Mea Culpa
The “C” word in the title is a polemic, which has little to no use in intellectual discourse today. Lets avoid it for the rest of the article.
Why free markets might be a useful
The basic idea, as presented by too many folks to list, attempts to solve a very simple problem, which in turn comes from a very simple assumption: trade is good. Trade is good! OK, so I grow beans, you grow rice. If we trade, we can both eat beans and rice and be healthier. Make sense so far? Now the question becomes- how much rice should I trade for a kilo of beans? This is the problem of price discovery, and its difficulty has lead to an enormous amount of writing on theories of value, theories of price, etc. etc. It gets even more complicated when we are trading hours of labor, derivative products, and other stuff. So, how do we solve it?
One common theory here is that we simply let markets decide prices. This is the efficient market assumption, that allowing people to demonstrate their interests, their wares, and compare to others around them – will enable folks to arrive at a good price that maximizes efficiency for everyone involved. Intelligent people freely participating in markets would lead to an intelligent price discovery.
Sounds great right? It seems plausible and possible. Free markets could help us run our economies more efficiently leading to improved living conditions, education, and eventually a shot at life on Earth surviving.
It’s a great idea perhaps, but sadly – we don’t see it being practiced anywhere. Instead, prices are controlled by centralized organizations, usually in connection with currency issuers. “Borders” are used to prevent goods moving and making sure markets remain inefficient. Trading is regulated and taxed to prevent market price discovery.
So, lets ask now: what would free market price discovery look like?
- Market participants, shoppers and traders, would have the opportunity to demonstrate their interest. Gone would be the market where people go in and purchase things for a fixed price, rather – one might expect that the price could change even as items are moved through the store. Fixed prices wouldn’t exist, as supply and demand would determine them dynamically.
- Trade through intermediate vehicles, exchange commodities aka “money”, could not favor any parties over any other. This means that fiat currencies would not be used, as these currencies clearly favor the issuer over the regular users. This should not be a surprise, as fiat currencies were basically introduced specifically because of their use in manipulating markets. Clearly, any free market with efficient price discovery would not use such tokens, as they enable the price to be skewed towards the interests of a single party rather than to reflect efficiency or intellgence.
- Geographic differences in price would reflect only transportation costs. This means that we wouldn’t see e.g. a gram of cocaine selling for the price of a beer in one place and the price of 50 beers in another, despite transportation of one gram not costing 49 beers. Basically, the free market hypothesis tells us that differences in price from place to place would be exploited by arbitrage and would disappear. If these arbitrageurs are attacked or removed, the market is no longer one in which free trade could facilitate intelligent price discovery. Similarly we wouldn’t see such a difference in prices from place to place in the big mac index, or in real estate, as we do today. Sure, there are some other factors than transportation costs which would enter, however – one could look and see if arbitrage were possible and it it were occuring – to determine if a free market were present.
- Marrkets would be public and inclusive. Mandatory licensure, regulation, zoning, customs, and various other practices which prevent our rice farmer from entering a market are things which would not be present in a free market. The goal of a free market is to allow all peoples interests, supply and demand, to be visible so that the most intelligent and efficient price could be agreed upon. If market infrastructure providers show favor to one party or another, such a system is no longer functioning as a free market price discovery mechanism.
- Education and information would be prevalent. Clearly, a market wouldn’t work unless the participants know how to use it. This means education as well as information systems that allow it to work. If at some point human society decides to start using free markets as a price discovery mechanism, the systems that are used would have to be designed so the relevant information is immediately accessible to all participants, and the all participants have had the opportunity for the relevant education in how to use the systems.