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Posted at 12:04 am on April 19, 2010, by John W. Payne
The left wing caricature of a market economy presents rapacious businessmen monopolizing resources and raising prices to further enrich the wealthy while crushing the poor and middle class. There are a multitude of problems with this notion, but the primary one is that the market almost always discourages monopoly and drives prices down for the benefit of everyone except the firms that cannot compete. Even more remarkable is that in many cases the downward pressure on prices actually reaches its logical conclusion of firms giving away numerous goods and services for free (i.e. at a zero monetary cost to consumers). One often overlooked example of this phenomenon is the near total availability of condiments at fast food restaurants. Salt, pepper, ketchup, mustard, hot sauce, and more can be taken in large amounts whenever you make an order. When I was still in college, I stockpiled those little packets to use at home so that I didn’t have to pay for them at the grocery store. I’m sure this seems insignificant to most people, but that’s only because the market has made these goods so abundant that we take them for granted. In ages past, salt was such a valuable commodity that it was used as money, giving rise to the expression “worth your salt.” And it was demand for other spices like pepper that sent Europeans scrambling across the world 500 years ago in an effort to reap the enormous profits they could bring. It is nothing short of amazing that what was once so expensive that thousands of people would risk their lives to procure it is now so abundant that we don’t even give a second thought to people giving it away. A similar, if more high tech, example of the same phenomenon is the plethora of restaurants and coffee shops that now give away free WiFi internet access to anyone who wants it. Most of these places don’t even require users to make a purchase, operating on the belief that the longer a person stays in the store, the more likely they are to buy something. If you have a laptop, you can now access the greatest store of information the world has ever known as much as you want for free, all thanks to the free market, which forces businesses to compete by enticing potential customers with such fringe benefits. You might object here that the cost of these goods is included in the price of a meal, so it isn’t actually free to the consumer. That cost is negligible, which is why they give the stuff away, but the point is true enough, so let me give you a few examples where the user never has to spend a dime to reap some pretty enormous benefits. Many of the internet’s most powerful tools are completely free to users. Without search engines, the internet would be of very limited use, but despite being so valuable, they are almost all free because if one tried to charge people would very quickly migrate to a free alternative. Facebook allows individuals, businesses, charities, and all other manner of like-minded groups to set up free profiles and communicate with each other. I regularly chat on Facebook with friends across the country and the globe. Two generations ago, such instant communication wasn’t available at any price, but now it’s just part of an average day. The major search engines and Facebook rely on advertisers to provide their revenue, so you only pay for those services if you buy something through one of their ads. Furthermore, even these ads typically benefit the consumers. Because the advertisements are generated by a computer program based on information given by the user, they are more likely to be of interest than the average TV or radio commercial, and if a person buys a product because of the ad, he is made better off, provided it meets his expectations. To give a personal example, I discovered the service Groupon, which sells daily coupons to local businesses with steep discounts, through an ad on Facebook. I have eaten numerous meals for around 50 percent off thanks to Facebook, a service that I enjoy for free. Now contrast these remarkable market achievements with the government. The free market is providing numerous, highly valued goods and services at no cost to the consumer. On the other hand, the government provides many “services” that I don’t even want (e.g. the drug war, the war in Iraq, illegal wiretapping) and never for free. Why anyone would ever prefer the latter to the former is beyond me. Filed under: Economic Theory, Market Efficiency Comments: 7 Comments
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"[T]he whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence. The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups."
Perhaps the free market is better at providing services like Facebook, ketchup, and salt, while the government is better at providing services like potable water, police and fire departments, and large transportation infrastructure.
The free market also produces things that I do not want and yet I am forced to pay for, like pollution.
Comment by David C. Miller — 2010-04-19 @ 8:24 am
Governments also produce pollution.
Comment by Bill — 2010-04-19 @ 10:13 am
Bill,
I agree that governments produce pollution. I never said otherwise. I would just like a more nuanced position than:
Free Markets
Pros: Gives us the internet, ketchup for free
Cons: ???
Government
Pros: ???
Cons: I do not want Drug wars or declared wars, but am forced to pay for them anyway.
Comment by David C. Miller — 2010-04-19 @ 11:11 am
Pollution is no doubt a negative externality, but you are not forced to pay for its production. Furthermore, strong enforcement of property rights can force companies to internalize the costs of pollution through torts.
With regards to water, police, fire departments, and transportation infrastructure, why should we believe governments have a comparative advantage in producing these goods? None of them really meet both criteria for a public good (and even if they did, there have been numerous solutions to public good problems from both the market and civil society), but every time government becomes involved, you do run into the problems of public choice. Those services will be used to benefit politically connected special interests at the expense of everyone else.
Comment by John Payne — 2010-04-19 @ 11:25 am
“Pollution is no doubt a negative externality, but you are not forced to pay for its production. Furthermore, strong enforcement of property rights can force companies to internalize the costs of pollution through torts.”
Using property rights to solve environmental problems is a whole other can of worms that I don’t want to open in this thread. Your original complaint in your post was that the government makes you pay for things you do not want.
The point of using pollution as an example is that the free market makes you pay for things that you do not want as well.
In the same way, my examples of police departments and water utilities are intended to show that just as free markets can give us services we DO want at a low price, governments can do the same. You seem to assert that private companies can do a more cost-effective job doing this, which is a rabbit-hole that I don’t want to go too far down today, but I encourage you (and others here) to explore in a future post.
Instead of extolling the free market for its cheap ketchup and condemning the government for its costly drug wars, perhaps take a look at real-world examples of private police forces, private civil infrastructure, etc. I’d like to read that.
Comment by David C. Miller — 2010-04-19 @ 12:40 pm
I apologize for the lateness of my reply, but this just slipped to the bottom of the list and stayed there for a while.
I’m also not going to get into the private provision of many so-called public goods in the comments section, but I do hope to write about them in the future.
On the subject of pollution, I still don’t think you’re understanding my point. I don’t pay for the production costs of pollution unless I voluntarily buy a product that I want. That pollution may inflict harms on me, but I do not have to give the company money to create it. However, with government services that might do me harm, not only do I have to put up with the harm, I also have to give tax money to support it.
Comment by John Payne — 2010-04-28 @ 3:45 pm
Thanks for following up, John, and thanks especially for clarifying. I now understand that we’re defining the ‘costs’ a private firm imposes on people in two different ways: you are using it in a strictly monetary sense, and I am counting things like higher asthma rates as a ‘cost’ of pollution.
Putting a price on ‘bad things’ that happen is controversial and tricky (I’m reminded of when Ron Burgundy asks Garth if he can just give him some money out of his wallet to make him feel better after offending San Diego). But your own argument dictates that this kind of accounting must be done! How else can you reasonably come to the conclusion that free markets are manifestly more beneficial in any and every case unless you properly calculate all of the costs and benefits, including vague benefits like freedom or vague costs like asthma?
I’m still not sure how ethical I find this whole commoditization process. But as long as I’m in the business of suggesting future topics of inquiry for you or this blog, might I suggest taking more things into account than just monetary costs? Is tracing the consequences seen and unseen valid for government policies but verboten for private ones?
Comment by David C. Miller — 2010-04-28 @ 6:10 pm