The term “free market” is one of the more widely misunderstood and misused terms in American politics. Republicans in general and Tea Partiers in particular have loudly and consistently proclaimed their unwavering devotion to the concept of free markets. They insist that things would be better for all of us if government simply “got out of the way of business”. Let the market work its magic. They should reconsider their position.
“Free market” is a political term, not an economic one. It implies a market free of government regulation. It is also a relative term. Markets completely free of regulation are nearly non-existent, but some markets are subject to much less regulation than others. Markets for most agricultural commodities, for example, are far less regulated than public utility markets.
Government regulates for two primary reasons: first, to protect the public health and welfare and second, to promote competition within markets. The first of these goals is easier to understand. The Government imposes child labor laws and regulations preventing businesses from locating a hog farm in the middle of a residential neighborhood because we can all agree that these are good things to do. It requires businesses that process and handle toxic waste to possess the necessary skills and facilities because public safety is at stake.
The goal of promoting competition is more complicated. The problem is that free markets are generally not competitive markets. In most markets, stronger competitors engage in practices aimed at reducing or eliminating competition unless regulations are imposed to prevent them from doing so: they acquire or merge with other significant competitors, they prevent suppliers from selling to weaker competitors, threatening to discontinue their own purchases if the supplier continues to sell to those competitors, they engage in predatory pricing practices intended to drive weaker competitors out of business. In under-regulated markets there is typically an imbalance between the negotiating powers of buyers and sellers, with buyers at a distinct disadvantage. The net result is that, in under-regulated markets, consumers pay prices that are higher than those that could be charged in a more competitive market and the economy suffers as smaller firms are driven out of business and jobs are lost.
Americans should be very familiar with the abuses that occur when markets are not competitive. In a competitive market, OPEC could not artificially inflate the price of crude oil by restricting production, Americans would not pay higher prices than the rest of the world for pharmaceuticals because Medicare is not permitted to negotiate with manufacturers, mutual fund sellers could not tout the shares of one fund over others without disclosing to potential buyers that they receive a higher commission on the recommended fund, health insurance companies would be prohibited from colluding with each other in setting prices, Goldman Sachs would have to disclose to buyers of certain mortgage bonds that the bonds were designed to fail so that a hedge fund manager could make tens of millions or even hundreds of millions of dollars by betting against them, etc., etc.
Like children, large corporations require limits. They are not immoral as claimed by some liberal elements of our society — they are amoral. Morality is not a significant factor in their decision-making process and, if it is present at all, it is usually trumped by economic considerations. Businesses pursue their own interests with zeal. They will bend any law, and occasionally break laws, in pursuit of those interests – even at the expense of public health and welfare. It is up to government to establish and enforce sensible boundaries within which businesses may operate. This is how the system works and indeed it is how the system must work.
When business catastrophes occur it is often as much a result of regulatory failure as it is a failure of business. Such was the case with the financial crisis of 2008. Over the preceding twenty-eight years Congress had systematically destroyed the regulatory system designed to prevent financial crises such as the ’08 debacle. At the same time they failed to reign-in new industry practices (i.e. derivative trading) that posed serious threats to the financial system.
Another example of regulatory failure occurred in the recent case of the Massey Mining disaster in West Virginia where twenty-nine miners died. Massey found it less expensive to pay fines rather than implement the safety measures demanded by regulators. While the actions of Massey were unconscionable — and possibly criminal, the regulator’s failure to act by shutting-down the mine was equally unforgivable
The regulatory pendulum has swung much too far in favor of big business. Politicians use the free market anthem to mask an underlying pro big business agenda. They want to protect the interests of the people and corporations that finance their campaigns. Democrats generally do a better job of disguising their efforts in this regard but many of them are just as guilty as their Republican colleagues.
The Tea Party’s call for free markets reveals a complete lack of understanding of markets and how they work. What they should be demanding are competitive markets.
I feel the need to point out a false premise in this post. You say that members of the Tea Party, and Republicans, want unregulated markets. This is absolutely false.
Conservatives, like myself, believe that regulation to a certain extent serves a purpose and agree that the government does play a role in providing oversight of certain industries. The size and scope of these regulations is what “free market” advocates most commonly debate.
By using the Massey Mining Disaster as an example of the disasters caused by under-regulating businesses is very deceiving. Events like this, and the oil spill debacle, are often caused, not by a lack of regulation, but a lack of enforcement. I don’t mean to excuse the mining company from any blame but only to point out that your admission of regulatory failures further demonstrates my point.
Our federal government, much like private industry, is overburden by the costs of too much regulation (ObamaCare’s impact on small businesses is a prime example). Although I agree that regulation is important, we would be better served by reforming and reducing the large number of regulations already put in place.
Perhaps you would be best served by reviewing the large number of frivolous regulations proposed and instituted by this administration (and the Bush administration). Maybe you will then see that is my generation, and our children, that will be burdened with these costs. The Tea Party people you like to criticize recognize that the reach of the federal government continues to expand and opening the door to increased regulation will only exasperate our country’s problems.