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The term "free market" hides many lies

It's more helpful to think of markets as being constructed rather than organic


Typically when we talk about the free market we refer to markets that operate free of government with prices and quantities set based on interactions between consumers and producers. The invisible hand and self-interest guide the market to equilibrium. This definition is actually quite specific to economics. Regulated markets by contrast have some sort of government intervention when it comes to demand or supply.


My issue with the term "free market" is that it implies that markets free of government intervention are actually free. This is rarely the case. There are usually entities that influence the market. Few markets are truly free when we think about the common definition of the word "free". Additionally, just because a market is regulated that doesn't mean its bad for consumers. Markets can be constructed to shape how consumers and businesses act.


For a market to be truly free no entity should hold to much power and there needs to be decent competition. Often, however, entities will create market power by developing an advantage. That could be a patent that means they are the only entity that can create a product. It could be vertical integration, for instance between the maker of a computer and the software that is usable on that device. Companies may get so big that they control the market due to their size and push out the little guys. Companies creating market power isn't always a bad thing. But when using the term "free market" you wouldn't think that you are describing markets where entities have considerable market power.



Governments may have to intervene in markets in order to create competition. They can do this by stepping in when firms act in ways that attempt to reduce competition. This could take many forms. It could be by acting as a centralised purchaser, making them the dominant entity purchasing a product or service. Another way is by preventing the merger of entities that could create a new larger entity with too much market power. Governments can also regulate returns to make prices reflect a competitive market. Governments have a variety of tools to create competition to get better outcomes for consumers.


Governments have tools that have a direct affect on price. Tariffs, subsidies and goods and services tax influence the demand and supply of products by changing the price of a product or service through intervention. Subsidies, for example, may be used to support producers and reduce prices for consumers. This could be useful when trying to promote consumption of healthy products such as fruit or vegetables. These tools that influence price are not always desirable. Tariffs to support local industry could lead to inefficiency and higher prices for consumers. Whether government intervention is good or not depends on the outcomes.


There are many factors at play beyond what companies and governments can control that further influence demand and supply. For example the amount of information available is a key driver in purchasing decisions. Would you pay $100 for a pair of jeans if you knew you could walk down the road and get the same pair for $60? Probably not. But if all you know is what is in front of you there you may still pay $100 for those jeans.


Cognitive biases are also critical to consider. Anchoring bias refers to our over reliance on existing information to make decisions. If we hear from a friend that they recently paid $100 for a pair of jeans we are more likely to perceive $90 as reasonable, even if there is a pair for $60. To what extent does the term free market recognise that we can be manipulated?


Markets can be constructed to achieve different goals - to an extent. Businesses can shape how consumers behave through platforms, marketing, innovation and a variety of other mechanisms to increase demand for products and raise profits. Likewise, governments can drive down prices, increase competition and progress societal goals. None of this should be a surprise, but let's not talk about markets as if they operate naturally.


In Economics 101 we are taught that the invisible hand guides demand and supply to match. The reality is that the world is a much messier place. To refer to unregulated markets as the "free market" doesn't fairly capture the dynamics at play. Many markets are not really free at all or are only "kind of" free. Companies and governments can guide the invisible hand to achieve the outcomes they are looking for.


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A New Zealand based politics and economics blog

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