Mr. Moderate

The economy of the United States has long been described as “a free market economy.” However, the truth of the matter is that the United States has not had a true free market economy since sometime before the Civil War. To understand this claim of mine, we need to first define what it really means to have “a free market.” Wikipedia defines a free market this way:

A free market is a market in which property rights are voluntarily exchanged at a price arranged completely by the mutual consent of sellers and buyers. By definition, in a free market environment buyers and sellers do not coerce each other, in the sense that they obtain each other’s property without the use of physical force, threat of physical force, or fraud, nor is the transfer coerced by a third party.

In other words, for a market to be truly free, there must be a complete lack of fraud, force, or coercion. In libertarian philosophy, the only legitimate role of government is to prevent the use of fraud or coercion in obtaining agreements between parties. I agree with this, up to a point. The additional point I want to make is this one: without a large number of buyers and sellers, the market is naturally coercive and thus no market with only a small number of buyers and sellers can ever be characterized as “a free market.”

This is a major point of distinction between myself and the majority of libertarians with whom I have substantial sympathies. In general, libertarians refuse to recognize that “big is bad.” But, given the nature of competition and how prices are set, the fewer sellers there are in any given market, the more their offers will naturally tend towards inflating the price requested for any given good or service.

We recognize that the existence of only a single buyer or seller is clearly a monopoly, and few would argue that a monopoly is a good thing, at least for normal economic exchanges. Granted, the government creates some monopolies when it protects patent, copyright, and trademark rights. It is at least arguable that the economy is better off if we allow those monopolistic protections to exist for limited periods of time. (The key word here is “limited.”) Unregulated monopolies can be allowed when the particular thing monopolized is not a necessity to any other buyer or seller. If there are strong economic arguments in favor of creating a monopoly for the provision of an economic necessity, then it should be the obligation of government to provide adequate regulation to prevent the monopoly from taking too much advantage of its monopoly position.

The most market freedom you can have is when there are numerous producers and numerous buyers of the produced product. The best examples of that situation probably occur in media, particularly in the music industry. If a particular artist or group has sufficient talent, there are numerous paths to success since there are numerous different outlets for the musical product. But even in the music industry, there are still monopolistic choke points, as the bulk of music is contractually controlled by a very few huge music companies, such as Sony, Warner, and EMI. There are plenty of diverse producers of music, and plenty of diverse buyers of music. Thus, any lack of freedom in the music market is due to the tiny quantity of music distributors who control which artists and groups have access to the huge quantities of promotional dollars which are generated by the distributors by taking huge distribution fees out of the revenue earned by the artists and groups. It is still possible for groups to promote themselves to fame and fortune, but it isn’t very likely to happen. In that sense, the music market is not at all free.

But the above description of the music industry severs to illustrate that an otherwise free market can be made to be not free if any particular layer of distribution is subject to monopolistic or oligarchic control. For the market for any particular good or service to be truly free, then there must be a sufficient number of buyers and sellers for every transaction necessary to get the produced good or service from producer to ultimate consumer. A monopoly or oligarchy at any point in the path between producer and consumer makes the market to be not free.

I am all for a free market. But in a complex modern world, few markets are actually free. You might think that the market for single family homes was free since most homes are bought and sold by individual families. This is a classic case of huge numbers of buyers and sellers. But the market is actually controlled by the fact that almost all purchases of single family homes need to be financed, and that the financing is ultimately controlled by the policies of Fannie Mae and Freddie Mac, both of which were created by the government of the United States and both of which follow similar policies for mortgage lending. While it is still possible to shop around for alternative sources of mortgage money, finding anything which isn’t strictly tied to what Fannie Mae and Freddie Mac will accept will be extremely difficult. Thus, the market for single family homes is not free. It is controlled (or “monopolized”) by the policies established by the federal government’s designated proxies: Fannie Mae and Freddie Mac.

The ideal of a free market is to offer the most possible freedom to the individual consumers who ultimately make all of the purchases in that free market. Unfortunately, fraud and other forms of coercion tend to rear their ugly heads when the government decides to ignore what is actually going on in any given market. The down-side for consumers is huge cost increases for certain goods and services when the market is not subject to intense competition between either large numbers of competitors or at least a couple of competitors who are dedicated to gaining market share from one another. One example of this is the competition between Eagle Snacks and Frito Lay. Eagle Snacks had been a division of Anheuser-Busch, who certainly had enough money available to compete with Frito Lay, who is in turn a subsidiary of Pepsi. At the height of their competition, a one-pound package of snack food was available from a typical supermarket for right around a dollar. After Anheuser-Busch abandoned the Eagle Snacks brand and stopped competing with Frito Lay, the price of a one-pound package of snack food has shot up to around three to four dollars. And if you go down the potato chip aisle in your local supermarket, in spite of the large number of pseudo-brands you will see, somewhere between 80% and 100% of the packages will have labels on them indicating that they are being made by Frito Lay. It seems that, today, Frito Lay has a monopoly on potato chips and related snack foods, and the consumer is paying for that every time they buy anything on that aisle of their local supermarket.

It is very hard to have a free market in the context of a complex modern economy. The specialization inherent in a complex modern economy naturally tends to establish “choke points” where monopoly power can be exerted (such as at the distribution layer of the music industry). And in a variation on Murphy’s law, it seems that any monopoly that can exist, will exist. If we really want a free market economy, then we need to combat the formation of monopolies and oligopolies to the maximum extent practicable. And in those cases where a good case can be made for the existence of a monopoly, then the government must step in and regulate the monopoly in order to protect the consumer. Otherwise, you will get all of the bad effects of monopoly power, up to and including the eventual total loss of individual freedom.