Capitalism: Free Market Myths

I was listening to the Freakonomics podcast a while back and they had a Harvard economist on talking about how cities are so much more sustainable than any other means of organizing people.  I have many things to say about cities, but I'll start out with a critique of his economics theories.  I have a hard time listening to hardcore market economists and their optimism about the potential of the free market given the world of examples of how it has utterly failed us, the biggest being that we are racing towards a great wall of eco-doom, and still not even taking a glance ahead. 

At one point, this economist criticized public school systems in cities, which are easy targets for critics. As market economists are wont to do, he proposed that the free market could do much better. He gave the example of restaurants to describe the flaws in how public school systems are set up. He said you wouldn't want the government to set up one restaurant and require all the people to eat there because it would taste bad and there would be no incentive to make the food better. So why would you want to set up an educational system like that? He said restaurants have to compete in the marketplace, so they have to do better than the one down the block or they will go out of business.

I was a little amazed that somehow he could draw a connection between these two very different economic sectors. For one thing, one is a luxury market that meets a finite need, the other is a program that continues throughout your childhood and teaches you information that prepares you to function better in society as an adult. You buy dinner and you get something that lasts you one meal. You aren't buying food service for the rest of your life. You aren't buying a nourishment plan that provides the most healthful food for you on a continuous basis. That kind of long term health strategy would compare better to an educational system.  

Education is not a product, it is not finite, and many would say it is not a luxury, but a basic need. Everyone doesn't need to go to a restaurant because they are hungry, they go there because they have extra money to spend and they don't want to cook a meal, but instead want someone to prepare it for them. If people are poor, they certainly won't starve if they don't have restaurant food. They could buy food for much less at a grocery store or go to a food pantry. A food pantry provides food for those who would otherwise not be able to afford it. And in a way, that's what public education is supposed to be. It's supposed to provide an education for all. The problem is that now the rich and upper middle class are able to send their kids to private school and because their child's education is provided for, they fight school levies that fund public schools. As a result, public schools are underfunded and cannot maintain a level of quality in many places. This is an example of the market at work, ignoring the interests of society as a whole and providing only for those who already have the most. There are many other factors affecting public schools such as the No Child Left Behind Act.
 

Education is what economists call a “public good”. It is something that is useful or vital to society as a whole, but something that if the government failed to provide, the market would likely not provide for all. Restaurants are not considered a public good because they provide a luxury. The market would not provide education for the poor, because it would not turn a profit, so we would end up with a huge part of our populace illiterate. Apparently, a lot of well off Americans who reject school levies and advocate for privatization of education don't care if we have an uneducated populace.
 

I don't know why this guy thinks his plan for the market controlling education is such an original idea. It's the same tired argument that just doesn't hold up. The free market does not act in the public interest, it acts in the interest of whatever makes the most profit. There are no other incentives in a market economy but profit. If some are expressed it is in spite of market forces, not because of them. If you want to know what would happen if education were entirely privatized, look at our health care system. As it is, the only reason some poor people can get health care is because of government involvement in the market.  The Affordable Health Care Act, as flawed as it is, is intended to provide health care where the market doesn't.  Unfortunately, Obamacare is the result of a government controlled by corporate interests trying to create a nationwide health care program.   

If the market handled all education, we would have a much dumber populace and even more disparity than we currently have in wealth distribution. If you want to see how a truly free market works, look at some Third World countries where the disparity between rich and poor is even greater than it is here. And if you want to see how efficient the free market is, look at the privatization of prisons, of the military, of health care. They do a worse job than the government would because they don't have to answer to public interest, and they charge ten times as much.
 

And this is what it comes down to. The free market was not meant to exist on its own. It was intended to be kept in check by democratic government. The free market has no morals, so government provides them. Unfortunately, our government is currently controlled by market forces so there's less backbone to keep market forces reined in. Other capitalist states provide much better examples of a stronger role of government in the economy and a system that places more priority on the interests of society.  Unfortunately, those governments are finding it harder to exist in a global capitalist system where they have to compete with countries like the US, who place the interests of big business above the interests of society.  As a result, their governments are becoming more like the US government.

This economist claims that bringing competition into the educational system will require schools to become better through competition with each other.   Free market economists, this one included, talk about competition as if it's this pervasive aspect of capitalism always at work with its invisible hand to improve what is being offered to society, whether it's a product or a service.  Competition is mentioned as a pillar of capitalism, and the image that forms in our heads is that all those corporations out there are embracing the idea of competition.

Yet one of the unwritten laws of capitalism that is the direct result of market forces is, “If you can eliminate competition, you will do better than anyone else.” Who would understand this concept better than us humans, who have taken over the world by eliminating all our natural competitors for resources. The free market rewards monopolization. This is how all the great capitalist moguls have succeeded. Rockefeller monopolized oil and railroads, Vanderbilt, railroads, Carnegie, steel, and Microsoft, computer technology. So competition is not the dominant force in capitalism. The greater force is the one that tries to do away with competition. The profit motive will always work against anything keeping a business from making more money...obviously. It's only natural that if you can eliminate the limiting factors, you will be rewarded. Market forces also reward monopolies with greater profits, so it is questionable as to whether any business welcomes competition. The only force in capitalist states working to promote competition is the government, and our government does a poor job of that.
 

There are many ways businesses actively work to eliminate competition in their markets. One is simply to buy up their competitors. We see this happen all the time with corporate takeovers and conglomeration. A good example is when AT&T, already a telecommunications giant, attempted to merge with T-Mobile in 2011. They argued that the government should allow the merger because it would lead to better prices for customers, but T-Mobile had been the only company providing a cheaper alternative. The merger would have left just AT&T and Verizon together controlling over 80% of wireless communications. They also insisted the merger would not reduce competition but Sprint, the third competitor, said the merger would greatly hurt their business and there are predictions they might not survive. Fortunately, in this case the FCC blocked the merger in the interest of preserving competition.

But there are other, more hostile ways of eliminating competition. When Starbucks was spreading across the US they would open multiple cafes within blocks of each other and in areas already dominated by competing independent cafes. After putting other cafes out of business they could close any extraneous Starbucks cafes and move on. With their vast resources, large companies like this are able to saturate the market and even lose money temporarily in the interest of doing away with competition, after which they can raise their prices and make more than ever before.
 

After I'd written most of this little essay, I was listening to Planet Money, the NPR podcast, and they were talking about how Egypt's military was supporting the people through the mass movement a couple of years ago. They said that much of the reason they were giving support is that the military in Egypt is apparently deeply involved in the country's manufacturing industry. Oddly, they make a lot of the products people in Egypt buy. A war would mean a disruption in commerce and a loss of profits for them, so they want to maintain peace. Anyways, despite their support for the people, they don't want a civilian leader because that would invite the possibility of private competition in the market they currently monopolize. This has come to pass even after the brief existence of democracy with the ousting of Mohammed Morsi and the military takeover of government. 
 

And there is another great market force working to eliminate barriers to profit—deregulation. This is the market force to privatize industries and lift restrictions on private business. If some practice that could help you succeed is illegal, it might pay off to invest in eliminating the law so you can make more money. This is the market force at work incessantly to undermine the role government is intended to play in capitalism. It is doing its best to eliminate checks and balances to the market. Lobbyists are a prime example of the way corporations or industries work to undermine government regulation in the interest of society. The morality that government was intended to lend to capitalism is constantly in the crosshairs of the free market.
 

The other side of the coin is that regulation can be good for business, as long as it's done in the interest of business and not the public. This is the kind of work lobbyists are doing as well, pushing for legislation that restricts their competitors, or getting sweetheart contracts from the government. Investing in lobbyists has one of the highest payoffs found in capitalism. For every dollar companies or industries invest, they can expect to see it returned by the tens of thousands.
 

I remember one economist saying that if you design a really safe playground, no one's going to want to play there and they'll end up finding someplace else to play where they have more freedom. So just as the market directs business away from competition, it directs business away from regulation, once again, towards what makes the most profit, not what is best for society. This is how our economy collapsed in recent years. One economist claimed regulators couldn't keep up with changes in banking, but the more plausible scenario is that regulators and politicians were pressured by business to allow them to do really risky things. For instance, Fannie Mae and Freddie Mac had some of the most powerful lobbyists on Capitol Hill. They used their influence to ensure they kept getting corporate welfare. They claimed they were providing a public good by giving loans to poor people, when in fact they were pocketing the welfare and giving higher salaries and bonuses to their executives. They also used their lobbying power to influence regulation to allow them to take the big risks they took that led in part to the mortgage crisis. When the government itself is controlled by the market, there is no oversight, there is no check to market forces, and we end up with an unregulated system and a lot more handouts to corporations who don't deserve them.

 

Next post: More myths of capitalism: Competition leads to efficiency