How the Financial Elite Con Us into Wanting the Wrong Thing
Competitive or self-regulating market economies promote dynamic creative destruction and rebirth—led by people’s needs, wants and desires, thus properly directing economic progress. Historically, competitive market economies are a relatively new economic system, and while very productive, they are not self-sustaining, are unstable and require significant state support and regulation to function properly.
Nevertheless, self-regulating market economies are superior to other political-economic systems—such as dictatorial fascism or autocratic communism—however, the state can mismanage them.
History of Market Economies
Market economies are nonexistent during primitive times, and even during feudal times, markets trade local goods and remain small, with no tendency to grow. External foreign markets carry only specialty items—such as spices, salted fish and wine. Foreign trade does not begin in feudal societies, between individuals, but is only sanctioned by civic leaders—between whole communities.
During feudal times, markets for local community goods do not mix with markets for goods that come from afar. Local and external foreign markets differ in size, origin and function—are strictly segregated, and neither market is permitted to enter the countryside.
Feudal society transitions into the mercantile society of the 16th to late 18th centuries, where the state monopolizes the economic system, for the state’s benefit. Colonies are forbidden to trade with other countries, and workers’ wages are restricted. However, mercantilism proves divisive; fostering imperialism, colonialism and many wars between the Great Powers. Market economies have yet to arrive, and would not do so until after 1790.
During the Industrial Revolution, production processes transition from hand crafting methods that supply only the local community, into mechanized manufacturing; thereby vastly increasing production, driving down costs and increasing wealth. The source of a person’s income is now the result of product sales to far-off, unknown customers. Private business entrepreneurs are the driving force pushing the state to institute the market economy, thereby protecting the sale of their goods in far-off lands.
Unfortunately, in practice, market economies result in corporate monopolies. Corporations may use a product dumping predatory pricing strategy, by charging less than their cost to produce, in a specific market, in order to drive weaker, smaller competitors out of business, and then significantly raise prices at a later date, in order to gouge the consumer. If the monopoly is in a vital economic area and the company institutes monopoly pricing to overcharge the consumer, only the state has the power to protect the market economy from monopolistic inefficiencies and break up the offending company; thus reinstituting competitive pricing. As a result, government regulations and market economies develop simultaneously.
Laws & Regulations Are Necessary
Leaving business a free hand, especially when dealing with far off customers, leads to misrepresentations, shoddy practices and fraud. The food industry is an example.
Upton Sinclair writes The Jungle (1906), exposing the disgusting unsanitary conditions in the Chicago meatpacking industry, during the early 20th century. Public uproar prompts President Theodore Roosevelt to pass the Pure Food and Drug Act of 1906 and the Meat Inspection Act. Roosevelt says that government laws and regulations are the only way to restrain the arrogant and selfish greed of the capitalist system.
Shocking examples of food fraud in 2013 highlight the need for enforcing government regulations. Inspectors uncover corporations selling horse meat as beef, and routinely mislabeling about 40% of the fish served in U.S. restaurants. Cheap rockfish and tilapia are substituted and sold as expensive snapper, and restaurateurs frequently switch escolar for white tuna, causing diners to suffer indigestion.
Over 70% of the tilapia sold in the U.S. is imported from Asia, and only 2% is inspected by the Food and Drug Administration. Much of this Asian farm raised tilapia is “filthy fish,” where pesticides and manure run off into the tilapia raising ponds, causing infections. Or the tilapia is raised in polluted Asian rivers. Americans are impairing their health by unknowingly eating filthy Asian tilapia, fraudulently substituted in U.S. restaurants for the healthy fish ordered.
Other fraudulently mislabeled foods include sausage, organic foods, energy drinks, milk and eggs. Without sanitary food preparation standards, set and fairly enforced by the government—Americans will soon return to naively eating rat droppings—so, unknown to them, CEOs can meet Wall Street earnings expectations.
Departments of Weights and Measures (DWMs) at the state and federal level develop “uniform laws, regulations and methods of practice” that impact about 50% of U.S. GDP—to ensure there is equity between buyers and sellers in commercial transactions.
Because gasoline stations routinely pumped less gas then charged for, DWMs now ensure the accuracy of gasoline pumps, octane levels, labeling and restricting water in gasoline. Butchers used to add lead weights to the chest cavity of the poultry sold, prior to weighing, then noiselessly dumped the weights out into an unseen padded draw before the bird was held up for the customer’s inspection, thereby swindling their trusting patrons.
Without the state to step in to punish fraudulent wrongdoers, dishonest business practices would be widespread. Consumer trust, in everyday market transactions, is paramount for market economies to function effectively and efficiently—making government regulations vitally important.
Without regulation and transparency, bad businesses drive out good businesses, following Gresham’s Law. The economic system then atrophies, with a loss of trust in the marketplace. What is lost is not just the money on an inferior product or service, in the short run, but more importantly, the bad businesses may use their outsized profits to buy political protection and start changing laws, to make new laws favorable only for them—thereby damaging the market economy and reducing the state’s economic growth and welfare.
Competitive Market Economies
An economic market system capable of directing the whole of economic life, without out-side help or interference, is called self-regulating. Once the self-regulating or competitive market economy is designed and implemented by the state, to give all participants an equal opportunity for success, the self-regulating market is to be let alone by the state and allowed to function according to laws and regulations, without after-the-fact government intrusions—regardless of the expected consequences.
Those in Western societies are told that competitive market economies, which have self-regulated prices for land, labor and money, set solely by the market, are normal, and that human beings develop market economies on their own, without help from the state, which is the proof of human progress. Also, that market institutions will arise naturally and spontaneously, if only persons are left alone to pursue their economic interests, free from government control. This is incorrect.
Throughout most of human history, self-regulating markets are unnatural and exceptional. Human beings are forced into the self-regulating market economy, by the state. Look at the following false competitive market economy assumptions.
We are told people naturally bartered goods. Actually, human beings, down through history, have no predilection to barter. Social anthropology says that assuming tribal and feudal men and women bartered are rationalist constructs, with no basis in fact. Market economies are the result of often violent government directives, implemented for society’s eventual improvement.
The assumption is man is a trader by nature, and that any different human behavior is an artificial economic construct. By not interfering in human behavior, markets will spring up spontaneously. Social anthropology disproves this.
Neoliberal Economic Theory
Originally, neoliberal economic theory means, “free enterprise, competitive markets, the priority of the market price setting mechanism, and a strong and impartial state—to ensure it all functions properly.”
The Mont Pelerin Society, led by Dr. Milton Friedman, supports Hayek’s economic theories, based on “free market” ideology and help change neoliberal economic theory by rejecting government regulation—calling it inefficient. In addition, financial economists at the University of Chicago School of Business promote the efficient market hypothesis or theory (EMT), supporting the Mont Pelerin Society’s conjecture. Thus, the primacy of deregulated or “free markets” becomes mainstream within academe in the 1970s. Large corporations then use “free market fundamentalism” to their advantage, by lobbying the U.S. Congress to pass legislation beneficial to them.
Some think that “free markets” are a matter of degree, and the practical issues of implementation are paramount. This is incorrect, and will not resolve the current “free market fundamentalism” debate. Instead, the real issue is semantics. Notice how quickly those with a political agenda change the debate from “competitive markets,” which require state regulations and are highly productive—to “free markets,” which result in fraudulent marketplace behavior, crony capitalism and weak economic growth.
Using the term “free markets” is an Orwellian ruse, designed to change the focus in the public’s mind from, “those in authority have to do better” to “those in authority know best, therefore, let them have their way.”
Today, neoliberal economic dogma promotes “free market fundamentalism” of reducing the size of government through the privatization of government services, deregulation and globalization. Privatization professes to reduce the state’s authority over the economy, but state money is used by private companies to lobby legislators, to change laws, which will increase the government’s demand for these same private corporation services. Privatization of government services by corporations does not promote the common good, only corporations’ private profits.
Neoliberal “free market” economists have doubled down on the failed liberal economic theory, with the ongoing 2008 credit crisis as the result.
Free Markets Are Impractical
“Free markets” are free from state intervention, i.e., unfettered capitalism. Those who understand how markets function realize this is an impractical view—simply a rhetorical device—using the popular word “freedom” to mask its real purpose.
“Free markets” are a fantasy, far outside the realm of practicality, used by wealthy international corporations to bully governments and labor, to get their way. The reality is a competitive market economy requires powerful complex opposing interests, mediated by government, to produce an efficient and effective economy that supplies the most to the many, which includes the common good.
Free Market Fundamentalism Leads To Economic Disaster
Nowhere is “free market fundamentalism” more highly trumpeted by neoliberal economists than in the financial markets. The foundation of neoliberalism is, “a deregulated financial sector will regulate itself efficiently, making better use of capital, thus ushering in a new age of prosperity.”
Tragically, the massive deregulation of the financial markets during the Clinton and Bush presidencies, results in the ongoing 2008 credit crisis—which the U.S. Government Accountability Office reports has cost the U.S. economy about $13 trillion dollars in lost GDP output.
“Free market” apologists ingenuously explain the 2008 credit crisis is not caused by “free markets,” but because government regulations are not loose enough. All “free market” failures are dismissed by the financial elite, because of cognitive dissonance. Bankers and neoliberal economists want to believe in what is making them richer and more important. This is the same logic used by those in charge in the USSR, when communism failed, “it wasn’t being applied purely enough.”
Free Market Ideology in Practice
“Free market,” ideology, as practiced today, is the opposite of what is stated. Instead, governments step in to save insolvent banks and large international corporations, when they make bankrupting mistakes, and give the bill to the taxpayer. This transforms the difficult but manageable ongoing 2008 credit crisis, into a much larger and dangerous sovereign bankruptcy crisis, with potentially calamitous political consequences.
“Free markets” usher in unfettered capitalism, unleashing the “law of the jungle” and a “dog-eat-dog world” that fosters fraud and corruption. Human beings, no matter their station in life, cannot be trusted to always do the right thing, especially in a competitive situation. Doing away with laws or regulations so those in power know it is impossible to be caught or penalized does not stop them from acting improperly. Only criminal punishment and public disgrace accomplish that.
The resulting “free market” business jungle includes monopolies, coercion, fraud, theft, parasitism, crony cabals and racketeering. Ironically, unfettered “free markets” are not free, but increase injustice, making the economic system inefficient. Only government laws and regulations can keep markets competitive.
The EMT Supporting Free Markets Is Wrong
New scientific evidence on the efficient market hypothesis or theory (EMT), shows University of Chicago School of Business researchers ask the wrong questions, use erroneous data and an incorrect research method to analyze the data, and then jump to false conclusions, based on half-truths—please read further in my journal articles: link, link and link.
The EMT and “free market fundamentalism” are false gods.
Markets are not efficient, based on the data. Consequently, “free markets” have no theoretical foundation. Therefore, reject the incorrect theory of “free market fundamentalism” It is impractical and dangerous, leading us into the ongoing 2008 credit crisis.
Competitive market economies only function properly by having fair laws and regulations, set up and impartially enforced, by a strong state. Dr. Robert M. Solow, 1987 Nobel Prize Winner in Economics and MIT Institute Professor Emeritus says, “The switch to talk about “free” markets diverts attention from these deficiencies and suggests that any attempts at corrective regulation are instead limitations on freedom.”
Neoliberal” free market fundamentalists” in business use “free market” ideology as a negotiation ploy. Do not succumb to this ruse. The U.S. requires “competitive markets for economic growth,” not “free markets for fraud.”
Why free market ideology is important
Markets, without government regulation, are called free markets. The influential Ludwig von Mises Institute publishes a monthly journal entitled, “The Free Market,” praising its virtues. Neoliberal economic theory, which is main stream within academe, supports privatization, deregulation and globalization. The political power structure in Washington thinks that free markets are the solution to the 2008 credit crisis, not its cause. Consequently, Dodd-Frank legislation has yet to be implemented, and may never be. This is the power of free market ideology.
People do not understand when government involvement in the economy is essential. Before the fact, government regulations are necessary, to create fair rules of business conduct, in order to be able to prosecute fraud, thereby establishing a level playing field. After the fact, government intervention, to insure that only crony capitalists win, is economically and socially destructive.
Eric L. Prentis
Kudos: An Excellent Explanation
This is one of the best articles I've read arguing “competitive markets" vs. “free markets" --- and the real difference between them; and why we need more regulation, not less --- because regulations (just like the tax code) are only as complicated as they are because of those who had abused and exploited them (they found the "loop holes" in previous regulations and tax laws).
This piece also fits hand-in-hand with another good piece titled "Capitalism Requires Government".
Robert Reich - The Myth of the Free Market
Another great related post...