We often here the term “market failure” or “a failure in the market” when an adversity strikes the economy. It is used to decry how markets can’t actually function on their own without the government stepping in and doing something to “fix” the problem or regulate a specific sector.
The term is used so often and by so many people in the mass media and in general that hardly anyone thinks about it. It seems to be an all to accepted opinion that markets cannot function correctly without some form of government intervention. After all, what can a consumer do to protect himself from those greedy “robber barons” in corporations.
Don’t Free Markets Lead to Monopolies?
To begin, it would make sense to understand just what the term “free market” actually means. Some conjure up visions of little mustached men in tuxedos and top hats running over the countryside trying to play a “fast one” on the unsuspecting public. The word “monopoly” has been used time and time again to denounce free markets as detractors claim that a monopoly is inevitable if markets aren’t regulated by wise government bureaucrats. To them, a monopoly and a free market are synonymous. Nothing could be further from the truth. Actually, it’s quite the opposite.
The phenomenon known as a monopoly cannot happen in a real free market. A free market is controlled by competition. Only through government involvement in the market does monopoly come into existence. To find examples of this look no further than your cable TV bill. The cable TV companies, through government lobbying, have carved out for themselves little fiefdoms where they have no competition from other cable TV providers. If the consumer could choose between company A or B or C or even new company D then prices and services would be cheaper and better. Regulation is not a concept of your concerned representatives in government, rather from big business itself. It is an invention of big business to squelch competition in a certain sector. The heavy burden of regulatory compliance is too much for a small business or start up business to bare, in many cases. Big business can absorb the cost of regulation much easier than a small business. Your representative in government is merely the middle man and facilitates the special interest in a specific industry or economic sector through the convoluted tax code. It is the tax code and Federal Register (where all federal regulation is cataloged) where congress wields it’s power and influence. By granting favors for special interest through a tax break or burden a competitor with regulation or even higher taxes (as Warren Buffet advocates), the congressman or woman repays the campaign contributor. Don’t hold your breath for any meaningful “tax reform” in your lifetime. These legalized gangsters in congress are not going to limit their power voluntarily. When discussion of tax reform becomes popular again in the media, they are simply discussing how to rearrange the deck chairs on the Titanic. The form changes but the end effect is always the same.
Even organized labor through regulation and labor laws has certain monopolistic capabilities. For one, the minimum wage law is an invention of organized labor to keep low skilled and low paid workers out of the market. Thus, reducing competition and raising unemployment for those who lack the job skills to command a higher wage. An entry level wage was never intended to be enough to live on. It gives the ability for younger workers, who have very little job skills, to enter the work force, attain the needed skills and advance up the ladder. If a worker with $4 an hour skills wants to find a job today he would have to work on the black market or depend on government handouts. No business would hire a worker with $4 an hour skills at the current minimum wage. The business would suffer a loss and become unprofitable. This is even more burdensome with young minorities. It is minorities who suffer the most with minimum wage laws.
Those who are already established in the market place also wield monopolistic powers through regulation and licensing laws. In this country it is illegal to open a dog grooming business without a groomer’s license. Why does someone even need a license to groom a dog? It again, keeps new competitors from starting up. In our big cities taxi cab drivers are required to buy a cab badge to operate their own taxi cab. In the metro New York area such a taxi cab badge costs upward of a million dollars. If the cab driver doesn’t own his own cab to require the badge, then just driver’s license fees and testing will cost upwards of $600. It costs less than $200 on average to operate a tractor trailer with hazard material across the whole country! Obviously, there is no free market in the New York City taxi business. This is public/private monopoly at its worst as is reflected in the cab rates. Competition would easily lower these rates and put more cabs on the streets to benefit customers.
The Progressive Era, was all along influenced by big business. Historian Gabriel Kolko is probably the foremost researcher in this area. It was his work that revealed the intertwining of big business and government to stay off the negative wrangling of the Populists in the later 19th century. The marriage of corporation and government was led by the House of Morgan and ended up with corporate interest ahead of of government interest. The break up of Morgan competitor John D. Rockefeller’s Standard Oil was a product of this marriage. Economists call this “corporatism” or as Kolko called it, “political capitalism”. Today it is better known as “crony capitalism”. This term is every bit as misleading as “market failure” as it has very little to do with capitalism. Corporatism is more related to fascism than capitalism which is socialistic in it’s core. It was Mises who reminded us that being pro free market doesn’t necessarily mean being pro business. The free market and business are two different things.
So What is the Free Market?
Now we see what a free market is not. It certainly isn’t the cooperation of government and big business. Corporatism is a quasi form of fascism. Unlike true fascism, the American form does allow companies to control some of the inputs and outputs of their operations. In fascist Italy and Germany the companies were allowed by the State to own their businesses but had no say as to how they would run them. They were merely business managers of their own property on behalf of the State. In America, the business owner does have the autonomy to control the company but with certain governmental stipulations. The wages are managed by government, the safety of the work force is managed by government and even hiring standards are regulated by government. The quality of goods are controlled by regulatory agencies as well as the prices of certain goods. How products are advertised is regulated and also their transportation. All facets of American business must in some way be controlled or regulated by the State’s regulatory agencies.
A true free market has none of this. A free market can be easier understood if the word “market” were substituted with “society”. A society is a collection of individuals. The market is the term used when these individuals trade and exchange with each other. If the exchange between people in a society is controlled then that society certainly isn’t free. Freedom defined means an absence of control or restraint. It is through governmental regimentation and regulation that controls are put on the free exchange of individuals. Two people, an employer and employee cannot agree to what wages are to be paid. The government interferes with that decision. How a company wishes to advertise it’s products is interfered with. Even how people wish to store their money. The banking industry is one of the most regulated and most “crony” of all the sectors in our economy. Usually, in the economy, where there is the heaviest of regulation one would find the most cronyism. Both regulator and big business benefit from the heaviest of intervention in the market. To the loss of the consumer. Where capitalism was intended to be a win-win for both business and consumer, intervention has turned the process into “I win mostly and you win sometime”.
The public knows there’s something wrong in the economy but through efficient public schooling, they can’t quite put their finger on it and call for more intervention. When I say “efficient” I mean just that. Public education has done a fabulous job of keeping America a hive of worker bees and not much more. Government teaches the public from K-12 ( and even higher education) that this country is great because of government. Look at how great the government is. You can’t do anything without the government there to protect you, help you, feed you, educate you and see that you find your place in the government’s designed world. Why, without the government you would shrivel up and blow away.
The words of President Obama ring in my head,
“If you were successful, somebody along the line gave you some help. There was a great teacher somewhere in your life. Somebody helped to create this unbelievable American system that we have that allowed you to thrive. Somebody invested in roads and bridges. If you’ve got a business — you didn’t build that. Somebody else made that happen. The Internet didn’t get invented on its own. Government research created the Internet so that all the companies could make money off the Internet.”
Now, to be clear, both political parties are complicit in this.No one party is “for the people”. This a big fat lie. Those in government are for those who help them to the top. I suppose those cronies are people so I will give them a half truth on that one.
When you hear a pundit talk about “market failure” it inevitably means just the opposite. Governmental failure. As F.A. Hayek pointed out in his book, “Road to Serfdom” one intervention inevitably leads to another. The unintended consequences of each market intervention are economic distortions, which generate further interventions to correct them. That interventionist dynamic leads society down the road to serfdom.
In reality, there is no such thing in capitalism as a market failure. The economy in a capitalistic society is disjointed enough that a bad decision or miscalculation by one or even several entrepreneurs will not effect everyone else. If company A goes into bankruptcy, the entire economy will not be effected. If GM or Chrysler had faded away then the automotive sector may have suffered a set back. Not the entire population by government obligating every tax payer to bailout these mismanaged companies. Anyway, Ford would have had been in a pretty good place to profit from the available resources and capital that the other two had misused. American taxpayers wouldn’t be on the hook for $50,000 for every Chevy Volt produced and sold. The Soviet economy could, on the other hand, be considered a market failure in a sense. Although there are no “markets” under socialism, the collective aspect of the philosophy led to a system wide collapse. Which brings us to the point, we saw this “system failure” Soviet style, when the housing boom went bust. Because of heavy government intervention the whole economy felt the negative effects of the financial sector’s involvement with corporatism. Here we saw cronies privatize the gains but socialize the losses.
The term is a loaded derogatory statement against the market place. We who advocate free markets should never refer to an economic miscalculation as a market failure. It is manipulative and only leads the public into more confusion of what free markets really are. This plays right into the hands of the State apparatus.
In closing I would like to leave you with a statement from Ludwig von Mises in his book, “Human Action“,
“Many people complain today about the lack of creative statesmanship. However, under the predominance of interventionist ideas, a political career is open only to men who identify themselves with the interests of a pressure group.”
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