Counter-Argument

[Fox McCloud]

Ok, normally I'd want to (and enjoy) pick this apart-but right now, I don't really have the time to; I figure I'd let you guys give a whack at this:

Many Conservatives and Libertarians often talk of the Free Market as if it is the solution to all of our economic problems. Is it really, or are there caveats to this system that doom it to fail?

What is the free market? Well, it is a market condition where sellers and buyers "find agreement" on what the price of a good should be, usually through the pressures of supply and demand. The market is not influenced by outside forces, such as government or coercion.

I'll start off the discussion with an argument against the "Free Market."

This market condition is purely theoretical. It sounds good on paper. Supply and demand forces keep prices in check, and firms are able to easily enter and leave the market as they please.

There is one element, however, that this model fails to control: Greed.

Imagine that there is a small market of 10 firms that make paper cups. Paper cups are basic. Just paper glued to itself in a way so that it holds a liquid.

Raw paper costs 2 credits per pound. Assume that the cups can be made with no wasted raw paper. It takes 1 credit worth of labor and 1 credit worth of glue to create 1 pound of cups. Customers gladly pay 8 credits per pound for the cups, leaving a profit of 4 credits per pound.

Since these cups are cheap to make, other firms can easily enter the market and compete.

Let's say Firm 5 develops a new cup with a coating of wax on the inside to prevent the cup from becoming soggy and falling apart. The wax adds 1 extra credit in Wax and 1 extra credit in labor to the cost per pound of manufacture.

Firm 5 sells the new cups for 12 credits per pound, with a 6 credit profit. Consumers love the new product and gladly pay 12 credits for it, leaving the un-waxed cups alone. The other firms scramble to develop their own protected cups.

So far so good. The market is working fine.

But, Firm 7 finds out how to squeeze out the extra credit in labor cost, lowering the total cost of production. Firm 7's CEO wants more money, and devises a plan to stack the market in his favor. So, Firm 7 undercuts the rest of the market and sells the waxed cups at 6 credits/lb for a 1 credit/lb profit. It costs the other firms 6 credits/lb to make their cups, so lowering to that price point no longer allows a profit since these firms have yet to find out how to reduce the labor cost. They best they can do is 7 credits/lb.

Customers flock to Firm 7.

Firm 7 now has a 70% market share.

Firm 3 has started to diversify into plastic forks.

Firm 7 makes a hostile bid to buy out Firm 3. The shareholders agree. Since there is no government, the merger happens without a pause.

Firm 7 shares it's secret with firm 3. Meanwhile, Firm 3 starts doing very well in the plastic fork market.

Firms 2, 4, and 10 find the labor secret and can now sell at six credits/lb too.

Using the Forks as a weapon, Firm 7 starts to sell the cups for 4 credits/lb at a loss of 2 credits/lb, shored up by a 6 credits/lb profit from the forks. This is called a loss-lead.

The other firms panic. Firms 1, 5, and 6 combine assets and merge. Their combined diversities allow the new firm to profit well enough to be safe from a takeover.

Firm 7 acquires Firms 2, 4, and 10.

The remaining two firms quickly merge to avoid the same fate.

Now there are only three firms left, with a high barrier to entry as the price war and conglomeration has made the paper cup industry unattractive to new firms.

Firm 7 controls the market with an 75% market share, with Firm 1024 at 15% and firm 89 with 10%.

We now have an oligopoly. These firms, especially Firm 7, coerce others out of the market and keep prices so low that new firms can not enter. Remember, the free market price for waxed cups is 8 credits/lb. These firms are selling them for 4 credits/lb. Firm 7 became close to becoming a monopoly. The free market no longer exists in this industry.

Greed ruined this industry. Oligopoly does not a free market make.

This does happen in real-life. Upon deregulation, these industries became heavily conglomerated: Railroads, Telephone Companies, Cable Companies, Software, Electronics, Airlines, Auto Makers, The Media, and Banks.

To maintain fair practices, regulation must occur. There must be rules to play by or else a very small group of firms dominate an industry.

What if one of these firms started making cups out of a toxic paper that cost only 1 credit/lb? Regulations must also exist to protect the consumer from harm.

Anyone else have an example of free market failure? Pro-free market and want to defend it? Let's discuss!

 

[Zavoi]

We now have an oligopoly. These firms, especially Firm 7, coerce others out of the market and keep prices so low that new firms can not enter. Remember, the free market price for waxed cups is 8 credits/lb. These firms are selling them for 4 credits/lb. Firm 7 became close to becoming a monopoly. The free market no longer exists in this industry.

Greed ruined this industry. Oligopoly does not a free market make.

One thing to remember is that the threat of competition can often be as effective as actual competition. In this example, who exactly is losing out because of Firm 7's practices? Certainly not the consumers, who now can buy cheap paper cups. And the only reason why Firm 7 is able to dominate so much of the market is because their prices are so low. If they try to take advantage of their dominance by jacking up prices, then the barrier to entry will be gone and other companies can start making cheaper paper cups.

But also, as far as the plastic forks are concerned, those sold by Firm 7 will be rather more expensive than normal because they are being used to offset the loss from the paper cups, so there is nothing preventing them from facing competition in this market.

What if one of these firms started making cups out of a toxic paper that cost only 1 credit/lb? Regulations must also exist to protect the consumer from harm.

This person seems to be confusing the "free market" with "anarchy." No free-market advocate would argue that a merchant selling poisoned food while representing it as "food" has not committed fraud - the same principle applies here. This type of regulation is not incompatible with the free market. Of course, from this it does not follow that it is necessary to have a government bureaucracy to approve every item that is sold.

 

[scooter]

This one is easy to debunk. In the end the consumers are getting a product for the cheapest price possible. According to the writer, cheaper than what the free market determined when the oligopoly did not exist. How this is a problem is beyond me.

As for the regulations on health, I've always said that it is fine for government to regulate OVER the markets. They just should not get involved IN the markets.

 

[Acala]

agree

This one is easy to debunk. In the end the consumers are getting a product for the cheapest price possible. According to the writer, cheaper than what the free market determined when the oligopoly did not exist. How this is a problem is beyond me..

Exactly! It is a windfall for consumers. The followup to this argument usually is that once the company has a monopoly, they raise prices and start reaping huge profits at will. Of course as soon as they raise their profit margin, new capital pours into that market as competition, attracted by the profit, and prices are driven down again. But, the argument usually goes, if the capital costs are so huge to get started that nobody else is willing to invest only to have their prices undercut as soon as they open their doors, the monopoly is entrenched. This has never been known to actually happen, but I suppose it is possible in theory for a brief moment in time before the market changes and new technologies change the dynamics of competition.

As for the regulations on health, I've always said that it is fine for government to regulate OVER the markets. They just should not get involved IN the markets.

What does this mean?

 

[Fox McCloud]

thanks for little tid-bits...anyone else want to take a crack?

*bumpity-bump-bump*

 

[forsmant]

This one is easy to debunk. In the end the consumers are getting a product for the cheapest price possible. According to the writer, cheaper than what the free market determined when the oligopoly did not exist. How this is a problem is beyond me.

As for the regulations on health, I've always said that it is fine for government to regulate OVER the markets. They just should not get involved IN the markets.

+1 What's the problem in this example?

 

[Truth Warrior]

Government controlled, managed and regulated economies do NOT work as well as "free markets".

Arrogant central economic planning systems efforts ALWAYS suck, distort and eventually fail. ala USSR, China, etc., etc., etc.

This same fate also awaits TPTB NWO.

The damage will be truly tragic, devastating, horrific and avoidable.<IMHO>

 

[hypnagogue]

This example also seems to assume that there is no competition in the plastic forks market. If the 7 firm is diverting profits from it's fork sales to it's cups production, than they are vulnerable to being undercut in the fork market which would eventually remove their ability to subsidize their cup business. When that occurs, the cup prices will increase and allow new competitors to enter the cup market.

The only way for a company to survive in a Free Market is to produce more value than you consume. You can shift things around somewhat, but only temporarily.

 

[CUnknown]

I think that guy was saying it was a problem for the workers?

To maintain fair practices, regulation must occur.

Heh, it is funny that he goes through all of that and then fails to explain the problem.
Or perhaps he thinks that oligarchy in and of itself is bad?

There must be rules to play by or else a very small group of firms dominate an industry.

I'm not sure why he thinks this, seeing as the consumer benefits.

I admit I am liberal in many ways, so I do sort of have an issue with workers being exploited. Although, I am sure you will say that the workers don't have to work there, or could form a union to protect themselves -- are you guys against unions? I think that unions are important for free markets. I'm not a big fan of government intervention, though. The unions shouldn't get any breaks from the government (other than being allowed to exist -- which I think is included in the right to peacefully assemble), but if the workers can organize themselves so that they have an advantage, what is wrong with that? It seems to me that they would be behaving exactly like the companies in that case -- consolidate for mutual benefit.

In fact, I'd go so far as to say that unions would be more powerful with a smaller government -- it's always the owners who beg for strike-breaking police when the workers form strong picket lines. Without these strike-breakers, it would be interesting to see exactly how powerful unions became, and what the balance of power eventually ended up being. I think that many liberals believe that the more powerful government is, the more powerful the worker's movement will be, but that is complete BS. In Communist China, for example, there aren't any unions -- the workers are treated like dogs.

So, I am all down for a free market, as long as the workers and companies both have equal rights to consolidate.

 

[Truth Warrior]

I think that guy was saying it was a problem for the workers?

Heh, it is funny that he goes through all of that and then fails to explain the problem.
Or perhaps he thinks that oligarchy in and of itself is bad?


I'm not sure why he thinks this, seeing as the consumer benefits.

I admit I am liberal in many ways, so I do sort of have an issue with workers being exploited. Although, I am sure you will say that the workers don't have to work there, or could form a union to protect themselves -- are you guys against unions? I think that unions are important for free markets. I'm not a big fan of government intervention, though. The unions shouldn't get any breaks from the government (other than being allowed to exist -- which I think is included in the right to peacefully assemble), but if the workers can organize themselves so that they have an advantage, what is wrong with that? It seems to me that they would be behaving exactly like the companies in that case -- consolidate for mutual benefit.

In fact, I'd go so far as to say that unions would be more powerful with a smaller government -- it's always the owners who beg for strike-breaking police when the workers form strong picket lines. Without these strike-breakers, it would be interesting to see exactly how powerful unions became, and what the balance of power eventually ended up being.

So, I am all down for a free market, as long as the workers and companies both have equal rights to consolidate.

In a "free market" who's to stop anything voluntary?

 

[buffalokid777]

As for the regulations on health, I've always said that it is fine for government to regulate OVER the markets. They just should not get involved IN the markets.

Thanks scooter, you just gave me the words that I have been trying to find but have been unable to.......to the anti regulation folks......

Regulation for safety=good......

Regulation for price=VERY BAD.......

Some people are so rigid they think any kind of regulation is bad.......even if it protects consumers from evil business practices such as a company poisioning its customers.......yes a company poisioning it's customers doesn't involve coercion.....but it usually does include duplicity........which makes me conclude duplicity has no place in a free market based on the austrian theories that are already presented........because duplicity hides the truth and when that occurs the market is no longer free as lies have become part of the equation......lies=manipulation in a market........