When The Free Market Works & When It Doesn’t
The Market Doesn’t Always, Automatically, Produce Low Prices That Benefit Buyers
The Market Price Is Purely The Result Of A Power Struggle Between The Buyer & Seller. It Has Absolutely Nothing To Do With A Fair, Unfair, Reasonable or Unreasonable Price
By David Grace (www.DavidGraceAuthor.com)
This column explores the situations where the Free Market either will not provide high quality/low price products or is unable to effectively and efficiently price products at all.
The Failure Of Simplistic Economic Theories
If you give an eight-year-old a comic book that depicts workers building a house with hammers and nails, he/she will have a simplistic, comic-book view of construction.
What the eight-year-old doesn’t learn from his comic book is that if the nail is too big it will split the wood, too small and it will bend, or too short and the joint will fail. If he attempts to use a hammer in a situation where screws and bolts are the required fasteners the hammer will prove to be worse than useless.
The eight-year-old’s comic-book does not prepare him for a real world that is far more complex than his comic-book has led him to believe, and it blinds him to many situations where something built with only hammers and nails will catastrophically fail.
There are many people who are similarly prisoners of a comic-book view of economics, but instead of a believing in a do-it-all hammer, their universal tool is the Market. In their simplistic world, the Market, like a hammer and a nail, works in all situations to efficiently and accurately price all goods and services.
But, of course, it doesn’t. Like the hammer, the Market works well in certain situations, poorly in others, and disastrously in some more.
What Is The Market?
The free market (the Market) is an economic system where buyers bargain with sellers for the purchase and sale of goods and services.
People Expect The Free Market To Always Benefit Buyers Over Sellers
People believe that the principal benefit of a free-market economy is that:
- the very existence of the market will guarantee that there will be competition between sellers, and
- that such competition will give the buyers such strong bargaining power that the buyers will always be able to purchase high-quality products at low prices.
Sellers And Buyers Want Totally Different Things
Contrary to the buyers’ universal goals of lower prices and higher quality, sellers’ want to charge higher prices and incur lower costs, thus making greater profits.
Buyers and sellers, therefore, have exactly opposite desires.
Buyers always want robust competition. Sellers never want strong competition.
When someone says that the free market always “works” they mean that the market will always deliver products with low prices and high quality for the benefit of buyers rather than products with high prices and low quality for the benefit of sellers.
But it doesn’t.
To understand when the Market will and will not provide low-priced products for the benefit of buyers, we first have to understand how the Market sets prices in the first place.
Market Prices Are Set By Bargaining Power Not Economic Fairness
For any particular good or service, the stronger the bargaining power of the buyer in relation to that of the seller, the lower the price and the higher the quality of that good or service.
For any particular good or service, the stronger the bargaining power of the seller in relation to that of the buyer, the higher the price and the lower the quality of that good or service.
The relative bargaining power of the buyer versus that of the seller is dependent on several factors:
Any material increase in the seller’s overall bargaining power will materially increase the price for that product.
Monopolies or cartels, restrictions on the available supply, elimination of substitute products, and an increase in the importance of the product to the buyer are all factors that will increase the seller’s bargaining power and thus result in an increase in the price and/or a reduction in the quality.
While the market will sometimes deliver high-quality products at low prices it will also sometimes deliver low-quality products at high prices, depending on the bargaining power of the buyers of that product versus that of the sellers.
Consider the EpiPen and the current price of insulin.
The existence of a free market is never an automatic guarantee that consumers will always be able to buy good products at low prices.
Situations In Which The Market Cannot Properly Price Products
There are several situations where the market cannot set a price that is effective, efficient and beneficial for the society or the economy as a whole.
The Market Price Cannot Take Into Account The Long-Term Effects Of A Present Sale At The Market Price
Without special taxes, the market price for lead paint cannot take into account the future damages to persons and property arising from the widespread use of lead paint. The same goes for leaded gasoline. The same for products whose manufacture generates pollution.
Without special taxes, the market price for tires and batteries cannot take into account the future costs of disposing of worn-out tires and dead batteries.
Without special fees and taxes, the market rent for a new, huge building cannot take into account the costs for widened streets, traffic congestion, auto-exhaust pollution, inadequate parking, additional required units of public transit, and the increased crime and police services necessitated by the thousands of additional people who will use the building on a daily basis.
The Market Price Cannot Take Into Account Present Benefits Or Detriments To Third Parties From A Sale At Today’s Market Price
The market price for a measles vaccine cannot take into account the benefits to third parties from a price so low that everyone is vaccinated and there is no epidemic, nor can it take into account the costs to third parties from a price so high that many people are not vaccinated and there is an epidemic.
The same applies to the market price for fire protection services and other goods and services whose wide-spread existence or non-existence materially impacts third parties.
The Market Price Cannot Take Into Account The Future Benefits Or Detriments To Third Parties From The Sale Of The Good Or Service At Today’s Market Price
The market price for job training cannot take into account the future cost to the economy, the government, and to the population at large from large numbers of untrained, unemployed and unemployable adults.
Without special taxes, the market price for cigarettes and alcohol cannot take into account the future cost to the economy, the government, employers, insurers and to the population at large from large numbers of people suffering from lung cancer, heart disease and alcoholism.
The Market Price Cannot Take Into Account Non-Economic Factors Arising From The Sale Of The Good Or Service At The Market Price
The market price for an old-growth redwood forest cannot include a cost component reflecting
- the irreplaceable nature of that forest;
- the immense recreational value of that forest;
- the unique value of that forest to future generations of citizens
- the historical value of that forest
- the ecological value of that forest
The market price of that forest can only consider the board-feet of the trees times today’s per-board-foot market price less the cost of harvesting plus the residual value of the land once the trees are gone.
If the Statue of Liberty were privately owned, its market price would only reflect the number of pounds of copper it contains times today’s per-pound price of copper less the costs of demolition plus the residual value of Bedloe’s Island.
The market price for the Statue of Liberty could not take into account the emotional damage and historical loss that its destruction would inflict on the present and future generations of Americans.
The Free Market Is Not A Silver Bullet
Since ancient times humans have longed for perfect, simple answers — the philosopher’s stone that would turn any metal into gold, the universal solvent that would dissolve any bond, the magic spell that would cure any ill, the silver bullet that would kill any foe.
Neither is the unregulated Free Market the universal tool that will automatically set every price at its mythical “perfect” value. There is nothing automatically perfect, magical, accurate or even correct about the market price for a product or service.
The Market Price Is Purely The Result Of A Power Struggle Between Two Parties. It Reflects Not The Slightest Element Of A Fair Or Unfair Price
The market price is nothing more and nothing less than the end result of the exercise of power. If the two parties are equally matched, then, in many cases, the price may be said to be reasonable or fair.
But the two parties are often far from evenly matched.
The market price paid to a farmer for a bushel of wheat in a bumper-crop year may be less than the cost of growing and harvesting the grain.
The market price paid to the drug company for a vial of insulin may be hugely in excess of the cost of manufacture plus a reasonable premium for overhead and profit.
To the extent that the power of the buyer and seller are not evenly matched, the resulting market price may be wildly higher than the cost of production plus a reasonable profit or horrendously lower than the costs of production and without the allocation of any profit amount to the seller at all.
The Market is less a system than it is a battlefield where the forces of the buyers and the sellers exercise their bargaining power. The final battle line that ends up being established between them is the price.
If the sellers’ forces are more numerous or better armed or are fighting on more advantageous terrain, the final battle line, the price, may be deep in the buyer’s territory.
Contrarily, if the buyer’s army is fitter, larger and more powerful than the seller’s, the buyers’ final advance may plunge deep into the sellers’ territory, a very low price indeed.
The Market Price Has Nothing To Do With Fairness
None of this is about a right, wrong, fair, unfair, proper, or accurate price. Fair has nothing to do with it.
The market price is determined solely by the relative power of the buyer and the seller and nothing more.
The market price has no moral component to it whatsoever.
The Market Price Cannot Automatically Take Into Account The Collateral Damage The Buyer-Seller Conflict Imposes On Third Parties
By its very nature, the bargaining-power battle between the buyers and the sellers cannot factor into their determination of the price any of the collateral damage that their final price imposes on the civilian third parties’ families, homes and villages.
— David Grace (www.DavidGraceAuthor.com)
