Free Market Economies
“The American free market system is the greatest engine for prosperity and opportunity that the world has ever seen. Freedom works.” ~Ted Cruz, Hillsdale College commencement 2013
Well not exactly since America does not have a true free market (more on that later), but Cruz’s commentary on one of the best known economic structures emphasizes what makes the system so appealing. A free market economy has several key characteristics, the most notable of which describes an environment in which the government has no influence on trade or business. Realistically, the modern world has never seen a completely free-market economy; Hong Kong comes the closest in 2018 and America has seen spurts of seemingly boundless economic freedom in periods like the Gilded Age, but never has a nation achieved complete laissez-faire capitalism. People ultimately use the terms “true free-market” and “laissez-faire capitalism” interchangeably since a government without influence on the economy effectively equals the hands-off government and demand driven prices described by laissez-faire. Expanding on this a bit, laissez-faire directly translates to “let it go,” or more loosely to “let it be”; when considered economically, this approach allows prices to fluctuate naturally and settle at the true equilibrium point, as opposed to having government dictated floors and ceilings that restrict prices from reaching the optimal point for both consumers and suppliers.
The primary benefits of a hands-off system lie in the market’s ability to accurately and, idealistically, instantaneously reflect both the supply and demand for a good in its price. Letting a good’s price settle at the equilibrium point ensures that suppliers produce no more of the good than consumers demand. This eliminates shortages and surpluses, as well as the economic inefficiency that comes alongside these inorganic developments of external intervention. In addition to basic firm-by-firm and consumer-by-consumer optimization through price accuracy, a free-market economy also limits entry barriers into all industries thereby allowing for greater competition and innovation. New firms in an industry necessarily increases supply which not only decreases prices for consumers, but also fosters market competition. Competition increases lead to more productive firms and technological innovation (to a point) as those companies that fail to innovate and work efficiently fall behind and fail.
While helping boost individual firms to prosperity, technological innovations also uniformly improve economic conditions because they increase productivity by allowing a firm to spend resources on new problems that could not have been pursued otherwise. Less noticeably, economic deregulation also allows an industry to flatten out, meaning lots of small firms control it, or to spike, meaning a few small firms control it. While consumers typically find oligopolistic and monopolistic tendencies undesirable, certain industries benefit from companies being able to take advantage of their large size to offer lower prices or higher quality items. For example, a smaller airplane producing company could most likely not produce planes at the same price and quality as Boeing and Airbus simply because this small company would lack the human capital base and advanced supply chain necessary to produce planes efficiently.
Opponents of free-market capitalism typically argue that the system gives too much freedom to big businesses which will lead to higher cost of living, decreased lower- and middle-class pay (and therefore a larger wage gap), and questionable ethical decisions. The primary concern of uniformly increased prices alongside decreased pay arises from the notion that without government regulation, monopolies will arise in every industry and they will have so much power that they can charge whatever they choose for their products which inflates prices while also paying their workers next to nothing for their labor, because no better alternative exists. People effectively fear a reversion to early 1900s working and living conditions, where over half of America’s wealth belonged to the top 1% and only a tenth went to the bottom 50%, industrialists stayed at the top through unjust (but smart) tactics that ultimately hurt consumers, and only the popularization of books like How the Other Half Lives and The Jungle could induce the government to do anything. People also fear that businesses will choose to overlook other ethical decisions, such as amount of pollution released during manufacturing or general employee safety, when the government does not regulate their behavior.
As previously mentioned, a complete free-market economy does not exist, and it never has. It simply exists as a piece of economic theory for researchers and politicians to consider when advocating for changes to policy or administration. Despite Senator Cruz’s statement on the topic, America’s “prosperity and opportunity” has been generated by the relative freeness of our market structure, not by the “free-market system.” Laissez-faire capitalism represents the theoretical extreme in the direction of complete deregulation and governmental passivity regarding economic affairs; next week we will consider the antithesis of the free-market and delve into economies under complete governmental control.
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