The free-market myth that wouldn’t die

Posted on Friday, August 22nd, 2008 at 1:46 pm by JTE

Proponents of the “free market” have a tendency to ignore one inconvenient fact: there is no such thing as a free market in reality. Never has been one. Never will be one. The “free market” is a myth, a fairy tale told over and over by newspaper columnists and TV pundits and quite a few professional economists. I’ve come across a few declarations of this myth lately that irked me (for example this infuriatingly ignorant and ignorizing dreck), and so I’d like to rant for a moment.

This is not to say that markets, as a system for organizing economic activity, are no good. There are some good things about markets, flawed as they always are. There are also bad things about them. Sometimes, the flaws are their saving grace! That’s because some “flaws” in what might otherwise be a fully “free” market (theoretically, that is, but only in theory since it simply cannot exist in reality) make the results of the market activity more socially beneficial. The opposite is also true: some flaws lead to worse social results, relative to what might happen if the markets were to be fully “free.” But again, that’s all pie-in-the-sky philosophizing, because markets are never, ever fully free.

Here’s photographic proof!

One result of a free market, proven beyond any doubt in multitudes of Econ 101 courses for the past century, is the so-called “law of one price.” As Wikipedia states,

The law of one price is an economic law stated as: “In an efficient market all identical goods must have only one price.”

(Where “efficient” is econo-speak for what laymen call “free.”)

Now even in the Econ 101 courses, the professors will mention some nuances to this blanket statement, for example to account for the difference in shipping costs to deliver an otherwise identical product from different locations. Similarly, as Wikipedia notes

The law also need not apply if buyers have less than perfect information about where to find the lowest price.

Yet here we are in the brave new 21st century, equipped with the world’s greatest information tools in history, and even still, prices for identical products differ by enormous magnitudes. An example: this Samsung 32-inch flat-panel TV, as shown through Google shopping.

Check it out… the lowest price shown is $382 and the highest price shown is 149% higher at $950. The screenshot doesn’t capture all the offers that the Google search unearthed, but obviously prices vary widely within those two outliers.

How can this be? How can there be so much difference in prices for an identical product? Well, economists and business analysts can probably offer quite a few explanations, but they all boil down to this: the market is not free. It is not efficient.

So keep that in mind next time someone says that all we need to do to solve some problem is to “set the market free,” “get rid of government interference,” or “blah blah blah.” As I implied above, sometimes it will make sense to reduce the government’s influence on a particular aspect of some particular market, but too many people have adopted a blindered ideology that the “free/efficient/unfettered” market represents an ideal that we should be always and everywhere be pursuing. Not only is that doubtful that the ideal is actually ideal, but it simply cannot be achieved, nunca. And as the “theory of the second best” teaches us, that means there is no good reason whatsoever to think that the best alternative is to move as close as possible to this unachievable so-called ideal.

Class dismissed!

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