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Tuesday, December 18, 2012

Free Market Sketch

I don't remember where this was now but a while back I had cause to do a very quick sketch on aspects of what a free market is and why it makes sense vs. centralized control. This was in a comment thread, but the context is mostly inferable:

Rough sketch, setting aside far-end issues of monopolies (including govt created ones like patents): Most competition is not winner-take-all but gradual. (Note WTA cases usually equate to monopolies, and often [but not always] require govt to create!) In the full ecology, one is rarely competing "every man for himself" but rather competing with one group (your competitors) to cooperate best with another (your customers, partners, and other businesses who provide orthogonal components to whatever solution/product you provide). This style of competition is Very Good at revealing and incentivizing places and ways to improve and innovate. In the absence of competition, a single group can often remain blind to its shortcomings for decades to eternity. It's easy to Imagine otherwise, but the reality is this is a shortcoming of human perception--our tendency to accept the status quo as normal/correct--which is rarely overcome by anything but competition--our drive to search for something different/better in order to gain an edge for our genes, ultimately... And I stress again, "competition" does not mean "every man for himself" because invariably the best way to gain for oneself is to provide for others.

Part 2: "investment" is the act of deciding where to best allocate resources. If you decide wisely, you profit; poorly, you lose. This is Exactly the same decision that needs to be made by your hypothetical govt body applying a "systems based approach", except that in the free market case the above "competition" benefits apply whereas in the govt case the "stodgy monopoly" problems apply. The lefty argument here is to point at all the places where investment appears to prioritize "profit" at the expense of long-term outcome. Here's the thing: If people were capable of being better at analyzing long-term outcome, they would invest better! I posit (and I think this is provable) that there are (mainly) three causes of bad free-market resource allocation/investment/decisions in general: 1) People aren't smart enough or don't have enough information to do better [in which case, the free market solution still provides far and away the best approximation and tasking a govt bureaucracy with same problem is disastrous!], 2) The allocation isn't actually bad, it just looks that way on shallow inspection ["cost" is a shockingly good aggregator of total energy input, for instance; the cheapest good is invariably more energy efficient to produce than more expensive items that are supposedly more "green"--the latter usually just hide their waste further from the consumer's eye!], 3) There is fraud or coercion involved [either because the govts doing it or because the govts not doing its proper job].

Part 2b: "finite resources" are central to the awareness of any free-market investor. There are whole markets devoted to predicting the long-term needs and availability of everything and anything, and when scarcity is detected on the horizon, investors raise the price on those goods which slows down their use and encourages competitive alternatives. Again, this is Exactly the process you want your govt agency to do, but you're trying to do it without the (natural!) incentive structure. It's been tried constantly throughout history and always had horrible results. It's easy for a lefty to sit in his arm-chair with nothing on the line and whine about the use of oil and that we'll run out and we should ration and legislate and yadda yadda, but the free market is already doing its best to predict the Real long-term outcome, which is taking Soooo much more into account than any arm-chair economist/environmentalist, including the inevitability of emerging competing energy supplies, better methods of finding and extracting, etc. etc. etc. Bottom line is if you have a better formula for predicting the future scarcity of resources, you can save the world And profit by investing accordingly right now.

Part 3: There are problems with an unfettered free-market! I believe (though even on this point I am not firm because I have no Proof) that power tends to consolidate and eventually monopolies do become a problem. I believe (and on this I'm pretty firm) that humans are sheep and can be programmed through advertising to waste their lives and money on stupid, self-destructive things (bottled sugar water imo is a better example than bottled plain water). I might concede that a failing of the free-market is that it does incentivize abusing people's stupidity in this respect -- but I know of no system that is immune to this that doesn't cost far far more in other ways than it saves here! (I am remembering my trip into East Germany before the wall came down. People still did/bought/consumed all the same stupid things, just with less choice. So I'm not sure I know of any system that is immune to this at all...)

And finally the tragedy of the commons (air quality, oceans, etc) is Definitely a problem, but it is not a problem of the free market, per se, because the whole point of "commons" is that they are the component that is Outside of the market. In other words, free market says nothing whatsoever about the commons -- they need separate provisions. (Though most of the better solutions to commons type problems are inspired by free-market principles.)

Hope that helps...

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Simon Funk / simonfunk@gmail.com