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CMV: Free market capitalism in America is a lie; we don't pay less when there's more competition.
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The US is arguably the birthplace of free market capitalism, yet the free market in the US means Americans actually pay more for many goods and services compared to other countries. Some examples:
- I pay $144 for a cell phone plan that covers 2 phones. In Ireland, you can get a cell plan with unlimited data for about $35 USD.
- Healthcare costs in the US are higher than in pretty much any other country on the planet.
- Prescription drugs cost about 3x as much in the US than in the UK.
- The cost of higher education. The US has more universities per capita than any other country and costs are also the greatest compared to a degree in any other country.
Americans have been sold a bill of goods about free markets. More often than not, corporations find a way to dupe the American consumer so that we pay more while the corporation brings in more profit.
Top Comment:
As others have stated: you provided exactly 0 examples of a free market product.
You also completely ignore the question of quality. You want it high quality goods, it is going to be expensive. For medicine, education and even cell phone plans there are lower cost options available to you. Yes, when you aggregate the offerings and look at the statistical cost spent on them, you do see that Americans can pay more for some things on average, but that's not because of a lack of low cost options. It's due to people from the first world generally wanting the highest or near-highest quality goods.
ELI5 Free market
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The concept of what ‘free market’ is confuses me. What is it? Why is it good/bad?
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Imagine you want to work, you need money to pay bills. I offer to employ you to flip burgers, for $5 an hour. If you were hoping for $10, you'd offer to work for $10 or turn down the offer. If you turn it down, I find another person who is willing and qualified for the position who will want to work for a lower wage. If I can't find anybody who wants to work for that price, it indicates that the wage is too low, and its not worth people's time and energy, as they can find better paying jobs. So I need to raise the price. And I, being a profit seeking business owner who wants to reduce costs, only wants to pay the bare minimum I need to (economics has this assumption that individuals,though law-abiding, are rational and selfish, to put it bluntly). So I was keep raising the price until I can employ somebody.
If you want that $10, either it means you are worth more, for example maybe you are a chef or can make better burgers than whatever joint I own and so can get more from other restaurants, or you have too high expectations. If you do have high expectations, you won't find a job and will be forced by desperation to accept a lower wage position. You can negotiate, even right now in the real world, that you offer such a value to the business that you should deserve that $10, and if convincing, I would employ you for it. But I would only if you can show that your abilities bring in more money or reduce costs to the business than I have to pay you.
This is supply and demand. I need workers, but I can't employ them if it costs too much, as I'd end up losing money and there'd be no point in running the business. So I will employ people for up to the value they provide to the business. Workers need jobs to earn money, and they want to maximise their wages, so they will try to find the best paying jobs they are qualified to work for. And when both parties come to an agreement, when we both settle on a price I'm willing to pay you and that you are willing to work for, thats when you get employed. That is the free market.
BUT unfortunately, that is not the society we live in. A free market merely allows this transaction to take place without regulation, and an arms length transaction (both parties acting willingly and of their own volition without law breaking). This would mean, however, that many entry level jobs, such as burger flipping, would pay for $5, or less. And those who aren't qualified to do anything else can't do anything else and are forced to take these jobs despite them paying too little to reasonably survive.
So, we have a regulation in place, that all workers must be paid a minimum wage no matter what. So that increases labour costs for employers. They still need workers, but the workers have to be paid a certain wage so they are forced to pay them at a higher wage than the market determines. This means that employers are likely to only employ the bare minimum needed to function, and give those who are employed, more tasks. This means that those who are employed become stressed with higher workload, but are paid more, and other people don't get employed. Whereas in the free and open market, the government does not intervene and more people get employed and have fewer tasks so less stress, but they get paid less.
Which is better? Well thats for you to decide. Should we employ more people but have them paid less? Or employ less but pay them more? Lower class people would likely prefer a minimum wage, upper class people would likely prefer a free market where they can have the labour they want at the price they want. One consideration that needs to be factored in here is that having a minimum wage can increase prices. Without burger flippers, my business cannot run at all, so I'm going to need at least one, and I'm going to need to set my prices to pay for them. The more they cost, the higher the prices. So having a free market, with no minimum wage can reduce prices and make the cost of living cheaper, which offsets the impact of lower wages.
So a free market, which can exist in other areas other than in labour and employment, is when two parties can come to an agreement as to the scope of goods and services provided, and for what price they will be paid for, with no government regulation. Its all what each party deems the worth of the goods or services and when they come to an agreement, they sign a contract and the transaction goes ahead. It can however disadvantage poorer and uneducated/unskilled people who simply cannot pay market rates for essential services (eg education) or survive off market wages. Government regulation helps these people by ensuring they have a way to pay for a basic form of these services and can get paid a modest but reasonable wage.
Any examples of a free market working?
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I've been listening to Ben Shapiro podcast lately and he swears by it. However I haven't heard him name some examples of it working. He was saying that healthcare can be taken care of via free market. Are there any examples of that working?
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Healthcare working, no. Other things, yes. Just look at food production post WWII. Bread basket or bread line? In a recent episode of The Americans(TV being another great example of a free market working), a Russian says something like "We have the same amount of land as them, the same variety of climate, the same abilites, so why can't we grow food?" Well because politicians that think it's a good idea to try growing watermelons where they don't grow(Krushchev) aren't great farmers. Farmers are great farmers, and when they partner with salesmen and mechanics, they can sure grow and move a lot of corn. Government had a light touch in America, mostly in the form of price-stabilizing corn futures. Like a safety net preventing the deadly toll of a truly "free" market. Beyond that, variety provides cushioning. If Kellog's goes bankrupt tomorrow, there will still be cornflakes in the store. Nobody will go hungry. If there's a stoppage at the state run cornflake factory, someone will.
But then there's things like healthcare, or water and air. Or even electricity these days, and the internet. Things where I say to myself "The concept of the profit motive is not worth the cost and should not apply here." Basically, it comes down to "maintenance" and "research and development" items that are always costs to a society and should never be profit generators. Water, power, infrastructure, hospitals, prisons, military, police, fire - that's maintenance of a 21st century society and should be government run, not for profit, but not necessarily at a large cost. Schools, NASA, DARPA - That's R&D, the investments we're making in the future of the nation. You can't try and get profits from either area, or you start eating yourself and falling apart. It's why private prisons and schools don't work today, same as private fire departments didn't work in NYC 120 years ago.
CMV: The free market is the best form for any industry and service.
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I believe that a free market (without government intervention) with competition will produce the best results: more quality, lower prices and more innovation. While a monopolized market, either by a private company or by the government, will have the opposite results. So, I think it's a good idea to have most things privatized. Education and healthcare included. The government could still give welfare to those who couldn't pay for it, like school vouchers and healthcare vouchers.
However, I see a lot of people in America complaining about their for profit colleges, health insurance companies, pharmaceutical companies, banks, internet providers, flying companies and private prisons. Are those industries really in a free market ? Could regulations solve these problems ? Why would a state run service be better than private run in these cases ?
PS: I'm an economics student from Brazil.
Top Comment:
A free market is to economics what the perfectly spherical frictionless cow is to physics: a useful basic model for learning and occasional simple real-world problems, but massively oversimplified and unsuitable for more complicated problems.
When people tout the benefits of a free market, what they're really touting are the benefits of competition, especially when that competition is sufficiently close to a state of Perfect Competition. That's what makes those markets so useful as tools for allocating resources.
Perfect Competition requires:
- An arbitrarily large number of buyers and sellers
- Consumers and producers have perfect information regarding the cost and utility of the goods or services
- Homogenous products
- Well-defined property rights
- No barriers to entry or exit
- No entities large enough to wield market power
- Perfect factor mobility
- Profit-maximizing sellers
- Rational buyers
- Lack of externalities
- Zero transaction costs
- No economies of scale or network effects
It stands to reason that when many of these factors are critically absent from a free market, that market is at great risk of market failure. In those circumstances, a system with government involvement seems preferable, doesn't it?
Take, for example, health care. You need it or you'll die, meaning you can't just leave the market, leaving providers a severe advantage. And unless you're a doctor—hell, even if you ARE a doctor in a lot of cases—you're going to a figure you trust as an expert, rather than having the knowledge to predict whether the services suggested will be worth the asking price. There's both a geographically-limited and world-limited number of those experts.
A completely free health care market, left to its own devices entirely, is a breeding ground for quacks, charlatans, and other crooks, while even the honest practitioners are at an extreme negotiating advantage over those seeking health care. Lower quality, higher costs.
ELI5: What is free market? What're the problems and efficiency of a free market?
Main Post: ELI5: What is free market? What're the problems and efficiency of a free market?
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Free markets are markets with no government intervention. Government intervention includes regulations, taxes, subsidies, production quotas, etc. Markets can be very efficient given a set of requirements met (better known as the first welfare theorem -- the perfect competition models in Econ 101). Stock markets are actually pretty efficient. But there are some circumstances where having an efficient market is not desirable. Perfectly discriminating monopolies are plenty efficient. They produce as much as firms under perfect competition. It's just not equitable. The monopoly makes all the welfare gains since it sells the products at the highest each consumer is willing to pay (not every consumer who purchases a good values it similarly). But we don't have monopolies like that even though there are varying degrees of price discrimination (like location based) which we do have. Still, an example of an act which is efficient but not equitable is insider trading.
Regular monopolies (one seller of goods), oligopolies (handful of sellers), monopsonies (one buyer of goods), oligopsonies (handful of buyers), negative externalities (external costs on a third party -- costs that are not placed on the market participants) are all examples of market failures. An example of a negative externality is emissions. Those emissions damage the environment and have health consequences for others but they're not factored into the market price. Governments then can intervene in these markets to bring them closer to the ideal: an efficient and equitable market (i.e. perfect competition).
ELI5: Why "free market" economics is often so frowned upon?
Main Post: ELI5: Why "free market" economics is often so frowned upon?
Top Comment:
there is no such thing currently in existence