Why the free market fails

"complete and transparent information empowers people to make better decisions for themselves"

There are some interesting debates on social media between people with different believes around the role of government in the economy. At the extremes there are those who think that the government should control wealth distribution and consequently the core of economic decisions impacting our everyday lives, and those who think that the government should have little to no role and that free market dynamics will alone result in an optimal balance of resources in society.

History teaches us that the former, when attempted, miserably failed not only to provide for a wealthy society but even to guarantee human rights such as freedom of speech. It is also true that the free market economy has failed to resolve for evident extremes and that in advanced countries like the USA and Western Europe, many people struggle to make a living while others (a small minority) accumulate insane amounts of wealth.

In this blog post I will share some thoughts about the reasons why the free market economy has so far failed to produce a society that sustainably provides for wealth for all it's members. To do so I will go back to basics, to the ABC of the economic theories we are thought at school (and often tend to forget).

A free market economy has 5 characteristics, which are summarized in this image:


The first characteristic is Private Property: resources are owned and controlled by individuals, not the government. This includes land, tools, goods, food and pretty much anything else. Note that the resources are not only owned by individuals, they are also controlled by individuals, which implies that the regulatory system in a free market economy is minimal.
The second characteristic is Perfect Competition: people make economic decisions for themselves, competing with each other, with the intention of maximizing their profit.
The third characteristic is Freedom: people are free to start a business, to access information, to purchase and dispose of whatever resources they need and everyone values this freedom above all else.
The fourth characteristic is the Rationality of the Actors: this means that people make economic decisions based on the basic principles of demand and supply. People will not overpay or underpay for a good or service, since the fair price will always be determined by the balance of supply and demand.
Lastly, the fifth characteristic is the For Profit motivation of people's economic decisions. When people make a decision the key motivation that prompts that decision is the maximization of their profit.
If we stop for a second and think at these 5 characteristics, we can immediately see how none of them is always completely present in any society. Can we realistically expect everyone to be 100% rational in every decision made, or to fully understand the supply-demand dynamics that determine the fair price of a good or service? Of course not. This means that the perfect free-market economy is a mere theory.
A society that aspires to the free market economy model, can however structure itself in a way that achieves it as closely as possible.
The blind spots are however many and a critical area of failure is found in relation to the Perfect Competition characteristic. As it happens with to free market economy, micro-economics 1.0.1 teaches us that also Perfect Competition has a number of characteristics, which are summarized in this graphic:
Also in this case it's obvious that we are dealing with a theoretical world where products are homogeneous, there are no barriers to entry and exit in business, there are no transportation costs and so forth. A characteristic that stands out is Perfect knowledge of Prices and Technology. In other words, for people to make rational decisions in a free market economy and consequently behave rationally in a way that maximizes their profit, they need to have complete and transparent information.
Let's make an example: imagine you went to the supermarket to buy honey crisp apples and the price was $2,99 for a pound. You may guess that to be a fair price and buy them or not based on some assumptions.
Now, imagine you also had these additional data points available to you at time of purchase:
- The apples where sourced from the farmer at $0.10 per pound.
- The distributor marked up the price to $0.20 per pound and lets the retailers sell the apples under their own brand
- The transportation cost per 1 pound of apples is $0.15.
- Consequently you know that the cost of the apples to the retailer is $0.35 per pound.
- The same apples were sold also to another market, down the street, who charges $1.50 per pound.
Everything else being the same, would you still purchase your apples, at this supermarket, for $2,99 per pound?
Chances are you wouldn't and you would walk down the street to the other supermarket to buy the apples there and save yourself some money. You may also decide not to do so, maybe because you don't have time today or because you have painful legs from the soccer game you played last night.
The point is, with complete and transparent information, you are able to make a rational decision that maximizes your profit at that moment, taking everything into consideration (price, as well as the time you have and your sore legs).
The point we are making here is that complete and transparent information empowers people to make better decisions for themselves. It's like when you go to a fast food for a hamburger but then you see how many calories it has and you opt for a salad instead. Knowledge is power and your ability to access, collect and organize information is the key to rational decision making and consequently to greater control over your life.
At memosnag we have made this our mission. We want to provide people with a way to easily collect and organize all the information they need for whatever reason. We have created a browser plugin that lets you save whatever you like or need from the internet: webpages, images, videos, text selections, links... you name it. Everything is saved in the cloud and is available for you to see in your personal Gallery. From there you can organize what you saved in Collections. Collections can be kept private, shared with selected people or even published.
We have also created apps for both iPhone and Android, so that you can save and organize the information you access via your mobile phone and access everything you save no matter where you are.
Memosnag's mission is to give people power and control over information, so that they can use it to make the best possible decisions.
Memosnag is 100% free. You can get it at memosnag.com . The browser plugins are available for Chrome and Firefox. And here are the iPhone app and the Android app.

[wpvideo MHN40DOS]