Free Market Ideology and Alternate Economic Systems

How does an ideological commitment to free market principles influence the consideration of alternative economic systems?

An ideological commitment to free market principles can significantly influence how alternative economic systems are considered. Here's a simple explanation using examples and quotes:

1. Emphasis on Market Efficiency: Ideological commitment to free market principles prioritizes market efficiency as a key driver of economic success. This perspective holds that the decentralized decision-making of individuals and businesses, guided by market forces, leads to efficient allocation of resources and optimal outcomes.

Example: "Advocates of free market principles argue that allowing market forces to determine prices, wages, and production levels leads to efficient resource allocation. They believe that alternative economic systems, such as central planning, may suffer from inefficiencies due to the lack of market signals."

2. Skepticism of State Intervention: A commitment to free market principles often fosters skepticism toward extensive state intervention in the economy. It emphasizes the belief that government interference can hinder market efficiency, impede individual freedom, and lead to unintended consequences.

Example: "Those who strongly support free markets view excessive government regulations and interventions as burdensome. They argue that alternative economic systems relying heavily on central planning may stifle innovation, discourage entrepreneurship, and limit individual choices."

Quotation: "The problem with socialism is that you eventually run out of other people's money." - Margaret Thatcher

This quote, attributed to former British Prime Minister Margaret Thatcher, reflects the skepticism toward alternative economic systems that rely heavily on state intervention. It implies that such systems may struggle to sustain themselves without adequate resources generated by market-oriented economies.

3. Focus on Individual Liberty and Choice: Ideological commitment to free market principles often places a strong emphasis on individual liberty, economic freedom, and the right to private property. It asserts that free markets provide individuals with the freedom to make their own economic decisions and engage in voluntary exchanges.

Example: "Supporters of free market principles argue that alternative economic systems, which involve greater government control, can infringe upon individual liberties and limit economic choices. They believe that market-oriented systems provide individuals with the opportunity to pursue their own goals and fulfill their economic aspirations."

An ideological commitment to free market principles can strongly influence the consideration of alternative economic systems, shaping the evaluation in several ways. However, it's essential to recognize both the strengths and weaknesses of this perspective:

Strengths:

1. Market Efficiency: The emphasis on market efficiency highlights the potential benefits of allowing market forces to guide resource allocation. Free market principles can incentivize competition, innovation, and productivity, leading to economic growth.

2. Individual Freedom: A commitment to free markets emphasizes individual liberty and economic freedom. It recognizes the importance of individual choices and the potential for entrepreneurship and self-determination.

3. Innovation and Adaptability: Free market systems often exhibit a high degree of innovation and adaptability, responding quickly to changing consumer demands and technological advancements.

Weaknesses:

1. Market Failures: An exclusive focus on free markets may overlook market failures, such as externalities, monopolies, or inadequate provision of public goods. These market failures can have adverse consequences and require government intervention to address.

2. Income Inequality: Unrestricted free markets can contribute to income inequality, as wealth accumulation is not distributed evenly. This disparity may result in social and economic divisions that require policy interventions to ensure fairness.

3. Systemic Risks: Unregulated markets can also be susceptible to systemic risks, such as financial crises or market instability. Some level of government oversight may be necessary to mitigate these risks and protect the broader economy.

Evaluation:

While an ideological commitment to free market principles brings several strengths, such as market efficiency and individual freedom, it's important to approach alternative economic systems with an open mind. Evaluating alternative systems should consider a range of factors, including economic efficiency, equity, stability, and the provision of public goods.

Quotation: "A system of free enterprise capitalism hinges on two main assumptions: rational individuals and efficient markets. Neither assumption is entirely realistic." - Alan S. Blinder

This quote highlights the importance of acknowledging the limitations of any economic system, including free markets. It suggests that a balanced evaluation should consider both the strengths and weaknesses of various economic models.

To ensure an effective evaluation, it is crucial to strike a balance between market mechanisms and appropriate government interventions. Recognizing the potential advantages of free markets while addressing their limitations through regulation and social safety nets can help achieve a more equitable and sustainable economic system.

Ultimately, a comprehensive evaluation should take into account the diverse needs and goals of society, balancing economic efficiency, social welfare, and the pursuit of individual freedoms within a broader framework of societal well-being.

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Ideological biases can indeed undermine the examination of empirical evidence and case studies that challenge the supremacy of the market system. Here's an exploration using examples, quotes, and simple language:

1. Confirmation Bias: Ideological biases can lead individuals to seek and interpret evidence in a way that confirms their preexisting beliefs. This confirmation bias may prevent them from critically examining empirical evidence or case studies that challenge the supremacy of the market system.

Example: A staunch advocate of free markets may dismiss empirical studies highlighting market failures or negative consequences of unregulated capitalism, instead favoring evidence that supports their ideological position.

2. Dismissal of Alternative Models: Ideological biases can create a tendency to dismiss or downplay empirical evidence and case studies that demonstrate the effectiveness of alternative economic models. This can hinder a comprehensive examination of diverse approaches.

Example: A fervent supporter of market supremacy may reject case studies that showcase successful mixed economies or government interventions in achieving positive outcomes, undermining the examination of alternative models.

Quotation: "It is difficult to get a man to understand something when his salary depends on his not understanding it." - Upton Sinclair

This quote by Upton Sinclair highlights how personal interests and ideological biases can hinder individuals from objectively examining evidence that challenges their beliefs. In the context of economics, those whose livelihood or influence depends on the market system's supremacy may be more resistant to considering alternative models.

3. Cherry-picking Data: Ideological biases can lead to selective use of data, focusing only on information that supports the market system while ignoring or dismissing contradictory evidence. This cherry-picking approach undermines a balanced examination of empirical evidence.

Example: An ideologically biased individual may highlight economic success stories under free market systems while disregarding instances of market failures or negative social consequences associated with unregulated capitalism.

It's important to note that overcoming ideological biases and fostering a more open examination of empirical evidence and case studies is crucial for a robust and informed economic discourse. By considering a wide range of evidence, including studies and examples that challenge prevailing beliefs, we can gain a more nuanced understanding of economic systems and their real-world impacts.

The goal should be to approach empirical evidence and case studies with intellectual honesty and a willingness to critically evaluate findings, regardless of whether they align with our ideological biases. Only through this objective examination can we foster a more comprehensive understanding of economic systems and strive towards the development of effective and equitable economic policies.

Fallacies of Capitalism 4: The Free Market Always Leads to Optimal Outcomes

 The Free Market Always Leads to Optimal Outcomes' Fallacy

The "free market always leads to optimal outcomes" fallacy is the belief that a completely unrestricted market, with no government intervention, will always result in the best possible outcomes for individuals and society. However, there are several limitations to this idea. Let's explore them with simple examples:

1. Market failures: Free markets can sometimes fail to produce optimal outcomes due to various factors. For instance, in the case of public goods like clean air or national defense, individuals may not have sufficient incentives to voluntarily contribute or produce them. In this situation, the market fails to allocate resources efficiently, and government intervention may be necessary to ensure the provision of public goods.

2. Externalities: Externalities occur when the actions of one party impose costs or benefits on others who are not directly involved in the transaction. For example, consider a factory that emits pollutants into the air. The negative effects on the environment and public health are external costs that are not reflected in the market price of the goods produced. Without government intervention, the market fails to consider and address these external costs, resulting in suboptimal outcomes for society.

3. Monopolies and market power: Unregulated free markets can lead to the concentration of market power and the emergence of monopolies. Monopolies can exploit their market dominance by setting high prices, reducing quality, and stifling competition. This reduces consumer welfare and can hinder innovation and economic growth. Government intervention, such as antitrust regulations, may be necessary to prevent and address market distortions caused by monopolistic behavior.

4. Income inequality and social justice: Free markets do not necessarily lead to fair or equitable outcomes. In the absence of regulation and redistribution measures, income and wealth disparities can become significant. This can result in social unrest, decreased social mobility, and unequal access to essential resources and opportunities. Government intervention may be required to address income inequality and promote social justice.

5. Market imperfections: Free markets rely on certain assumptions, such as perfect competition, perfect information, and rational decision-making by all participants. However, in reality, these assumptions often do not hold true. Market imperfections, such as information asymmetry, unequal bargaining power, and imperfect competition, can distort market outcomes and lead to suboptimal results. Government intervention and regulations can help mitigate these imperfections.

In summary, the "free market always leads to optimal outcomes" fallacy fails to consider the limitations and challenges of unrestricted markets. Market failures, externalities, monopolies, income inequality, and market imperfections are examples of situations where the free market may not produce the best possible outcomes. Recognizing these limitations is crucial for understanding the importance of government intervention and regulation to promote a more efficient, equitable, and sustainable economy.

The Big Myth of Market Fundamentalism

 

The SVB debacle has exposed the hypocrisy of Silicon Valley

US tech innovators have a culture of regarding government as an innovation-blocking nuisance. But when Silicon Valley Bank collapsed, investors screamed for state protection writes John Naughton in The Guardian 

So one day Silicon Valley Bank (SVB) was a bank, and then the next day it was a smoking hulk that looked as though it might bring down a whole segment of the US banking sector. The US government, which is widely regarded by the denizens of Silicon Valley as a lumbering, obsolescent colossus, then magically turned on a dime, ensuring that no depositors would lose even a cent. And over on this side of the pond, regulators arranged that HSBC, another lumbering colossus, would buy the UK subsidiary of SVB for the princely sum of £1.

Panic over, then? We’ll see. In the meantime it’s worth taking a more sardonic look at what went on.

The first thing to understand is that “Silicon Valley” is actually a reality-distortion field inhabited by people who inhale their own fumes and believe they’re living through Renaissance 2.0, with Palo Alto as the new Florence. The prevailing religion is founder worship, and its elders live on Sand Hill Road in San Francisco and are called venture capitalists. These elders decide who is to be elevated to the privileged caste of “founders”.

To achieve this status it is necessary to a) be male; b) have a Big Idea for disrupting something; and c) never have knowingly worn a suit and tie. Once admitted to the priesthood, the elders arrange for a large tipper-truck loaded with $100 bills to arrive at the new member’s door and cover his driveway with cash.

But this presents the new founder with a problem: where to store the loot while he is getting on with the business of disruption? Enter stage left one Gregory Becker, CEO of SVB and famous in the valley for being worshipful of founders and slavishly attentive to their needs. His company would keep their cash safe, help them manage their personal wealth, borrow against their private stock holdings and occasionally even give them mortgages for those $15m dream houses on which they had set what might loosely be called their hearts.
The most striking takeaway was the evidence produced by the crisis of the arrant stupidity of some of those involved

So SVB was awash with money. But, as programmers say, that was a bug not a feature. Traditionally, as Bloomberg’s Matt Levine points out, “the way a bank works is that it takes deposits from people who have money, and makes loans to people who need money”. SVB’s problem was that mostly its customers didn’t need loans. So the bank had all this customer cash and needed to do something with it. Its solution was not to give loans to risky corporate borrowers, but to buy long-dated, ostensibly safe securities like Treasury bonds. So 75% of SVB’s debt portfolio – nominally worth $95bn (£80bn) – was in those “held to maturity” assets. On average, other banks with at least $1bn in assets classified only 6% of their debt in this category at the end of 2022.

There was, however, one fly in this ointment. As every schoolboy (and girl) knows, when interest rates go up, the market value of long-term bonds goes down. And the US Federal Reserve had been raising interest rates to combat inflation. Suddenly, SVB’s long-term hedge started to look like a millstone. Moody’s, the rating agency, noticed and Mr Becker began frantically to search for a solution. Word got out – as word always does – and the elders on Sand Hill Road began to whisper to their esteemed founder proteges that they should pull their deposits out, and the next day they obediently withdrew $42bn. The rest, as they say, is recent history.

What can we infer about the culture of Silicon Valley from this shambles? Well, first up is its pervasive hypocrisy. Palo Alto is the centre of a microculture that regards the state as an innovation-blocking nuisance. But the minute the security of bank deposits greater than the $250,000 limit was in doubt, the screams for state protection were deafening. (In the end, the deposits were protected – by a state agency.) And when people started wondering why SVB wasn’t subjected to the “stress testing” imposed on big banks after the 2008 crash, we discovered that some of the most prominent lobbyists against such measures being applied to SVB-size institutions included that company’s own executives. What came to mind at that point was Samuel Johnson’s observation that “the loudest yelps for liberty” were invariably heard from the drivers of slaves.

But the most striking takeaway of all was the evidence produced by the crisis of the arrant stupidity of some of those involved. The venture capitalists whose whispered advice to their proteges triggered the fatal run must have known what the consequences would be. And how could a bank whose solvency hinged on assumptions about the value of long-term bonds be taken by surprise by the impact of interest-rate increases? All that was needed to model the risk was an intern with a spreadsheet. But apparently no such intern was available. Perhaps s/he was at Stanford doing a thesis on the Renaissance.

Why Free Market Capitalism is not as Good as they say

 

MSP won’t bankrupt India. It’s complex, but so is disinvestment

Debunking six myths about the MSP for BJP and allies, free-market wallahs and ecological warriors. Yogendra Yadav in The Print 


 

A spectre is haunting India’s ruling class – the spectre of MSP. Over the last few days, various sections of this ruling class – political allies of the Bharatiya Janata Party, economic ideologues of free-market and some ecological warriors – have entered into an unholy alliance to exorcise this spectre and stymie the possibility of India’s farmers getting a fair price for their produce.

Ever since Prime Minister Narendra Modi’s dramatic, though over-delayed, capitulation on the farm laws, the fear of the ascent of the rural has left the Indian bourgeoisie petrified. Minimum Support Price (MSP) is now the new battleground. End of “reform” – arguably the most abused word – is the latest war cry. Ever since the Samyukta Kisan Morcha (SKM) has reminded the PM of its pending demand of a legal guarantee of MSP, we have witnessed a flurry of articles, editorials and debates out to block the possibility that the PM may concede this one as well. MSP is the “bane of agriculture” and the demand for its legal status “totally unreasonable” says the 50-word editorial of The Print, which I often agree with.

As in much ideological propaganda, this tirade against MSP is full of ignorance, prejudice, and fabrications. I cannot imagine such ill-informed canard getting space on national media if it concerned share market, Provident Fund, debt restructuring or anything that touched upon the interest of the “middle class”.

As this historic farmers’ struggle enters end-game, it is vital to debunk some of the misinformation and disinformation that surrounds the current debate on MSP. 
Farmers shifting goalpost?

The first lie is an accusation: Farmers are shifting the goalpost by inventing the demand for legal guarantee of MSP once the demand for repeal of three agricultural laws was conceded. This is nonsense, contrary to the well-known and widely publicised position of the SKM. Demand for MSP realisation has been prominent on the charter of demands, next only to the repeal of three laws, at every stage of this struggle, from the very first memorandum to the 11 rounds of negotiations and the Kisan Sansad. The government’s power-point response to the SKM’s demands acknowledged this issue. This has been one of the main demands in the public domain, reiterated in almost every public speech. There is nothing new or surprising about it. Assured remunerative price has been a flagship demand of the farmers’ movement for decades.
‘MSP already exists’

The second lie is plain and simple: MSP is already available. So, why bother about legal status? Sadly, the PM’s rhetoric of “MSP tha, hai aur rehegi” has given fresh lease of life to this myth. The truth is that MSP has existed mostly on paper. The government’s own data shows that only 6 per cent farmers actually benefit from it. (I think a realistic number is around 15 per cent). That is why, over the years, farmers, movements have made three demands.

We can call these three components of the demand for MSP. One, the promise of Minimum Support Price should have a sound statutory status, instead of remaining just an executive order. (A working group of Chief Ministers headed by Narendra Modi recommended this component to PM Manmohan Singh in 2011. The Commission for Agricultural Costs and Prices also reiterated this demand in its 2017-18 report.) Two, the government should make good this promise by creating a well-funded and effective administrative mechanism that ensures that every farmer actually received at least this minimum price for her entire produce. (Successive governments, including this one, have repeatedly promised this without putting such a mechanism in place). Three, there should be a fair and comprehensive method of computation of MSP that takes full cost into account and is extended to all agricultural produce. (This was recommended by the Swaminathan Commission). All these three asks remain unfulfilled to this day.

 
Environmentally unsustainable?

The third lie is presented under an ecological garb: Legalisation of MSP would lead to over-production of water-guzzling paddy and delay the much-needed diversification of crops. This reasoning is fallacious: The over-dependence on paddy (and sugarcane for that matter) is not because of generous MSP, but because of skewed procurement. While the government declares MSP for 23 crops, it makes good this promise only for wheat and paddy, and that too in select states. No wonder all farmers in these states are hooked to these crops that are not environmentally sustainable. The solution does not lie in withdrawing MSP, but in making sure that the farmers realise MSP in other crops like chana, makka, bajra and various dals. The government should offer attractive MSP for pulses (as recommended by the Arvind Subramanian committee) and oilseeds and ensure their purchase.
Will it distort the market?

The fourth lie is dressed up as elementary economics: Any tinkering with prices by way of MSP would distort the market. Yes, it would, just as TRAI regulations distort telecommunication market, just as ban on surge prices distort road and air transport market. Ever heard these free-market wallas complain against these distortions? Do we not fix minimum wages lest they distort labour market? Should we allow aspirin to be sold for Rs 1,000 per tablet? As for the fear of food prices going up, the way to control it is to offer subsidised food to the poor, not to deny fair price to the producer. The fact is that “free market” is and must be regulated all over the world to meet overall societal objectives. Farmers are offered subsidies and price support all over the world. If price assurance is a bad idea, why declare MSP in the first place?

Impossible for govt?

The fifth lie takes bureaucratic form: MSP may be a good idea, but it is practically impossible. How can the government purchase all the produce of all the 23 crops? Where would it be stored? What would the government do with it? Or so goes the argument. The simple response is: No government needs to do something as silly as that in order to ensure that all farmers receive MSP. My colleagues and I have repeatedly argued that there are multiple methods for ensuring MSP to all farmers. The government can procure more than it does today, especially in pulses, coarse grains, and oilseeds. For the rest, the governments need not purchase. The farmer can be given deficit payment for the gap between the MSP and market price, as was done by the Haryana government this year for bajra. Government can do selective intervention in the market, or use protectionist policies in international market, to prevent prices from falling. And, in the last instance, it can use punitive measure to disallow trading below MSP. All this is complex, yes. But developing a mechanism for MSP delivery is no more complex than designing disinvestment or drawing up mining contracts.
Will India go bankrupt?

Finally, the fiscal lie: India would go bankrupt! My colleague Kiran Vissa and I had debunked this fear-mongering by presenting a rough estimate, with complete breakdown, of how much would it cost the government to make up for the gap between the existing MSP and the prevailing market price. Our calculation for 2017-18 showed the overall cost to be Rs 47,764 crore (just 1.6 per cent of the Union Budget that year and less than 0.3 per cent of the GDP). If the MSP were to be raised to the level recommended by Swaminathan Commission, it would still cost Rs 2.28 lakh crore (about 7.8 per cent of Budget and 1.2 per cent of GDP). Can India afford it for the welfare of nearly two-thirds of its population? That is the real question that the country must face.

Thanks to this historic farmers’ movement, the country has woken up to a political reality: Farmers do not belong to the dustbin of history, they are very much a part of India’s present and future. A legally binding system of fair calculation and effective delivery of MSP to each farmer is a logical corollary of this realisation. As A.R. Vasavi says, it’s time to move towards “Maximum Support Policy”. It is all about political will now.

Do rich countries undermine democracies in developing countries? Economic History in Small Doses 3

Girish Menon*

The IMF led consortia (World Bank, WTO…), have represented the interests of the rich countries. Historically, they have advocated free market policies in developing countries. Whenever such weak economies got into economic trouble the consortia have insisted on harsh policy changes in return for their help. By such acts, are the rich countries really helping the growth of democracy in developing countries?

---Also read

1. Ideological Positions and Economic History

2. Is Corruption An Obstacle to Economic Growth? - Economic History in Small Doses 1

3. Are Democracy and Capitalism in Conflict? Economic History in Small Doses 2

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Free market policies have brought more areas of our life under the ‘one rupee one vote’ rule of the market. Let us examine some of these policies:

The argument is framed thus, “politics opens the door for perversion of market rationality; inefficient firms or farmers by lobbying their politicians for subsidies will impose costs on the rest of society that has to buy expensive domestic products.” The current farmers’ agitation in India is being tarried with this brush.

The free marketer’s solution is to ‘depoliticize’ the economy. They argue that the very scope of government activity should be reduced to a minimal state through privatisation and liberalisation. This is necessary, they argue, because the politicians are less competent and more corrupt. Hence, it is important for developing countries to sign up to international agreements like the WTO, bilateral/free trade agreements like RCEP or TPP so that domestic politicians lose their ability to take democratic decisions.

The main problem with this argument for depoliticization is the assumption that we definitely know the limits where politics should end and where economics should begin. This is a fundamental fallacy.

Markets are political constructs; the recognition of private ownership of property and other rights that underpin them have political origins. This becomes evident when viewed historically. For example: certain tribes have lived in the woods for centuries until the point when this land is sold off by the government to a private landowner and then these tribespeople now become trespassers on the same land. Or the re-designation of slaves from capital to labour was also a political act. In other words the political origins of economic rights can be seen in the fact that many of these rights that seem natural today were once hotly contested in the past.

Thus when free marketers propose de-politicizing the economy they argue that everybody else accept their demarcation between economics and politics. I agree with Ha Joon Chang when he argues that ‘depoliticization of policy decisions in a democratic polity means – let’s not mince our words – weakening democracy.’

In other words, democracy is acceptable to free-marketers only if it does not contradict their free market doctrine. They want democracy only if it is largely powerless. Deep down they believe that giving political power to those who do not have a stake in the free market system will result in an ‘irrational’ modification of property and other economic rights. And the free-marketers spread their gospel by subtly discrediting democratic politics without openly criticising democracy.

The consequences have been damaging in developing countries, where the free-marketers have been able to push through anti-democratic actions well beyond what would be acceptable in rich countries.

* Adapted and simplified by the author from Ha Joon Chang's Bad Samaritans - The Guilty Secrets of Rich Nations & The Threat to Global Prosperity

Economics for Non Economists 1: What is a free market economy?

by Girish Menon

Suma, you have asked a really fundamental question and I will try to answer it in two parts viz;

-         What is a market economy?

And

-         What does free mean in the context of free market economy?

So let’s start with the first aspect – What is a market economy?

The activity of buying or selling a good is called a market transaction or a market activity. Thus a market is a set of arrangements where goods are exchanged for money.

Today most countries in the world adopt the market model for the production and consumption of goods and services. They believe in the Adam Smith quote, ‘It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.’

Google Dictionary defines self interest (own interest) as ‘one's personal interest or advantage, especially when pursued without regard for others.’ Some economics texts assume that the self interest of a goods producer is to earn profits whereas the self interest of a consumer is to maximise her happiness by paying for goods she requires.

Adam Smith’s theory expects citizens in an economy to be both producers and consumers of goods. As a producer you are expected to generate a profit from your toils. You, as a consumer, are expected to use the profits to buy other goods to live your life.

Based on the above logic, market theory predicts that if all the citizens of an economy are left to pursue their self interest then it will result in the automatic production of all goods and services that citizens require in order to be happy.

Though Adam Smith preferred the word ‘invisible hand’, I have used the term automatic. Google dictionary defines automatic as ‘working by itself with little or no direct human control’. In other words producers make and sell goods which they think will be demanded and hope to profit from it. There is no authority other than their anticipation of consumer needs that guide their decision to produce and sell goods. Similarly, consumers pay for a good because they think it will make them happier and there is nobody telling them what to buy and consume.

Thus, a market economy would be an economy where the production and consumption of all/most goods and services is determined by the self interest of its producers and consumers. This system is also known as capitalism.

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So, what is a free market economy?

These days it’s not only the UK, USA etc. but many other countries who call themselves free market economies. But are they truly free market economies where the production and consumption of all goods are determined automatically with its citizens unabashedly following their self interest?

I notice that you seem to be shaking your head. Especially in this Covid climate you will have noticed the role that the UK government has played in your life and the way it has affected your pursuit of self interest and happiness. So what I will now do is list the conditions necessary for Adam Smith’s theory of the invisible hand to work:

1. There are many buyers for a good in the market and no buyer is large enough to get a discount on the price.
2. There are many small sellers of a good in the market and no seller is large enough to set its own price.
3. The goods produced and consumed are identical or homogeneous. In other words a consumer cannot recognise the producer of the good.
4. There must be freedom of entry to the market – or no barriers that prevent a potential producer from entering the market.
5. There must be freedom of exit from a market – if a producer wishes to quit a market then s/he should be able to do so freely and without any sunk costs.
6. There must be perfect knowledge. Producers must have full knowledge of the technologies used by its rivals and consumer preferences. Consumers must be aware of the short and long term benefits and costs from consuming a good.
7. The factors of production must be mobile. It means that the land, workers, machines used for producing a good should be easily redeployed to producing any other good when demand changes,
8. There must be no transport costs.
9. There must be independence in decision making. No external forces affect the decision making ability of producers and sellers.
10. No externalities. The act of production and consumption based on self interest should not result in benefits or costs to third parties.

I am sure that after you have read the above conditions you will agree that neither the UK economy nor for that matter the Indian economy is anywhere close to being a free market economy. I don't think there is a single economy in the whole world that satisfies most of the conditions of a free market.

I will now let Ha Joon Chang have the final word on free markets:

“The free market (economy) does not exist. Every market has some rules and boundaries (by governments) that restrict freedom of choice. A market looks free only because we so unconditionally accept its underlying restrictions that we fail to see them. How ‘free’ a market is cannot be objectively defined. It is a political definition. The usual claim by free market economists that they are trying to defend the market from politically motivated interference by the government is false. Government is always involved and those free-marketeers are as politically motivated as anyone. Overcoming the myth that there is such a thing as an objectively defined ‘free market’ is the first step towards understanding capitalism.’

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• When I presented this article to Suma she said, 'Girish, you have not understood my question. I meant where can I find the free goods that should by definition be there in a free market?' 

You’ll Find an Unicorn Before You Find a Free Market

Syed Bakhtiyar Kazmi in The Dawn

THE realisation that conventional economic wisdom, seeped in the myth of the free market, will be extremely antagonistic towards any solution based on protectionism and planned industrialisation, stipulates a bit of digression.

Scope limitation: the discussion here under is based on pure common sense sans any political bearing, with the simple objective of discussing alternative options for economic growth; those who know it all already need not read any further.

Whilst conspiracy theories may explain the ‘why’, it is indeed mind-boggling ‘how’ the world was sold an idea, ie free markets, which has nothing to do with reality. Essentially, you need the long arm of the government to even enforce the rules of the market, including breaking cartels for countering undesirable social outcomes.

My personal favourite from the net is, “You’ll find a unicorn before you find a free market”!

Perfect competition in free markets, even in theory, inevitably eventually results in an oligopoly or monopoly, as in the case of Coke and Pepsi.

More to the point, how many genuinely believe that any domestic cola manufacturer has any chance of ever taking market share from Coke and Pepsi in Pakistan; and this has nothing to do with quality or free markets!

Capturing the market for coloured aerated water has only to do with deep pockets!

This example is easily applicable to our case study, the imported can opener. To recap my observations in another article, because of free markets, Pakistan had started importing can openers which were cheaper and shinier than the domestically manufactured can opener. However, with the rupee depreciating, the Pakistani can opener might have become cheaper, but the domestic facilities have closed down and we probably have lost the skills to manufacture a can opener during this time.

At this point, foreign manufacturers will go to any lengths to scuttle any new initiative for the domestic manufacturing of can openers; dumping and price war are just the tip of the iceberg. The home country of our foreign manufacturer of can openers may probably even oppose Pakistan in the UN Security Council, just to apply pressure to protect their manufacturer’s interests!

Is that voluntary trade?

Here the free market proponents argue that voluntary trade is beneficial for both parties. They argue that purchasing, say, a Coke, demonstrates that the purchaser values a fizzy drink more than the money in his pocket, and hence should have the right, and the choice, to spend his money as he wants.

There is nothing wrong with that statement. However, no person, with even a tiny bit of common sense, is expected to borrow every day to drink a Coke, if he cannot afford to pay back that debt.

In the case of a nation, government is the repository of common sense of the populace; so how does borrowing in dollars to pay for Cokes every day for 207 million people make any sense? How is getting burdened with external debt mutually beneficial trade?

And here we come to comparative advantage theory which basically argues that nations should only produce and export items where they have a comparative advantage. Notwithstanding that most developing nations can only have a comparative advantage in raw materials or basic manufacture, let us for a minute be practical.

Under this fantastic ‘all else being held constant two-nation-two-products comparative advantage’ theory, Portuguese winemakers would be re­­quired to stop making wine, since London’s winemakers have some sort of advantage over them. But why would Portuguese winemakers, who can still make cheaper wine, and perhaps better tasting wine, stop producing wine, which they can easily sell in Portugal, and start making cloth when they are clueless about the cloth trade ab initio?

The Portuguese government could force them out of the wine business, but then we really are not talking about a free market, are we? And where is the guarantee that after a few years, when the last of the Portuguese winemaker has passed away, London winemakers will not suddenly start charging double? After all it is a free market. Portugal both now pays double and borrows to drink wine, or it does not drink wine since it cannot afford it. What in your opinion should Portugal do?

Here the free trade theory argues that free floating currency will increase the competitiveness of Portuguese wine; but the last winemaker is already dead!

As in our can opener example, we have forgotten how to make can openers; the problem is that if all our food is in cans, then we will be forced to borrow and buy more expensive can openers.

But the music will eventually stop! It always does. So where do we get the can openers from?