This essay is about free markets. As background I will provide a brief summary of the conclusions of the first essay in this “Invisible Hand” series which examined the physical object nature of our money and some of the unfortunate consequences of that nature. I will be concise so this review won’t take long.
All money in history (and pre-history) has been considered to be or to represent physical objects such as a basket of grain, a cow, a coin, or a paper bill. Today most money is in computer accounts and though it zips around the world from account to account at almost the speed of light, it still is treated as if it were a physical object of some sort. Because we treat money as if it were a physical object, anything which is true of physical objects in general will also be true of money. This obvious point is ignored by economists and others who talk and write about money even though it is the most important truth about money. The importance of the physical object nature of money cannot be overstated. What follows are some of the consequences of that physical object nature.
First, money is like other physical objects in that it can be taken from its owner against that owner’s will; by force, fraud, or stealth and it can also be lost or destroyed. This means that you need to suspect almost everyone of trying to get your money by fair means or foul.
Second, money must be amoral because all inanimate physical objects are amoral. Even animals are amoral, in that they have neither an ethical sense nor morality, especially when they are used as commodity money. You can use your physical object money for anything, good or bad.
Third, the money supply is independent of the supply of goods and services for sale because the supply of one physical object is independent of the supply of other objects.
Fourth, money falsely simulates a zero-sum game in monetary transactions because the money gained by one party must be lost by some other party or parties. Money makes us think that other people can gain money at our expense and that we can only gain money at their expense. It makes us treat others as if they were competitors, rivals, opponents, or even enemies.
Fifth, money is almost impossible for a society or nation to control. In every nation that attempts to limit, regulate, or tax trade a black market comes to exist; and organized crime flourishes in all nations.
Sixth, money transactions are two-party interactions. Two-party interaction is inherently unstable because if one party gets an advantage in power such as having more money, the stronger party can use that power to gain still more advantages. This is particularly true of money. The old saying “them as has, gets” is true. Possession of money does make getting more money quite a lot easier. Naturally, the weaker party in such two-party interaction will eventually want to end the interaction. Thus the relationship is unstable.
Keeping that review in mind, let’s consider free markets.
Way back when, in the old days… no not that recently. Really way back, 10,000 years ago. In those days there was a free market. In fact, there were a lot of free markets. Every society, and there were hundreds around the world, had free markets. There were no governments or corporations. People were hunter-gatherers. There were no farms: women had not yet invented agriculture. If you had some property, and you wanted to trade that property to someone else for an item of that other person’s property, there was no one to stop you. You could trade with anyone you wanted so long as they were willing, also. You would know about as much as the other guy did about the products being traded. There was no inside information that you or he had that would give one or the other of you an advantage. And since both of you would be better off after the trade, because both of you clearly were in a better situation because of the trade, you had helped him out and he had helped you out. Naturally, you and he would feel good about each other. You were doing him a favor, and he was doing you a favor. Each of you would like to do this trade thing again at some time in the future, therefore there was no incentive to cheat your trading partner. You might even come to depend on the other fellow and help him out when he had problems. You might have one of your children marry one of his children just to be sure you could always continue those helpful trades in the future. Of course, those trades were barter. Trade made friendships and alliances. There was no money involved. The markets were all free.
Time passed (a few thousand years, say) and in the geographic region in which we study the people we find that commodity money has developed due to the adoption of agriculture. This might be in what is now China, Pakistan/India, the Middle East or Egypt. People are trading more than ever now. But most of the trades involve exchanges of whatever they are using as commodity money for other things. You would think that after thousands of years of free trade, of markets that were completely free, that the folks back then would have realized how useful and beneficial those free markets were. But people are only human, after all, and the transition from no money to commodity money was so slow that no one really noticed what was happening or even realized that it had happened. If you were to ask someone from 7,000 years ago what things were like before there was a commodity money, he would have replied that there had always been commodity money.
Things have changed in other ways as well. It’s 5000 BC, and there are cities and governments in several places. There are regular trade routes with known tracks and trails. A few people even spend all their time traveling to trade. There are armies which also serve as what we would call police. But the huge government bureaucracies we are accustomed to simply do not exist. And yet, there are no free markets.
Before we explain that statement it would be best to be very clear about just what exactly constitutes a free market. As usual we will turn first to Wikipedia. But you may use any resource you please for your definition so long as you examine the characteristics rather than merely compare a socialist or communist state with a free world nation. We will be discussing actual free markets here, not varying degrees of unfree markets. When I use the term “free” I mean really free, not just less oppressed.
Wikipedia says and I QUOTE “A free market is a market system in which the prices for goods and services are set freely by consent between sellers and consumers, through the forces of supply and demand without intervention by a government, price-setting monopoly, or other authority.” UNQUOTE. They also include the concepts involved in “perfect competition” meaning the market will reach an equilibrium at which it will experience a Pareto optimum. But this perfect competition idea requires the following, also from Wikipedia: QUOTE “A large number of buyers and sellers, no barriers of entry or exit (anyone can provide any product), perfect factor mobility (that is, capital goods and services can be easily shifted from one kind of production to another), perfect information in which all buyers and sellers have the same information about the market available to them, zero transaction costs, they maximize profit, the products are homogeneous so that it doesn’t matter which seller one buys from the product is the same, no scaling advantage so the big producers have no advantage over the little producers, well-defined property rights, rational buyers, and the costs or benefits of an activity do not affect third parties.” UNQUOTE Free markets, Friedrich Hayek maintained, are also expected to generate a spontaneous order which results in a better “allocation of societal resources than any design could achieve.”
If Hayek was right, then one would have expected all the surviving economies to have retained their free markets when they developed commodity money. The free markets would have generated a spontaneous order which would have allocated the various societies’ resources optimally. Thus, those societies with free markets and agriculture would have survived much more easily by natural selection than societies without free markets. But that’s not what we find. We find the reverse. We find no free markets at all once the societies make the transition to agriculture. With hunting-and-gathering economies there are always free markets. With agricultural economies or later there are never free markets.
Let’s refer to that free market definition again to refresh our memories. Prices for goods and services are set freely by consent between sellers and consumers without intervention by a government, price-setting monopoly, or other authority. If some people are kept out of the market and denied the right/power to sell, that gives those who remain power over prices. So ideally there will be no barriers to entry or exit. But we know those agricultural societies mostly practiced slavery. That’s price-setting with a vengeance. It’s also a huge barrier to entry or exit, entry as a seller and exit as labor. Slavery is about as opposite to a free market as it’s possible to imagine.
Given the population of the society/economy, there must be a large number of buyers and sellers such that no individual buyer or seller can significantly affect the prices. But that isn’t what happens in the village or city markets. Let’s say you are selling wool in the market. You have been selling wool in this market in the city square for your entire adult life. Some stranger arrives with wool to sell. How do you feel about that? Are you pleased that another person will be selling the same product that you’re selling, so that your marketplace can experience a Pareto optimum for allocation of societal resources? No, I didn’t think you’d be pleased. In fact, I think you would feel threatened. What if the new guy is willing to sell his wool for less? What if your usual customers buy from him instead of from you? What if you have to reduce your prices to just half what they were before in order to get just half of the sales you previously had? If you have other friends in the wool trade that operate in that market do you think they might join you in encouraging the new guy to take his wool to some other market? If you bribe the police/soldiers do you think they might run that guy out of town? Do you think you could come up with other means of eliminating that competitor? So much for a large number of buyers and sellers, and no barriers to entry into the market; and you’ll notice that government had nothing to do with it. You did those things to eliminate competition because you wanted to for your own personal, private, profit-seeking reasons… not because the government told you to.
If we go over that list of factors in perfect competition we find that some are physically difficult to arrange for many products, so we should not expect perfect competition to exist in the real world. But it might be possible to approximate it for all practical purposes if it weren’t for our physical object money.
But let’s get back to you as a wool seller in the market. Let’s assume a village of about the same size which also has people meeting in the square to trade but let’s take the time back a few thousand years, to a time when there was no commodity money because it had not yet developed. You are in the market looking for people who have things you need and who, themselves, need wool. The new guy also has wool to trade. But what are the odds that he is looking to trade for the same things you want to trade for? Well, there aren’t nearly as many products in those times as there are today, so the odds are significantly higher that some of the things you want to trade for he also wants to trade for. But you have a big advantage over this other guy. You know exactly who is likely to have what you want and who is likely to want what you have. Also, they are likely to have traded with you before and expect to trade with you in the future. So the new guy will be just an additional resource for the village to be welcomed. If there happens to be a shortage of wool this year perhaps he can trade for what he needs. If there is no shortage some people may be willing to trade with him anyway since wool lasts rather well and he doesn’t have that much wool since he’s only a single producer. In other words, this new guy is no threat to you.
So what’s the difference between the two situations? There is no difference physically between the two. The people are the same. The marketplace is physically the same. If you looked around during the typical market day watching the people trade (one by barter and one using commodity money) it’s unlikely you’d notice any difference at all. Oh, you might notice after a while that all the trades seem to involve some particular commodity but that’s pretty subtle and you could easily miss it. The differences are not external differences. The crucial and most significant difference is in the minds of the people involved.
The use of money, physical object money (which we shall call POM for convenience), entails all those consequences I mentioned earlier. You will notice that in the market, buyers and sellers are rivals or competitors in that false zero-sum game simulation which POM creates. You will also notice that the new guy with wool to sell is in competition with you for the limited amount of POM in the marketplace that day. If he gets money it is at your expense. You see any sales he makes as being sales that could have been yours. Remember that in barter, you and your trading partner are allies? Well, with POM you and the people you sell to are not allies but enemies or opponents. It causes a completely different relationship in the market. And it has nothing to do with government! If government becomes involved it is at the request or urging of the participants in the market who are attempting to prevent the market from being a free market. Therefore POM will prevent free markets in this fashion, and for this reason, regardless of whether there’s any government participation or not. See organized crime around the world and how unfree are the markets in which they participate.
But let’s look at that large number of buyers and sellers in the market again from a different perspective. Remember that another of the consequences of POM is that the interactions are two-party interaction and thus unstable. Barter is also a two-party interaction. It’s also an interaction in which one party may gain a power advantage. But how can one turn that power advantage into a still greater advantage? It’s really hard with barter because you are trading for only one or two things you need. And that’s true of both parties. It may be an inconvenience to not make the trade but it’s a similar inconvenience to both parties since both will be better off for having made the trade. To refuse to trade is like cutting off one’s nose to spite one’s face. With POM it’s different. POM trades for everything. To cut off one’s supply of POM is tantamount to a death sentence. Thus when the economy shifts to POM over the centuries, there’s a shift in social relationships as well. Those who gain more POM likewise gain more power in all their relationships. This can greatly reduce the number of buyers and sellers. Some products only the few wealthy can buy. But that pales to insignificance compared to the effect on numbers of sellers. As wealth concentrates in the hands of a few, the capital resources are also concentrated into the hands of a few which reduces the sellers dramatically. You may have noted that when a new industry begins there are many who enter the market with the new product or a variant thereof. After a relatively short time, many of those who entered the market have failed and left the market and only a handful remain. We see this again and again in the modern economies.
The concentration of wealth has only a modest effect on the number of buyers and that effect is insignificant until it becomes extreme. There comes eventually a tipping point at which the lack of spending by the poor for lack of money reduces or eliminates sources of income for those in the so-called middle class, which converts them to poverty and the blight spreads with ever-increasing speed until a point of economic collapse. The positive feedback loops that POM provides also generate a powerful destabilizing influence.
When there are only a few sellers in the market for a product, it becomes quite easy for those sellers to agree on the prices they will charge for their product. This price-fixing behavior does not even require a formal meeting or organization to bring about. Just noticing what the competition is charging is sufficient. This problem is made worse as division of labor increases. That is, as more people specialize and thus become more expert in their trade, there become far more trades in which to specialize and thus fewer people in each trade. Since there are a limited number of participants in each guild, for example, the guild has far less trouble keeping its members “in line” so that they present a united front to customers.
Those experts in various trades now will have more knowledge of their products than their customers. That gives those experts the advantage in dealing with buyers. Again, this takes us away from free market characteristics. There is no longer equality of information about the products being bought and sold as there was in the much simpler barter economies. The modern economy is far, far more specialized than the economies of 5,000 years ago. The vast majority of the products people buy are almost totally outside the buyer’s areas of expertise. I can judge the haircuts I get but I have no idea what’s on the skin of the apples I buy let alone what’s in this computer I am typing on. On so called “perfect information” the markets fail miserably as technology advances.
Now let us consider transaction costs which are held to be zero in perfect competition. Transaction costs include search and information costs to find the desired products and what prices are being asked in the market, bargaining costs which accrue in the process of haggling or bargaining over price between buyer and seller, and policing/enforcement costs when contracts settled upon in the bargaining phase are violated. Look how many of these costs are a result of the consequences of POM. Finding the desired product will be a cost in any system. But the price is a product of POM. Bargaining costs are strictly POM as a result of the zero-sum game simulation, the taking money against the will of the owner consequence, the amoral consequence, and the “cannot be controlled” consequence. Whether policing and enforcement is even possible when the inherent instability gives too much power to the seller is a function of POM. Naturally, the policing and enforcement costs are necessary because of the competitive relationship in the markets which use POM. When economic relationships are those of enemies it’s difficult to function at all without rules and officials. Unless the rules are fair and the officials unbiased, the market simply cannot be free. The opportunities for fraud in the market result from POM being vulnerable to being taken by fraud. The amorality of POM means that POM can be used to destroy the freedom of the market thus harming everyone either directly or indirectly. The fact that the use of POM cannot be controlled simply makes possible the violations of all ethics, morals, and laws concerning actions appropriate to the market.
As the technology of production improved, and as the range and quality of products increased, the homogeneity of the products in the market was reduced greatly. The point has been reached today when the buyer has almost no way to compare the different products under consideration without the help of an expert and each producer of products attempts to make those products unique in appearance if indistinguishable in fact. I cite the beer and soda manufacturers as examples of industries in which the product differences are almost imperceptible but the advertising would have you believe otherwise.
Thus our conclusion must be that POM renders free markets impossible. As a test for that conclusion one has but to produce evidence of any economy in history which is agricultural or higher in technology that had or has a free market economy. An indicator would be that the nation had no organized crime.
Articles or learned tomes on free markets notice and emphasize government interference with markets. I can’t disagree with the attention given to governments in that regard. What I think is missing is the recognition that even without government involvement, free markets would be strangled in the crib by POM. Simple fraud alone is all that is necessary to destroy or prevent free markets. Fraud does not require any government, laws, enforcement or oppression. Fraud is freelance, every man for himself, you’re on your own, I can do this for myself, and equal opportunity. Fraud takes place at every level in the marketplace from advertising through contracts to packaging, the stock market, and to the top of the financial markets; it even includes activities within and among businesses. You simply cannot create and maintain a free market with rampant fraud. Yet POM makes fraud possible and inevitable whether there’s a government involved or not. Organized criminal activities include swindling each other. Drug deals gone sour are a reflection of that truth.
Libertarians who think it sufficient to change or restrain government to attain free markets, or who think that anarchy will bless us with free markets, are living in a dream world. Elimination of government is irrelevant. Government has just been the tool, the means by which those in the market have tried to gain unfair, immoral, and unethical advantages over other market participants. It’s always been that way and so long as we employ a POM it’s going to continue to be that way. The only way to get a free market is to eliminate POM. Of course you don’t see or hear anyone advocating that we change the most basic aspect of how our economies operate. Similarly, you don’t see anyone solving the economic, political, and social problems we face either.
The benefits of free markets are huge. They are efficient, productive, and a reflection of basic freedoms. The obvious superiority of free markets has legitimately made them a goal and objective of many economists and political thinkers for hundreds of years. But by ignoring the consequences of POM, all attempts to achieve the free market goal are doomed to failure. Worse than that, scoundrels of all stripes have attempted to take advantage of the movements to bring about the free market by defrauding their followers. Attempts to eliminate government enforcement of regulations in the marketplace are not motivated by a desire to get government out of the market but rather are an attempt to give free license to the swindlers. The massive multi-trillion dollar frauds of the real estate bubble in the early 21st century show what happens when there’s no regulation of the markets. At its best, government tries to support the little guy in his unequal contest with the big money interests. The problem is that big money interests control the government and always have. About the closest we have come in the U.S. to government actually helping the poor and middle class came after the Great Depression and WWII with things like high taxes on high incomes, social security, the G.I. Bill, Medicare, and limitations on Wall Street. You will notice that once the big money interests got back in the saddle in running government, the playing field got tilted again to greatly benefit those big money interests. That, too, is a consequence of POM.
Where does this leave us? Is our situation hopeless? Is humanity doomed? Are all attempts to escape the power of POM fated to be frustrated? That depends. If one goes after the powers that be, the powers that prevent free markets, whether those powers are big money interests or your local small businessman; if one confronts them head on, one is destined to lose. These interests have been fighting opposition for thousands of years. They have adapted to all sorts of government theories from simple, brutal oppression as in the dark ages after Rome fell through enlightened kings to democracy and on to communist totalitarian oppression. They have successfully prevented free markets with and without the aid of federal, state, and local governments. They have used fair means and foul including mass murder. (The St. Valentines’ Day massacre was one market participant trying to eliminate a competitor.) A direct attack on these interests will almost certainly fail and any organized effort will almost certainly be co-opted by persons hoping to exploit such an organization for personal self-aggrandizement. In other words, revolution almost always replaces one oppression with another. Life for the average citizen of the British Colonies in America hardly changed at all with the success of the American Revolution: slaves were still slaves, voting was still restricted to property-owning males, taxes were still being imposed and collected, and Shay’s Rebellion failed; and that was under the Articles of Confederation – which was a very weak government. Any kind of rebellion or opposition using force will be overwhelmed, undermined, undercut, and subverted by the very nature of POM.
The alternative is to present a plan to replace POM with a superior type of money. You will have noted by now I am sure that even the big money interests have problems. The rich have cares and woes. Economic collapse harms almost everyone, including the big money interests. Let’s see how a non-POM would differ in its effects on the market.
The consequences of the proposed non-physical object type of money would include the following: Non-POM could not be taken from its owner against the will of the owner; thus there would be no taxes, fraud, theft, loss, or destruction of one’s money. Second, non-POM would be moral and could not be used to pursue immoral ends. Third, the supply of non-POM would always match the supply of goods and services for sale. Fourth, the non-POM would accurately reflect that human beings are mutually interdependent so that what is good for others is good for ourselves. Fifth, non-POM would be easy to control so that it could not be used for illegal or immoral actions. Sixth, non-POM transactions would be three-party transactions in which A has power over B, B has power over C, and C has power over A. This arrangement is inherently stable, avoiding power getting concentrated into the hands of a few.
Non-POM would promote, encourage, and facilitate free markets, as well as have free markets integral to its existence and functioning.
A further advantage is that no coercion would be involved. No one would tell others what they have to do under threat of force.
Property would be completely private, no joint or group ownership; and all that with no government except for foreign relations. If you like anarchy, you’ll love the lack of laws: since they are totally unnecessary and would be ignored.
I’ll bet you think that’s completely impossible. But then you probably haven’t read “Invisible Hand” at NOPOMSTUFF.INFO yet either. Since you have never known any kind of non-POM; how could you possibly know what is possible or impossible with such a medium of exchange, standard unit of account, and store of value? Unless you accept the possibility of a solution, you blind yourself to solutions which exist. There are none so blind as those who will not see: So take a look!