A free market is one in which there is no government, monopoly or other authoritative interference in the workings of a market. However there is in practise no such thing, as there are always constraints on a market from one or more of those sources.
For instance, in a small country there may be only two or three organisations which are involved in the whole supply chain, and if they are much the same size there is no drive to compete strongly. If one large competitor decided to drive another large competitor out of the market, it would be expensive and difficult, and would more likely than not trigger monopoly prevention legislative mechanisms.
On the other hand, a small competitor might be worth an aggressive approach as an attack could be targeted and localised. It would be cheaper and while it might raise a few worries about lack of choice (in an area), it would not trigger any monopoly laws.
An open market goes hand in hand with the laws of supply and demand. Generally these are expressed as graphs showing the intersection of the supply curve (an upwards trending line) with the demand curve (a downwards trending line). Any change in conditions is shown by other lines more or less parallel to the first.
These curves can only be illustrative as they are almost never drawn with quantified axes, and the curves are drawn without the use of any measured data. They are arbitrary. Nevertheless they purport to show the effect of market changes on the equilibrium or balance point where the curves cross.
While the laws of supply and demand may be true in the sense that if either the price or demand changes the other also changes, the graphs are of little practical use, and they are only marginally mathematical, as definite mathematical conclusions cannot be made from them. It is impossible to quantify the effect on demand of raising the price of a can of beans by 10c, for example.
Nevertheless one could probably use the graphs to suggest that if the price changes in one direction the demand will move in another direction, and these guesses may be used to decide on price changes. It’s definitely a guess, though as the opposite may happen – if you put up a sign saying “Beans now $1.55 per can”, having raised the price by $0.05, you may sell more as you have drawn the customers’ attention to the beans.
The “Free Market”, the “Laws of Supply and Demand”, and the principle of “Laissez Faire” are part of the backbone of Capitalism. Capitalism is a robust economic system which has achieved immense feats and advances. It has harnessed science and sent men to the Moon, given us a computer and communication devices in our pockets. There is no doubt that Capitalism has been hugely successful.
In spite of its amazing successes, there have always been drawbacks to Capitalism. The trend of prices is to rise continually, though at times, they do fall, as demand reduces in recessions and market collapses. These recessions and collapses hurt the poor much more than the rich, as the poor have fewer resources to cope with these setbacks.
Capitalist markets lead to concentration of resources, especially money, in the hands of the rich, and a scarcity of resources in the hands of the poor. It leads to the growth of large market dominating firms, as one firm succeeds while others fail. The successful firm often widens its control of the market by purchasing up and coming smaller firms or older firms who themselves may control a smaller market niche.
Capitalism fosters the growth of the gap between the very rich and the very poor. It is often argued that, in countries where the economic system is Capitalist in nature, the “poor” have much more in the way of consumer items than their parents could have imagined. Most people have a car. Most people have a television. Most have a cellphone.
This is all true, but that is only because these items are both essential and relatively cheap. At the same time, health care is becoming unaffordable for many of the new poor. Schooling is also a huge drain on the poorer families. Many poor people work at multiple jobs to bring up their children and pay for the operations that their parents are coming to need.
As a result, many of the new poor live from day-to-day, with no real opportunity to save for retirement or to lay by a little money to allow for the vicissitudes of life. A small accident that requires time off work and consequently reduction of income becomes a disaster in such a situation.
Capitalism stratifies society and the bottom strata, often those with a lack of education or intelligence, lags behind those who are in higher strata. Those at the highest levels tend to outstrip those at lowest levels until their wealth, to those in lower strata, appears as meaningless numbers. What the difference between $100 and $1000 to those at the bottom? It’s a huge amount. What about the difference between $10 billion and $100 billion? It’s irrelevant.
Capitalist market forces tend to favour those who already have over those who don’t and the barriers that prevent those in the lower strata from moving up are immense. Those few who make are the lucky ones. Yes, luck plays almost as big a part in entrepreneurial success as luck does in winning the lotto.
Capitalism is the best economic system that we have ever had, without a doubt. It is however not without its flaws. Socialism is not a good economic system, but purports to deal with the issues of poverty by redistribution of wealth. (Maybe I’ll do a piece on socialism’s flaws at some time).
Capitalism however does not deal with poverty or the poor. Some effects do trickle down and today’s poor appear rich in comparison with the corresponding strata in the past, but the fundamental poverty still exists.
It would be nice to think that there is some other system, waiting for someone to discover it. The odds are probably good, as no system lasts forever. What it would look like I’ve no idea. We would need to get a much better scientific view of the so-called social sciences to really solve this fundamental problem.