“Market” Economies

As economists have observed for years, countries that don’t have “market economies” tend to have severe economic and social problems, but outside of textbooks, and even inside them, there’s a problem defining exactly what a market economy is. The traditional economist’s definition of a “free market economy” is one where a willing buyer and a willing seller agree on the price of a good, the idea being that government stays out of setting the terms of the transaction.

There are at least two catches to this definition. First, the term “willing” is usually constrained by reality. So if the only food market in town charges 50% more than the market in the next town, and you don’t have transportation and don’t want to starve, you may pay the prices, but how “willing” are you? In practice, of course, except in times of disasters, the various price differentials aren’t that great, but they do exist.

The second catch lies on the seller’s side. In practice, a seller of a good has to price a good at a level that covers his cost of production or acquisition, as well as his costs of selling it, with enough of a profit to support himself or his business. What has been historically overlooked to a great degree, if less so today, is that many of the costs of production have historically been foisted off on others and not included in the final cost of the good or service. The most notable example of this is air, land, and water pollution, and the costs of cleaning up after industry have become so great that most industrial countries impose regulations on the producers of goods limiting or prohibiting the creation and emission of pollutants. Industry, of course, has historically protested that such regulations stifle a “free market.” That’s not quite accurate. What such regulations do is to give a cost-of-production advantage to those producers who make their products in places with less costly regulations, which is why many multinationals have off-shored their production facilities. What gets overlooked in this “economic” debate are the costs of clean-up and the added costs of health care incurred by those living around highly polluting facilities.

All of this leads to the proposition that a “true” or a “full” market economy is only possible if ALL costs of production are factored into the price of a good or service. Obviously, this isn’t possible, certainly not at present in a world of over 200 nations with differing environmental and other regulations, but it should be used as a standard against which economies should be measured as to the degree of their compliance with market principles.

The idea of the so-called “free market economy” has come to mean in practice the amount of freedom a producer has to foist off costs on the rest of society. The amount of such freedom a producer has is largely determined by two factors – the regulatory structure, or lack thereof, in which it operates, and the amount of financial resources, i.e., capital, it has, which affects its power to influence regulatory oversight. If people who work for a producer or seller of goods cannot live on what they are paid – and that includes not only food and shelter, but medical care and other necessities – and society deems that those workers and their families need assistance to live, in effect the producer has shifted some of his costs to society as a whole, and everyone is taxed to pay for that assistance.

So, in point of fact, goods producers who complain that government regulations hamper the “free market” because those regulations force them to clean up their toxic or unhealthful emissions or by-products or require a living wage are complaining that they’re not as free to impose costs on society as producers in other states or countries are.

And that’s why there is a difference between a “free market” [or capitalistic market] economy and a true market economy.

6 thoughts on ““Market” Economies”

  1. D Archerd says:

    You have to bear in mind that what businesses – even those in a “free market economy” – really want is not an actual free market, or even a “level playing field”. What they really want is competitive advantage that will allow them to grow faster than their competitors. If they can achieve competitive advantage by off-loading costs onto society at larger or, even better, onto poor people in developing countries, that’s what they’ll do. If they can gain competitive advantage by skewing regulations in their favor by raising barriers their competitors suffer and they don’t, e.g. protective tariffs, that’s what they’ll do.

    The only time you ever hear businesses promoting a “free market” or a “level playing field” is when they perceive that someone else has a competitive advantage over them and they’re seeking to neutralize that advantage.

  2. Tony says:

    Last year, the Washington Post published an article citing statistics showing that pollution is segregated by race and class (see http://www.washingtonpost.com/blogs/wonkblog/wp/2014/04/15/pollution-is-substantially-worse-in-minority-neighborhoods-across-the-u-s/). And one of my clients, who sells an organic mold remediation product, recently commented that some of the worst health outcomes he saw were in poor and minority neighborhoods.

    What these points show is that even in a somewhat regulated market, like that of the United States, goods producers will leverage their financial resources and the structural biases in a society to foist off their costs, not on the whole of the rest of society, but on the poorest and least powerful members of the rest of society.

  3. joe says:

    Unfortunately it is not true that all rules propagated by government are good. Nor is it true that preventing government from making rules is good, because then the powerful just invent their own rules to impose.

    There are rules to protect our fellow creatures, the environment, workers’ rights, and citizens’ rights, such as democracy.

    Then there are rules to protect monopolies, rich people, bankers, patents, resource exploitation and so on.

    Unfortunately the government is gutting the former, and boosting the latter, as demonstrated by Citizen’s United or TTIP. Although we have no such thing as a fair or free economy, the trend is for this to get worse: an even more distorted playing field, further distorted by a distorted justice system and straight old corruption. Why do you think the presidential candidates are raking in so much money? Quid pro quo.

    It seems that every 4th generation of humans need to learn why a society needs good rules that do not benefit only them personally. This seems to take a world war, or some other catastrophe. If the West continues creating an enemy of Russia, this cycle of stupidity may finally come to an end, due to nuclear annihilation. Adiamante here we come!

    1. Josh Camden says:

      Instead of Adiamante, i was hoping more for the Green Progression or maybe the Ecolitan Matter.

      Although I wonder if the Ecolitan Matter, might not have happened far after Adiamante.

      As far as the idea of “Every 4th Generation,” I have to say that due to the level of advancement in knowledge (sciences & technology) we have now entered into an era that isn’t “like” any generation before. History repeats itself and we are still human, but it seems that long-held cycles are coming undone.

      1. joe says:

        For our behavior to change due to Science, it would require us not just to use its artifacts but also to apply its methods all the time: in particular not to believe whatever thoughts pop up in our heads.

        I have met very few people who apply the methods of Science throughout their lives, even among Scientists. Most simply believe whatever their neolithic brains suggest to them — the same neolithic tendencies we had before civilization. As a result most of us are primitives with very powerful tools. This makes our natural cycles even more dangerous.

  4. Josh Camden says:

    I have always thought of a “Free Market Economy” as an idea that could never actually exist in the real world, but still worthy of the attempt.

    I also find it irritating when people do not understand the difference between the ideological concept and the reality.

    Of course, I imagine that as the Global Market continues to bring us closer together at some point we will face the decision to either clean our act up, or to export our waste off-world, thereby dumping our pollution into the solar system. I’m sure we’ll choose the cheaper-in-the-short-term solution, just as economics would predict.

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