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The Problem with the Free Market is that It is Never Free | Common Sense

The concept of a “free market” is often bandied about by Republicans and conservative voters as some sort of magic cure for our economic ills. I’ve had people ask me if I believe that the best way to advance our interests economically is to let the free market work.  My answer is “yes” – ceteris paribus.

The problem with voters, pundits, and politicians like Mitt Romney and Scott Brown is that they do not understand that the free market is never free. It only works as prescribed in ceteris paribus. Most people don’t know what ceteris paribus is, but they do know the loose English translation of that Latin phrase: “all other things being equal.” It is a vital assumption for economists but practitioners know that all other things are never equal or held constant in reality.

Will letting the free market work out the mortgage crisis succeed? Yes, it will, but at what cost? Would letting the automotive industry go belly up, have worked? Yes, but at what cost? Would letting vital financial institutions go bankrupt have eventually cleaned up financial excesses? Yes, but at what cost to the rest of us?

Given a certain amount of supply of something, and a certain amount of demand for that item, the intersection of the supply and demand curves will dictate what the optimum price for the product would be – ceteris paribus. But here comes Jay Gould and James Fisk. Those two decided to add to their wealth by cornering the gold market in the mid-1860s. Their scheme was found out and Black Friday resulted. Did the free market take care of it? Yes, but at what cost as hundreds of honest investors lost their shirts in the process?

And here comes Rockefeller, Vanderbilt, Mellon, Morgan and so many other “robber barons” with their machinations to manipulate major areas of the economy and the market. These men did an awful lot of good in pushing American industrialization forward, but at what cost? Too much cost, apparently, as their constraints of the free market precipitated an era of trust busting pursued by Republican President Theodore Roosevelt, among others.

And here comes The Jungle, a novel about the horrible working and living conditions, and unsanitary practices of the meat-packing industry in Chicago. My acquaintance had asked me about my belief in the magic of the free market, did so while enjoying a tuna melt sandwich made at a golf course grill. He apparently had no concern whatsoever that he could become seriously ill by doing so. Why? Because the free market is not allowed to do what it did in so many food industries in the last century.  The cost was judged to be too much.

And here come the owners of the Triangle Shirtwaist Factory in New York City. The wonderful free market permitted them to lock the doors of the work areas where the blouses were made, including the emergency exits. When fire broke out the workers could not get out of the area to safety. Nearly 150 immigrant workers, most of them women under the age of 25 died in that fire.  Did the free market take care of the owners? Sort of; they were found innocent of criminal charges but guilty in a civil suit. They had to pay $75 per victim, although they received $400 per victim from their insurance company. I guess the free market worked, but at what cost?

And here come Enron, AIG, and others in our time. Here come “credit default swaps,” “liars’ loans,” and other variations of the old Gould and Fisk schemes, and Vanderbilt and Rockefeller manipulations of the supposed free market. Time and again American economic history has shown us that the free market is never really free. And it will never be free as long as people are human.

The point of regulation is not to constrain the operations of a free market but to protect them. Government regulations have the intent of trying to approximate ceteris paribus in the real world. They protect the workings of demand (us) and they protect the availability of supply (honest investors and business people) so that the laws of supply and demand can work as they are supposed to work.

The free market is also not “free” to the extent that economics, business, and finance do not operate in vacuums. They operate within our society and culture which has values that in many ways define the country. As a society we believe, for example, that we are our brothers and sisters keepers. You may be poor, but not for that will we allow the market place to deprive you of proper health care.

The political incarnation of the free market is democracy – the majority rules. This is also ceteris paribus. The majority of 100 is 51, yet it takes 60 votes to get anything passed in the Senate. And anonymous individual senators are allowed to prevent any nomination from coming to a vote, even if the nominee is passed out of committee unanimously. I wonder why the free market bleaters like Romney and the Republican leadership in Congress aren’t jumping up and down about that?

We’ve also learned through our history what today’s Republican politicians ignore in their pandering rhetoric, the “free” in free market is not a synonym for freewheeling.

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