I believe the biggest myth in America is that of “free markets.” This term is a misnomer, making everyday people feel safe when they see that word “free.” Free markets are anything but free.
Free market contemporaries believe in the notion that “less government is better government.” They believe government has no role in economics; the “market” was created perfect in the eyes of free market fundamentalists.
This is empirically rooted in the ideas of Adam Smith and couldn’t be further from the truth. After moving past the feudal age, we entered one of capitalism, an economic system that lets people privately own land and their subsequent labor.
Free market fundamentalists forget that government, not the market, created the rules of the market. The government established who could have land. If not, people would be squatting on mass amounts of it and killing each other trying to gain ownership of it.
According to principles of contemporary free market fundamentalists, the government should have no role in deciding who can and who can’t own property. This decision should be entirely left to private parties making private decisions, no matter the consequences resulting from this ideology.
The concept of an economy having little or no government involvement, is one of absurdity, especially since government had to create the rules of the first markets. The real question is not if government should have a role in the economy, but rather what role the government should have in the economy.
Free markets, which should properly be called laissez faire economics, don’t even work when a reasonable person dissects the assumptions of neo classical economic models.
Let’s look at perfect competition. Market fundamentalists think every market employs perfect competition, where no firm has pricing power over another firm. Perfect competition is the exception and oligopoly is the rule.
Oligopolies are market structures dominated by a few sellers of a certain product. Examples of oligopolies would include the four largest cell phone companies controlling 89 percent of the market and the television industry being currently dominated by eight large multi-national corporations.
If the sheer size and loss of consumer surplus in oligopolies isn’t bad enough, they also have the highest market structure rate of economic collusion. What is collusion? It is when firms agree to fix prices or establish quotas in order to protect their profits at the expense of everyday consumers.
The second assumption of “perfect” markets is that there exists perfect information in a market. This assumption has been empirically disproved by 2001 Nobel Prize-winning economist Joseph Stigliz. He won his prize in 2001 for proving that, in nearly all markets, there are information asymmetries, meaning that one party in a transaction has more/better information than the other party. He showed the government can intervene in a market and make all market agents better off.
Markets don’t take into consideration externalities. Externalities are costs or benefits that are distributed to individuals not involved directly in an economic transaction. An example would be air pollution. It is something that is negative to humans as a whole, but as people buy and use more carbon emitting devices, you will still incur this cost even if you never buy one. Regulating markets can stop some of the negative affects of externalities and promote externalities with positive effects.
Markets are not free. They never were. They were created by government. It is the job of government to subordinate the wants of the market to the needs of the people.