III. Do Free Markets Exist?
In order to describe a market, both the participants and goods available for exchange must be defined. These two definitions form the scope of a market. In this manner, the environment of trade can be partitioned or subdivided by utilizing subsets of the total possible participants and goods, services, or information.
The most common partitioning scheme is the subdivision of markets by country, as national law establishes a clear distinction between various subsets of participants and goods. In such an example, the components number in the millions and the sheer magnitude of variables and interactions appears almost impossible to analyze. However, this is only an abstraction. The market could have been partitioned in any number of ways―either by expanding the scope to a global, galaxial, or universal markets, or by further restricting the scope to states, cities, and localities. Likewise, the scope of the market can be defined to include only certain subset of goods, services, or information. Continuing in this vein, one arrives at the most basic market―the action of trade between a single buyer and a single seller exchanging a single item.
Thus, to answer the question of whether free markets exist, the proper scope need be attributed to the analysis. By separating the environment of trade into its constituent parts, it is possible to find examples of free markets at various levels of abstraction.
For the simplest market, a single buyer and a single seller exchanging a single commodity, an example would be a teenager's weekly allowance in exchange for mowing the lawn. For a local market, an example would be a neighborhood garage sale. In both cases, all parties voluntary exchange goods or services in the absence of coercion or physical force, even if the parent is persuasive or the neighbor a convincing salesperson. At the national level, citizens of a country are free to trade paper currency for hard currency and vice versa. At the global level, language is arguable the most sucessfuly free market in human history: citizens of the world are free to voluntarily exchange information, ideas, alphabets, and the definitions of words which form language itself.
Furthermore, as the environment of trade is the sum action of its the individiuals and goods which participate in trade, each exchange forms a sort of sub-market in and of itself. Any such sub-markets which exist in the absence of physical force, compulsion, or coercion can properly be labeled a free market. Despite complicated (and often regulated) supply chains, as all transactions ultimately end at an individual consumer, the majority of worldwide exchange takes place in such sub-markets.
Thus, free markets not only exist, they are prevalent in modern economies.
9 Comments
Farhad2000I disagree that free markets are highly prevalent in modern economies.
One tenant of a completely free market is the lack of asymmetrical information, that both the buyer and seller are aware of all other buyers and sellers.
In your example, the parent would know of all other kids competing for money to mow the lawn, the kid is aware of all parents seeking his services and at what price point.
This is just a small local example, this can be taken further on international levels, where it gets even more complicated as we factor in protectionist trade policy, trade agreements, trade restrictions, trade quotas and so on.
For example in the 70s, the Japanese auto industry was decimating the local auto industry in the US, the Big 3 lobbied the government to do something about it. Through negotiations the Japanese agreed to a voluntary quota system, they would import only a limited amount of their more efficient cars, this drove up their price artificially in the market, allowing them to gain alot of profit by re-branding their cars for a luxury car market known today as the Lexus.
The Big 3 gained via continued dominion of the US auto market, the Japanese gained through a new luxury auto market, while the consumer lost because market efficiency was not there, the cheapest model cars made in Japan were not available to the US consumer.
International trade fails free market ideals in many ways, since a lot of first world nations do not allow third world nations into their markets especially in terms of agriculture. In the 1920s to 1950s, there was highly restrictive trade as various international economics locked off their markets to rebuild their economics, this took over 70 years to slowly unravel via the GATT and the emergence of the WTO. However there are a lot of barriers, the G8 also have larger influence and bargaining strength over third world nations, they also understand WTO legalese better.
Now think of something that holds a large control of the market like Wallmart in the retail industry, in some areas they are the sole superstore thus this is already not a free market, everyone is forced to purchase their products at one place. This doesn't stop the seller to change their price because the consumer is dependent. This is where we can say no free market exists due to regional monopoly.
The closest we come to a free market is the stock market but only on price, all sellers and buyers know the price however not everyone knows profit forecasts, insider information, business conditions, corporate structure and so on.
imstellar28 says...^Farhad2000:
I disagree that free markets are highly prevalent in modern economies.
One tenant of a completely free market is the lack of asymmetrical information, that both the buyer and seller are aware of all other buyers and sellers.
Do you agree with the definition of a free market I gave in section I? I do not think a free market requires informational symmetry. As I defined, the only distinction is the restriction on the use of physical force.
In your example, the parent would know of all other kids competing for money to mow the lawn, the kid is aware of all parents seeking his services and at what price point.
This is just a small local example, this can be taken further on international levels, where it gets even more complicated as we factor in protectionist trade policy, trade agreements, trade restrictions, trade quotas and so on.
Do you think my example is invalid? I admit things get complicated as you increase the scope, but increased complication does not nullify the underlying principles.
As far as your examples:
1. Japan Auto industry: in your examples you are demonstrating how restrictions are harmful to the consumer. At this scope, it is not a free market, but if you reduce to scope you find free markets. The trade from manufacturer to dealer might not be free, but the trade from dealer to consumer is relatively free. and the used sale trades from consumer to consumer are 100% free.
2. International agriculture: again it sounds like you are demonstrating how restrictions are negative. Worldwide, if you reduce the scope of the market to only agriculture, the vast percentage of exchange occurs in the absence of force (it is a free market). Whether you are in a tribe in afrika or a suburb in the US, the daily or weekly exchanges you make to obtain food occur in a free market. When you buy food at a supermarket there is no physical force applied--even if there is physical force experienced at the level of the supermarket and its supplier.
3. Walmart: same argument here, when you walk into walmart and pick up an item and give the cashier money for it--no physical force is experienced (save, maybe for sales tax which does not exist in all states). The market which occurs between the cashiers and the owners however, is not free as there are minimum wage laws, overtime rules, etc.
This is what I mean by expanding and reducing the scope of markets to conduct analysis. While the overall market in all three of your examples are not free, the vast majority of the sub-markets which they are comprised of, are.
Farhad2000Yes this is true when we discuss these ideas conceptually but what I wanted to show is that its impossible for a free market to arise locally or internationally.
imstellar28 says...>> ^Farhad2000:
Yes this is true when we discuss these ideas conceptually but what I wanted to show is that its impossible for a free market to arise locally or internationally.
I don't think it is a valid conclusion to state that free markets are impossible by providing four examples of markets with some non-free components. Clearly, there are tens of thousands of such examples, but for me to prove that free markets exist, I need but one single example to disprove your statement that they are impossible. I found examples of free markets in all four of your examples--do you disagree? When you walk into the supermarket and buy an orange, what physical force, compulsion, or coercion exists in the exchange between you and the cashier? You cannot find a single example of exchange of trade that occurs in the absence of physical force, coercion, or compulsion? That is what you require when you make the statement "free markets don't exist" or "free markets are impossible".
And if you require at an entire market must be free for free markets to exist, then you assert that in the entire universe (or local, nation, etc.) if even a single person uses force on another in the action of trade the entire system of non-free. This is not only impractical, but impossible to ever prove or disprove without omniscience. This is why I am showing that a common error in failing to identify free markets is an overly-expanded scope.
Farhad2000But again we are working on normative descriptions that have no basis in reality, they are wrong even when they are right because we are trying to describe something theoretically.
Market conditions are often so complex that no free markets can exist, because coercion forces don't always need to be of a physical nature they can be of a persuasive nature, for example advertising, branding and even packaging.
"When you walk into the supermarket and buy an orange, what physical force, compulsion, or coercion exists in the exchange between you and the cashier?"
Nothing exists on a singular level on that transaction but as we increase the scope and go behind the supply chains on a regional or national level we will find inefficiencies that will redefine that as a non-free market, for example government subsidies to Florida which convert back into higher price points consumers need to pay over cheaper and better products from the third world, protectionist polices and so on.
imstellar28 says...^I agree with you, there are lots of regulations and price controls in effect on oranges.
However, in doing an economic analysis one has to break down the market into its constituent parts or else the sheer magnitude of transactions and variables is impossible to work with. When you isolate trade environments into sub-markets, really simple markets emerge which are actually rather easy to analyze.
One interesting thing that is revealed through this process is that free-markets do exist (as you just confirmed in my supermarket example), and comprise a large part of markets which at various levels exist with a moderate or even high degree of regulation. As in the case with the oranges. The number of people walking into supermarkets and buying oranges must be in the millions, but the number of exchanges between any given supermarket and its suppliers on any given day could probably be counted on one hand. Thus, the analysis of regulation is can be greatly simplified because it occurs primarily in a limited volume of exchange.
Furthermore, if we define sub-markets at each level of the supply chain, and the majority of transactions occur at the consumer level, we find that the majority of exchange in a highly regulated market is in fact, unregulated.
dgandhi^However, in doing an economic analysis one has to break down the market into its constituent parts or else the sheer magnitude of transactions and variables is impossible to work with.
While this is a necessary consequence of using capitalism, since it structurally obscures the minutia, and consequences of transactions, that does not mean that the models of these sub systems are truly representative of the nature of the interactions in situ.
Remove the hit man from your model of interactions of the mob, and it's all "free market".
imstellar28 says...^dgandhi:
that does not mean that the models of these sub systems are truly representative of the nature of the interactions in situ.
I am forced to conclude you do not understand what a market is. The sub-markets (systems) are not representative of the overall market, they are the overall market. Take them away and the market does not exist.
dgandhi>> ^imstellar28:
The sub-markets (systems) are not representative of the overall market, they are the overall market. Take them away and the market does not exist.
If you leave things out of your sub-markets, or you ignore the manner in which your sub-markets interact, simply adding disparate analyses of sub-markets will not provide a coherent picture of the whole market, please reconsider my mob example.
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