Tag Archives: free market

Free Markets Need Rules?

It may seem to be a contradiction to describe something as free when it is bound by rules.  That is the case with free markets.  They exist only when specific rules are obeyed.  The banning of anti-competitive behavior exemplifies those rules.  When those rules are broken a free market becomes something else.

When left to their own devices, free markets self destruct. To understand why, focus your attention on how resources are redistributed in free markets.  Then a way to save free markets from themselves can be conceived.

Successful free market participants are rewarded with more resources than their competitors for their efforts.  (A buyer gets something that another buyer can not afford to buy.  And a seller makes a sale instead of another seller.)  The most successful competitors get extra resources.  Ideally these extra resources are used to increase supplies of whatever they offer.  This is supposed to happen until the price of these supplies become too low for less efficient competitors to stay in business.  This can conceivably lead to a monopoly.

That situation would be ideal if it does not afford the winner an opportunity to change the market’s rules and artificially inflate their advantage.  A monopoly’s, (or cartel’s), influence over the market’s rules is proportional to their share of the market.  The rules inevitably are changed to favor established sellers and become anti-competitive.  That violates free market rules.  A manipulated market is not free.

Free markets are worth preserving.  They bring as many sellers together with as many consumers as practicably possible.  Free markets most dependably give consumers what they demand until rules that protect established sellers happens.  Then the free market is subverted and becomes something else.  Rules defining free markets also need to help preserve them.

It is too bad that what makes free markets so desirable also gives successful participants an incentive to become domineering.  An equally impartial dis-incentive is needed for balance.  It is obvious that this dis-incentive needs to punish participants that begin to dominate a free market.

A free market rule that imposes a progressive tax on the value of market share can provide a plain and impartial method to preserve the market’s competition and innovation.  It can also provide an equitable source of government funding.  The tax could be scaled so that it diminishes the incentive of established market participants to gain market share until they have around 33% of market share.  Then that incentive can be completely canceled out.

The target of 33% can be optimized to maximize tax revenue.  Potential revenue for this kind of tax is only limited by the health and growth of the market.  That gives regulators a strong incentive to do what is really best for the market.

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Russian Styled Centralization Replacing ‘Big Three’ Cartel’s Control Over American Auto Industry

This article by David Herszenhorn and Jackie Calmes titled “‘Car
Czar’ prescribed for automakers” describes a fundamentally flawed proposal to rescue collapsing industries. It would have an
elite group of industry-wide managers led by an appropriately named ‘Czar’ guide the failing American auto industry.

The name Czar reminds us of Russia and its instinct to centralize control
over industries and the economy in general.  That kind of economic
management is what caused the collapse of the former Soviet Union.
Competition is suppressed along with innovation for various self-serving
reasons in economies that are managed this way.

Lack of competition and innovation is also why the American auto industry is failing in the face of foreign competition. The ‘Big Three’ are essentially a cartel that has ruined the American auto industry’s free market. This scheme to appoint a  body of central managers over the industry is only going to enshrine the industry’s fundamental dysfunction.

There is a better way to use the money that would be used
to fund the auto industry’s bailout; and the money used to fund the new bureaucracy meant to manage the industry. Give it to average taxpayers in the form of a voucher. These vouchers
would subsidize the purchase of energy efficient, environmentally
friendly, American made cars. This would let consumers decide what
American auto companies, either old ones or new start-ups, deserve
help from the government.

We can avoid the pitfalls of both Russian styled socialism and US styled free capitalism.  The corrupting and smothering affects of centralized market controls by governments and big businesses are kept in check.  We must restore the rightful status of consumers as the leaders of our economy, for freedom’s sake.

Congress Abandons Consumers

The reason why the economy is collapsing is because too many average consumers have lost their purchasing power. From the beginning of the crisis this has been obvious. So why are policymakers concentrating on implementing a trickle-down approach to rescuing the economy?

They have put their faith in the directors of big businesses to save our economy. Almost all of the cash meant to rescue the economy, (last count = more than 2.7 trillion), has been given to them. This is despite the widespread belief that free markets most efficiently direct investments to where they would be most useful. Our leaders need to remember why free markets work well.

Free markets democratize the economy. They give consumers the power to direct the economy. Consumers do this with their purchasing power. They give money to sellers and investors who offer the best deals for the things consumers want. In a free market anyone can hope to become a self-made business magnate. And the customers get to choose them. Free market economies serve the will of the people.

Our free market economy is quickly disappearing. The people have lost their purchasing power and Congress has abandoned them. Money for saving the economy has been given to the leaders of big businesses. They are not investing that money in people who would compete against them. The directors of big businesses are using their purchasing power to help themselves.  Regular consumers are left to fend for themselves.

Congress’s mistake must be corrected soon. The bailout money is being hoarded by big businesses that are laying off employees. More consumers are losing their purchasing power. If centralized control over the economy remains for the long term, then innovation would probably be stifled by timid bureaucrats and big business leaders eager to protect their profit margins. The situation is getting worse.

Policymakers and Congress can easily correct this situation. Simply direct the bailout money to average consumers. Let them choose which businesses deserve a bailout. Chances are almost everyone will get what they want.

Break Up Bailed Out Businesses

This should be self evident: Businesses that are too large to fail should not exist in a free market economy.

A business that becomes too large to fail also becomes a liability for the rest of society.  The benefits of economies of scale for society are outweighed by the inefficient monopolistic tendencies of businesses that dominate markets.  And the implicit guarantee of a government bailout encourages too much risky behavior.  It even encourages directors and executives of companies to strategically engineer the need for bailouts.  When a business becomes that large it should be broken up into competing businesses that don’t dominate markets.

We are being told that the government bailouts are supposed to preserve our free market economy.  But the only thing the bailouts are preserving is the freedom of over-sized businesses to dominate a market economy that could otherwise be truly free.  Break up the bailed out businesses.