But this basic economic theory heavily depends on a myriad of simplifying assumptions that always hold only to a certain degree of approximation — and sometimes not at all.

For one, it assumes the market is fair. Sure, when faced with a choice between two equally priced products, we will pick the one of superior quality; or, given equal perceived utility, the cheaper one. But all of this works only if there is a transparent mechanism in place for gauging the quality! In the case of foodstuff mentioned above, it is already obvious how this can be circumvented. Sure, if a producer sells bad food (and the word gets out), the free market might adjust to that knowledge, and the seller might go out of business. But if you or a loved one are among the unlucky buyers that get severe food poisoning and die, the market adjustment will probably be of little consolation.

Furthermore, it assumes that sellers (or buyers, for that matter) never collude. In this basic model, monopolies and cartels can never form, because they are inherently inefficient, and a new market entrant could always provide the same services for a better price. Again, this is obviously not the case in many industries. First, because the barrier of entry might be extremely prohibitive in terms of cost or expertise (e.g. healthcare), or because the resources might be scarcely concentrated in very few regions (oil & gas).

But most importantly, it assumes that market players are rational. A true revolution in economics occurred in the middle of the twentieth century, with the development of behavioral economics. The aim of the field is to study the markets and the daily choices we make by also drawing from knowledge of psychology and social sciences. No economists worth their salt do economics today without taking this body of knowledge into account. What they’ve found is that people are predictably, systematically, and inevitably irrational — and market players armed with this knowledge will gladly profit from it.

For a truly eye-opening (and occasionally downright depressing) account of our daily misjudgments, I recommend “Thinking, Fast and Slow” by the Nobel winning economist Daniel Kahneman. If that won’t make you shove wax in your ears and tie yourself to the proverbial mast, I don’t know what will.

Brain scraps — if you’ve made it this far

Of course, delegating supervision and regulation to the State does not automatically solve everything. Public servants can be incompetent, inefficient, or corrupt. In theory, this problem is solved by electing public servants, directly or indirectly, for limited terms, in free elections; while the free market weeds out the incompetents and corrupts through competition. We’ve seen both mechanisms fail plenty of times.

One of the most fascinating instruments for controlling the market is the patent. I have never heard a libertarian argue for dismantling the patent system (yet). Patents infringe heavily on the market, because it provides a mechanism to enforce market exclusivity for a product (or an implementation of an idea into one). One can argue that patents defend competition by protecting the “little guy” from being bought out by the “big corp”, and allowing new entrants in the market. However, due to market forces, patents have become so expensive that arguably it is now the big companies that hold most patents in some industries, and keep competition at bay.

There are countless examples of deregulation done right, where competition revived a stagnating sector and brought mass development. I don’t mean to argue against deregulation or privatization for any sector in particular, but for out-of-principle, dogmatic, liberalization.

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