Free Market

[abbielives!]

any one know a good refutation of free market theory?

[Demogorgon]

What aspect of it?

[BobKKKindle$]

The basis of Free-market-theory, as you describe it, is Say's law. As I understand it, Say's Law is a foundatational theory in Classical Economics, and is essentially the idea that, given the free interplay of the market forces of demand and supply, the quantity of a commodity produced in a market will be equal to that which is demanded and will be sold at a price that reflects these two economic variables - markets will clear.

However, this theory is fundamentally flawed because one of the assumptions that is made is that firms have perfect knowledge of demand both in the present and in the future - knowledge of the future is important because a time interval between the start of a production cycle and the entry of a commodity into the market place exists. In addition, the theory does not account for the fact that production is carried out by the firms between which there is no coordination and exchange of information, who are thus unaware of the production decisions undertaken by their competitors, limiting allocative efficiency.

[ComradeRed]

However, this theory is fundamentally flawed because one of the assumptions that is made is that firms have perfect knowledge of demand both in the present and in the future - knowledge of the future is important because a time interval between the start of a production cycle and the entry of a commodity into the market place exists. In addition, the theory does not account for the fact that production is carried out by the firms between which there is no coordination and exchange of information, who are thus unaware of the production decisions undertaken by their competitors, limiting allocative efficiency. Marx's criticism was better. Say's Law works if and only if the firms work without trying to make a profit; actually, mathematically, no profit can be made for Say's Law to work.

However, even bourgeois economists assume that firms want to maximize profit. This presupposes the existence of profit.

Thus there is a contradiction with Say's Law. It's true iff there is no profit; there is profit; thus Say's Law is not true.

Marx pointed this out in vol. 2 of Capital if I recall correctly.

[ComradeRed]

Oh and as for criticisms of the free market, I assume you mean "conventional economics"?

In that case, if you are mathematically uh lazy or anti-math, then I would recommend Steve Keen's "Debunking Economics".

If you are a math wizard, I would recommend a number of books but most (if not, all?) are cited in the bibliography of "Debunking Economics".

It just depends on how much you know and are savvy about math.

[Issaiah1332]

Originally posted by [email protected] 02, 2007 06:16 pm
Oh and as for criticisms of the free market, I assume you mean "conventional economics"?

In that case, if you are mathematically uh lazy or anti-math, then I would recommend Steve Keen's "Debunking Economics".

If you are a math wizard, I would recommend a number of books but most (if not, all?) are cited in the bibliography of "Debunking Economics".

It just depends on how much you know and are savvy about math.
How does the free market account for monopolies and oligopolies?

[Janus]

How does the free market account for monopolies and oligopolies?
It doesn't since supporters of laissez-faire economics assert that monopolies cannot form in a totally free market system because it requires government intervention (which is false since not all coercive monopolies have been government granted monopolies).

[Issaiah1332]

Originally posted by [email protected] 03, 2007 12:30 am

How does the free market account for monopolies and oligopolies?
It doesn't since supporters of laissez-faire economics assert that monopolies cannot form in a totally free market system because it requires government intervention (which is false since not all coercive monopolies have been government granted monopolies).
I dont get how monopolies have to have governmental intervention?

I mean in a free market, people could acquire enough power to be the only dealer of a certain product. That is bound to happen in a free market.

[ComradeRed]

Originally posted by Issaiah1332+April 02, 2007 05:45 pm--> (Issaiah1332 @ April 02, 2007 05:45 pm)
[email protected] 03, 2007 12:30 am

How does the free market account for monopolies and oligopolies?
It doesn't since supporters of laissez-faire economics assert that monopolies cannot form in a totally free market system because it requires government intervention (which is false since not all coercive monopolies have been government granted monopolies).
I dont get how monopolies have to have governmental intervention?

I mean in a free market, people could acquire enough power to be the only dealer of a certain product. That is bound to happen in a free market. [/b]
Because this supposes that there is perfect competition; at least for Neoclassical economics and its derivatives like Monetarism.

That's just not how it works.

There is this process where firms either buy other firms or go out of business. It's called the accumulation of capital.

Well, if you start a new firm on say operating systems, you're not really going to have as much market power as say Microsoft or Apple. That's because they've all ready consolidated their market power through the accumulation of capital. The process is described quite well by Marx in Capital vol. I.


It doesn't since supporters of laissez-faire economics assert that monopolies cannot form in a totally free market system because it requires government intervention (which is false since not all coercive monopolies have been government granted monopolies). Pure sophistry. This denies the fact that as time goes on there is inertia in the market; it's harder for a new firm to be as big and powerful as an older firm.

Think of it this way: it's like amoebas reproducing by eating each other. Eventually you'll have fat amoebas (this analogy breaks down because amoebas reproduce whereas firms do not, which is why the "evolution" argument for capitalism given by Austrians break down). A new amoeba would not be nearly as fat as an old one if we introduced a new one to this system; likewise a new firm would not nearly be as consolidated as an old firm in a market with inertia.

Again, try and go against Microsoft.

A counter-example could be given of google, but that is of a different market: search-engines and advertisement. Only now once they've consolidated are they considering whether or not to challenge Microsoft.

It's not as though the google guys dropped out to challenge microsoft. They dropped out to start a search engine company. It's just that this particular company is expanding its horizons because it all ready has a majority share on the search engine market.



How does the free market account for monopolies and oligopolies? It doesn't.

[Kwisatz Haderach]

Another fundamental problem with free market theory is that supply and demand are measured in monetary terms. In other words, "demand", for example, is defined as "the amount of money that people are willing and able to pay for a certain good at a certain available quantity".

Why is that a problem? Because different people have vastly different amounts of wealth, and therefore vastly different abilities to influence market demand. In a market economy, money gives you "wanting-power". The more money you have, the greater the power of your needs and wants on the market. A market works according to the principle "one dollar, one vote".

[ComradeRed]

Originally posted by Edric [email protected] 02, 2007 08:38 pm
Another fundamental problem with free market theory is that supply and demand are measured in monetary terms. In other words, "demand", for example, is defined as "the amount of money that people are willing and able to pay for a certain good at a certain available quantity".

Why is that a problem? Because different people have vastly different amounts of wealth, and therefore vastly different abilities to influence market demand. In a market economy, money gives you "wanting-power". The more money you have, the greater the power of your needs and wants on the market. A market works according to the principle "one dollar, one vote".
That's "not a problem" if you believe in economic canon, since there is that whole "return to scales" issue.

But that's fundamentally flawed since you're mixing apples and oranges together, by measuring capital, land, labor (etc.) in terms of their monetary cost. That was Sraffa's big criticism of the "return to scales" idear.

[Kwisatz Haderach]

I'm not sure I recognize which issue you are talking about - could you elaborate a bit?

[BobKKKindle$]

Edric O, you are right in saying that under the free market one's access to goods and services is limited by the financial resources that one commands, but that is something that is accepted as justified by those who support Capitalism - they believe that differences in income dervie from the individual's innovation, skills, and productivity. I think the original poster was asking for criticisms of the economic theory that is used to support the free market - the idea that markets clear (Closely related to Say's law) for example.

[Kwisatz Haderach]

I was pointing out that one's wealth determines not only one's access to resources, but also one's power to determine the production and allocation of future goods. In other words, it's not just that the rich get more stuff than the poor - the rich also get more influence in deciding what will be produced next year. And that is something that most free market theorists are reluctant to admit, because their ideology is founded on the assumption that the market "gives people what they want".

If the decisions of the rich weigh more heavily in the market than the decisions of the poor (which they do), then market demand does not accurately reflect "what people want".

[ComradeRed]

Originally posted by Edric [email protected] 02, 2007 09:52 pm
I'm not sure I recognize which issue you are talking about - could you elaborate a bit?
In economic canon, when a firm maximizes its profit (i.e. when marginal cost is equal to marginal revnue) that's the ideal of all possible situations.

Not only because profit is maximized, but because through the magic of the market, each input is paid proportionally to the amount it is used in the production process.

See Return to Scales. (http://en.wikipedia.org/wiki/Returns_to_scale)

The reasoning behind this is kind of fudgy because it's using a static analysis and when you start using time dynamically it breaks down completely.

[Janus]

I dont get how monopolies have to have governmental intervention?
That's the thing, some do and some don't. For example, the Dutch and British East India Companies only gained their economic power through government intervention and backing. There are also actual government monopolies (various state owned oil companies) and government grant monopolies (Standard Oil) but there are also "natural" monopolies like Microsoft or Carnegie Steel.

[abbielives!]

Originally posted by [email protected] 02, 2007 02:56 am
What aspect of it?

ermm, all of it.. :blush: