Free Market Capitalism is an Oxymoron
A successful capitalist economy will never have a truly free market and ‘free’ markets will be void of actual freedom. In addition, a Capitalist economy will never be able to maintain a small government and instead, will be a driving force in expanding government. In today’s highly politized debate around economics, the idea that Capitalism and free markets are mutually exclusive may at first appear absurd.
To explain, it may be helpful start by defining terms. So, what is Capitalism? In simplest terms, it is a system of exchange where private ownership controls the materials used to make goods. These materials may be the raw materials, or the tools used to make a product. So, in a capitalist economy, if I make iron nails, for example, then generally speaking, I will own the forge, the anvil, the hammer, the iron, the flux, and maybe even the facility where the nails are made. Since I own the means to production, then it stands to reason, I should own the fruits of my labor or the capital. However, the personal usefulness of a bunch of nails only goes so far and since I cannot turn these iron nails into food and shelter, I need a market to exchange these nails in. Enter the market based economy. Here, as a distinguished maker of nails, I determine what I will sell my nails for based on a variety of factors, such how much time and money it takes to make the nails and how much people are willing to pay. This is supply and demand. This system is only as good as people’s ability to spend money on nails though. Assuming people with a demand for nails, can pay for the product, then, this model is great. I have tools, I produce, I make available a needed resource and I reap the benefits of my labor. If I make a quality nail, then demand may increase. There will only be so many I can produce on my own each day though, so I may need to hire people to work with my materials to create more of my product. In return, I pay them a set amount from my profits. Now, with demand met, the sun is shining, and the birds are chirping under the banner of capitalism in a market based economy.
At this point, it is worth discussing the market based economy for a moment. Here, there are two opposing poles, with everything in between making up our economic spectrum. These poles are the free market and the regulated market. We will define each of these starting with the free market. As we dive in, let’s note that the term free market, is often an ideological term and therefore can be used in a variety of different ways. For this reason, we will stick with a most basic concept. We will define the free market as a place for people to freely buy and sell goods, where the prices are set by the natural laws of supply and demand without government or any other authorities control. So, to be a viable free market, supply and demand must find a natural and sustainable equilibrium without interference from government or any other authority. When proponents of free markets discuss its merits, it is usually within a breath or two of a warning against a heavy-handed government imposing taxes, restrictions or other mechanisms that hinder or control supply and demand. This is a warning against the opposite of the free markets, the dreaded regulated market. Regulated markets are usually defined by government controlling supply and demand. However, what is often missed, is that regulation in the market isn’t restricted to just government. In a market void of government, the strongest forces will then administer the regulating. In the absence of government, what then are the strongest forces? To answer that, lets go back to our entrepreneurial nail maker.
Business is still humming along nicely. With a full labor force, I can manufacture nails faster than anyone in town and maintain a high-quality product. With a decent product, some demand, and enough money in the economy so that demand can be afforded, there are but a few factors that can hinder my success.
First, production costs, which can range from the costs in acquiring raw materials and manufacturing tools to paying workers to press the iron into nails. The second factor that can affect my business success is, competition. In a free market, anyone can start making nails and potentially sell them at a lower price than mine. Certainly, it is in my best interest and in the best interest of my business to limit costs and remain competitive.
So, as a businessman, how do I deal with these variables? If my business remains relatively small and I am directly involved in things such as procuring materials and managing the workforce, then it is reasonable to suggest that I will manage costs and competition in good faith to my workers and the community. However, this is often not the case, even with the smallest businesses. In fact, the history of market economies are a history of cut throats, pirates and robber barons. This is because in almost every market free of government regulation, the most dominant force is the one that acts solely in its own benefit without regard to labor or community.
How do these dominant forces then manage costs and competition? Historically, the list is long but may include limiting pay increases as much as possible, divorcing labor wages from capital. They will require workers to work more hours for the same pay or as is often the case, hire kids or minority groups and pay them less wages than is typical or fair.
Eventually, they will expand their control of the means of production which in our example may mean acquiring the mines that extract the iron or even transportation company that ships the raw iron. A greater control over the means of production also means I can better deal with the second variable, competition.
If I can own the mines, I may charge a fee to allow my competition to mine my land. This of course adds to their costs and limits their ability to compete. If I am particularly shrewd, I will simply make the iron unavailable to my competition. If I own the means of transportation of raw materials, then I can also control my competition by limiting what they can ship and the costs as well. If I expand my transporting business to include other goods, I can further control the nail markets. For example, a lumber company needs to ship wood to build houses. I can offer them a discount on the shipping costs if they agree to use my nails exclusively for their houses. Since I now have a guaranteed revenue from nails, I can discount my shipping costs for the home builder in a way that no other transport company can match. In this way, the freedom to expand my control of the means of production, means the loss of freedom of my competitors. Of course, in other cases, I may just buy the competition outright to control the market.
In any case, the titans of markets will create monopolies and ultimately control their markets. This is market control through private regulation. Proponents of this laissez faire approach, use the concept of the Invisible Hand to get around the obvious issue of private market control. The term Invisible Hand suggests that the business owner’s self-interests will automatically direct them to act for the greater good. So, as a business owner, it is assumed I will pay my workers a just wage because it is in my best interest to keep them happy and producing adequately. After all more money in the economy means more people can buy my nails. However, the Invisible Hand demonstrates itself as a considerably lesser force than private market control. The Invisible Hand, throughout history seems to act less like the stern hand of an authority figure guiding the markets toward equity and more like the idle threat seemingly inviting petulant behavior. The more ‘free’ a market is from government regulation, the more controlled the market is by those whose self-interest is directly tied to the means of production and therefore the less freedom actually exists. Just as with anarchies, the most powerful and often the most ruthless become the warlords.
The unsustainable environment that results when the private enterprise is left ‘free’ to control the means of production will not last long as capitalism requires a labor class that spends. Ultimately, the warlords will concentrate more and more wealth in their coffers; and as they accumulate more wealth, the amount of wealth labor has access to eventually becomes insufficient to maintain the economy. The market then becomes categorized by recessions and depressions.
As the warlords’ power expands, so does the freedom of others diminish. As markets become less equitable, the suffering and general unrest of the populace will increase. Sooner or later, government will intervene. The state must step in and create laws to protect workers; child labor laws, safety regulations, minimum wage laws, etc. The state must create laws to prevent monopolies and ensure competition. Furthermore, the larger the capitalist economy becomes; the larger government must grow to deal with increasingly complex market control mechanisms employed by capital.
To summarize, with Capitalism, insufficient government regulation creates market warlords and thus the less free the market truly is. The more a market is controlled by these warlords, the greater the need for government to intervene and perhaps more importantly, the more willing the populace will be willing to grant more control over markets to government. This is the great contradiction the economic theory and why there is no such thing as ‘free market capitalism’. Due to its inability to self-regulate properly, Capitalism acts as super fertilizer to grow government and will only ever be able to sustain itself and prosper in relation to government oversite and regulation. Government involvement must ensure competition and most importantly, that the wealth of labor grows with the wealth of capital. Labor and Capital have a symbiotic relationship and must be treated as so, less one devours the other creating an unhealthy and unsustainable environment.