A major problem is that being free and being unfettered are two aspects of markets that are in constant conflict with each other, reflecting the fact mentioned earlier that buyers and sellers are in constant conflict - buyers wanting low prices and sellers wanting high prices. Because of the buyer/seller conflict a market cannot be free to the same extent for both participants, because each seeks advantages for him or herself, and an advantage for one is used to disadvantage the other. Therefore any freedom of choice that permits an advantage to be taken by one side naturally restricts the freedom of choice of the other side.
A transaction is an adversarial encounter where one participant's freedom is the other participant's constraint.
Because of this an unfettered free market is a logical impossibility. A free market can only work if both buyers and sellers respect each other's property and refrain from taking advantage of the other side, and they only do so if an outside authority (law enforcement) guarantees respect for property and prevents exploitation. This is the irony:
A free market must be fettered in order to guarantee its freedom, and an unfettered market can't be free because those with stronger positions exploit the weaker.[114]
From now on therefore I shall refer to unfettered markets rather than unfettered free markets, because unfettered markets are what neoliberalism champions, and the freedom they embody is strictly one-sided.
The distant past was a time of unfettered - but certainly not free - markets.[115] The strong took what they wanted - usually land - and distributed it to their supporters, who 'allowed' peasants to work it to provide for their own and the owner's survival needs, and to provide surplus wealth almost exclusively for the owners. Slavery, child labour and widespread exploitation of the poor were commonplace because such people would work, or could be made to work, for no more than barely kept them alive. People who had strength used it for their own benefit.
Although proponents of the unfettered market view insist on the enforcement of law, order, property rights and contracts, regarding these as the only legitimate duties of the state, they argue fiercely against any further outside interference. In this they are faithfully following in the footsteps of earlier proponents, who fought every proposed infringement of market freedom, including slavery and child labour, since both were particularly lucrative.[116] An unfettered market has no means of applying self-limitation. It operates very much like a machine, doggedly maximising the output for any level of input, without any concern for the environment, resource depletion, fairness, justice, human suffering or even death. The limitations that these concerns demand must be applied externally, by the state on behalf of society as a whole. Modern proponents of unfettered markets now accept the need for many of these limitations (or at least they daren't deny it), but in accepting, however reluctantly, such limitations, they have moved their position on fettering from absolute rejection to acceptance by degree. Their position has moved from upholding a point of principle to one of arguing where society should draw the line.
A major problem with unfettered markets is that often there are third parties that are affected by the transactions, without having any say or sometimes even any knowledge of them. This has become more evident as we increasingly recognise the environmental dangers of human activity. Suppliers whose production processes create pollution or carbon dioxide have been allowed to dispose of these unwanted products into the atmosphere or rivers or the sea free of charge, even though harm is done by them. Here production costs are borne by the population as a whole rather than by suppliers, who are able to sell their products and buyers to buy them more cheaply than they would if they bore the full costs themselves. These effects are known as negative externalities. The only way to ensure that proper account is taken of external costs is to impose them from outside, by taxation, regulation or in extreme cases by prohibition. There is no way that an unfettered market can allow for such costs.
Yet another problem is that while neoliberals loudly denounce any form of external intervention as distorting the market, they allow participants to do their level best to distort the market, and without appropriate intervention by an external authority there is nothing to stop them. This is ideal for dominant suppliers who go to enormous lengths to apply their own fettering to prevent potential competitors from entering the market and to exploit any advantage, both legal and sometimes illegal, that they can find to sell their products for as much as possible. This is the use of one participant's freedom to constrain the other participant discussed above.
A few common examples illustrate the point:
· banks sold unwanted credit card payment protection insurance (PPI) to unwitting customers by hiding it in the detail of the card agreement;
· energy suppliers confuse customers by offering vast numbers of different tariffs so that it is difficult to compare one supplier's offerings with another's[117];
· sellers withhold or distort disadvantageous product information from buyers and sometimes also from regulatory agencies, for example see what pharmaceutical companies are prepared to do for profit[118],[119], and also how a car manufacturer disregarded people's health and the environment in cheating on exhaust emissions[120];
· when there are relatively few existing competitors suppliers form cartels (informally or in secret to avoid prosecution) to rig prices against buyers; in a similar vein contracting companies apply collusive tendering for the same reasons[121];
· sellers hide information about the true costs to customers of their products, first prize in this regard going to the banking and financial trading sectors who by concealing how they operate and opaque charging practices manage to divert a massive share of national income to themselves. This is so successful that it deserves and gets a complete part of the book to itself - see Part 2;
· dominant sellers apply restrictive trade practices to limit competition, for example exclusivity deals where companies are granted exclusive rights to sell or resell a manufacturer's goods or services in return for a binding agreement not to deal in other manufacturers' goods[122];
· a large unscrupulous supplier can supply goods below cost temporarily to undercut and force smaller suppliers out of business, then raise prices afterwards to more than before to make up for the loss and make ongoing extra profits[123];
· companies offer bribes to foreign officials in order to sell products[124];
· "...cigarette companies stealthily made their dangerous products more addictive, and as they tried to persuade Americans that there was no 'scientific evidence' of their products' dangers, their files were filled with evidence to the contrary." (quoted in the preface of Stiglitz 2012); and
· companies offer special deals to new customers - mobile phones, broadband, insurance, credit cards, bank accounts etc., all designed to exploit people's forgetfulness or disinclination to change when the deals run out.
Whenever they can unscrupulous people and businesses use whatever tactics they are able to dream up to serve their own interests. The rewards for hiding the truth, cheating, lying, obfuscation, exaggeration and so on are very substantial. Neoliberals claim that unfettered markets reduce the risk of corruption by taking power away from public officials who had authority over others during the heavily state-controlled post-war economy, but the freedom that laissez-faire confers merely provides different opportunities which are exploited to the full.
Buyers are usually the losers in the above situations but large buyers can also exploit their position as do supermarkets that use their immense buying power to fix prices and impose exclusive supply contracts on small suppliers.
People are heartily sick of having to be on their guard all the time to avoid being taken advantage of and of having to switch energy, insurance, phone and other suppliers every year. In today's market not only are there no rewards for loyalty there are penalties. What we have is a very far from the ordinary person's view of what markets should provide.
There is also the natural supply effect mentioned earlier that acts to prevent new suppliers from entering the market, and that is economy of scale. It is normally cheaper per product to produce two products rather than one, ten products rather than two, and so on, until the full wealth-creating capacity of the supplier has been used up. At that point it is normally cheaper per product again to expand production or set up new production facilities. This can go to great lengths as evidenced by the many massive global suppliers - oil companies, supermarket chains, car producers, consumer product suppliers, pharmaceuticals, IT companies and so on. It is very difficult for potential new suppliers to gain a foothold in markets that are dominated in this way, so competition is very limited (although suppliers make it seem otherwise by offering many similar products under different brand names and by supplying wide product ranges) and therefore unfettered markets lead to domination by the few.
The sheer size and wealth of these corporations allows them to set up their own:
· research and development departments to find ways to innovate to reduce costs further wherever possible;
· extensive well-funded legal departments to challenge or intimidate potential competitors or anyone who might pose a threat to their business, and to deter challenge from aggrieved parties;
· marketing and advertising departments to keep their products at the forefront of consumers' minds;
· lobbying departments with generous budgets to befriend and persuade ministers and other authorities to favour their own interests; and
· production and administrative facilities across the world to take advantage of low labour costs and favourable tax regimes.
These are the multinational corporations, many of whose revenues exceed the gross national products of entire countries.[125] The particular problems thrown up by the activities of multinational corporations are examined in more detail in chapter 75.
Additionally there are many products that don't lend themselves to market competition or are too big or too risky for private investors to consider without government guarantees and subsidies. These include public utilities such as water provision, effluent disposal, electricity supplies and public transport. Public utilities have few sellers but many buyers, and would gravitate to monopoly provision in an unfettered market, which would allow exploitation of buyers by sellers. Although the current policy is for these markets to be privatised, at best they represent contrived markets requiring substantial regulatory overhead to prevent exploitation of customers and oversee proper investment. Also if the government hoped by these means to divest itself of failure risk then it can't do so because the fact that the economy depends on them means that regardless of who makes the profits during good times ultimately the government is responsible for keeping them in service during bad times - see also chapters 91 and 92.
There are also things known as positive externalities, where benefits accrue to external parties from market activities. If the externality is significant and can't be prevented the unfettered market provides no buyers and no sellers, since neither is willing to pay for or to provide things that can be enjoyed free of charge by others. Such things include state (national and local) infrastructure and services such as roads, street lighting, bridges, emergency services, flood barriers, and security services such as policing, defence forces and intelligence agencies. It might be argued that a completely unfettered market might avoid positive externalities by providing many of these services and restricting use to those who could pay, charging enough to be profitable. Indeed this is what happened in the past with turnpike roads, bridges and fire services, but to introduce them widely into a modern economy would disrupt its operation to such an extent that it couldn't be allowed. Some use is still made of road and bridge tolls but these are very limited and often applied to restrict usage, as are congestion charges, rather than to make a profit. The only viable way to provide services with positive externalities is by state ownership at local or national level.
The 'market freedom vs state control' debate is a smokescreen to hide what's really going on. All markets must be controlled, indeed a market is no more than a forum for controlled exchanges.
Robert Reich (Reich 2016) makes this case very effectively. While people engage in the debate they miss the real question, which is: 'Who should exercise market control?' The unscrupulous know full well that markets must be controlled, but they don't say that openly. They are content to let the debate rage on in the foreground, while in the background they surreptitiously and with mounting effectiveness increase their stranglehold over markets - this is the freedom conflict where without effective state control the powerful seize control for their own benefit.
Reich identifies five areas where rules have to be laid down for markets to function:
· Property: what constitutes property? This used to be relatively simple but with modern intellectual property it is much more difficult and strict definitions are needed - and change regularly. What are the things that can be exchanged in a legal market? Human beings - not any more; explosives - only under strict conditions; body parts - in some countries yes and others no; and so on.
· Monopoly: to what extent can single players be permitted to dominate the market?
· Contract: what terms are allowable and what are prohibited when parties engage in contracts to exchange things?
· Bankruptcy: under what conditions can people under contract be allowed to walk away from their obligations?
· Enforcement: what penalties are to be applied when market rules are broken?
It is the government acting as society's agent that must set the rules, yet Reich shows very clearly how wealth power labours ceaselessly and with frightening success at applying any and all tactics to persuade governments to change market rules so as to channel an increasing share of national wealth production into its own hands, against the interests and even without the knowledge of other members of society. He further shows how governments - if they can muster the courage and political will - can change back those rules so as to become fairer to all, and do it transparently so that all can judge for themselves how fair they are and argue their case if they feel they are being discriminated against.
As Reich points out: "The pertinent issue is not how much is to be taxed away from the wealthy and redistributed to those who are not; it is how to design the rules of the market so that the economy generates what most people would consider a fair distribution on its own, without necessitating large redistributions after the fact" (Reich 2016 p102).
If unfettered markets always worked for the benefit of society there would be no need for the Sale and Supply of Goods Act, the Trade Descriptions Act, the Consumer Credit Act, the Consumer Protection Act, the Distance Selling Regulations, the Unfair Terms in Consumer Contracts Act, and all the other many relevant protection laws and regulations. There would be no need for the Office of Fair Trading, The Trading Standards Institute, the Financial Conduct Authority, the Competition and Markets Authority, the Office of Gas and Electricity Markets (Ofgem), the Water Service Regulation Authority (Ofwat), the Office of Communications (Ofcom) and so on. In truth constant vigilance is needed to guard against any tactics that suppliers can find to distort the market in their favour, particularly when they are supplying essentials. Buyers generally have less scope for distorting the market but where they can, such as in colluding against suppliers or in using buying power to exploit suppliers, appropriate measures are again needed to counter such activities.
Armed with all this information we can now set down some conditions that are required for markets to be fair:
i. buyers and sellers are free to enter or leave the market at will and can easily do so;
ii. all relevant product information is accurate and freely available;
iii. products can do no or limited harm to buyers;
iv. either no harm is done to third parties or to the public interest, or full compensation is provided for such harm.
Additionally:
v. where private markets fail to meet social needs the state must make provision.
There is another condition that isn't primarily to do with fairness, but has a strong influence on how markets behave, and that is independence of participants. This is considered separately in chapter 34.
The more that fair market conditions fail to be met and the more harm that the unfairness can cause the more regulation is necessary.
The more that fair market conditions are met, the more the market provides a mechanism that operates automatically, efficiently and cheaply, and delivers very substantial benefits for all.
Adam Smith, in his influential 1776 book 'The Wealth of Nations' (Smith 1776 p24), summed up this mechanism nicely:
It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest. We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities, but of their advantages.
Butchers, bakers and brewers were trades where it was relatively easy in Smith's day for new suppliers to enter and compete in the market, so they represented fair markets. It is less easy now because economies of scale favour large suppliers to the detriment of potential new entrants. Neoliberals cite this quotation in arguing that all markets should be unfettered, thinking that Smith's reference to the 'invisible hand' was used in connection with competitive markets, when it was used in quite a different context - see chapter 80. In fact Smith was very well aware of the dangers of unfettered markets - see his quotation in the next chapter in relation to monopolies.
If the state tries to control all markets, as it did in the USSR, it collapses under its own inefficiencies. Imagine the administration and waste involved in trying to ensure sufficient supplies of all consumer products for all villages, towns and cities. It can never succeed and oversupply or more often acute shortages are the result. All this can be avoided by leaving it to the market wherever possible, and to the resourcefulness of people in recognising good opportunities for personal gain by catering for what other people want.
The mistake is in believing that all markets should be unfettered. Although belief in the widespread benefits of universal unfettered markets is untenable, it still remains mainstream economists' and many politicians' ideal to be aspired to as far as possible.
The most telling cases are the banking and financial trading sectors, which have great wealth and power and use it to lobby governments to reduce or remove regulations that restrict their activities. They were immensely and increasingly successful during the 80s, 90s and 00s and in consequence there was woefully inadequate fettering of financial markets, resulting in the 2008 worldwide crash and subsequent Great Recession - see chapter 54.
A major reason for their rise to prominence was the Efficient Markets Hypothesis (EMH) - the idea that prices generated by financial markets represent the best possible estimate of the value of any investment. This became one of the central theoretical doctrines of neoliberalism, developed by Eugene Fama just as the Keynesian era was drawing to a close. Empirical work tended to support the theory, in that fluctuations in financial pricing appeared to be random, implying that there is no underlying pattern in the data. If this is true then there is no point in trying to 'beat the market' because at every instant the price of any investment is 'correct', meaning that it automatically includes everything that is known at that instant, not only about the investment itself but also about market behaviour, so that any tendency for a pattern to emerge (say prices rising before Christmas and falling afterwards) will be immediately and fully exploited and therefore rendered ineffective. Once EMH is accepted it follows that any form of financial regulation is harmful because it hinders the market's ability to reflect correct prices. In fact any form of state interference can only distort the market, making it less efficient, and the only satisfactory solution is expose all businesses, or as many businesses as possible, to market forces, by allowing the private sector to run them, because private enterprise will always outperform the state. It implies that there can be no such things as bubbles and busts in asset prices, and in spite of plenty of experience to the contrary throughout history, and even in spite of the dotcom bubble and bust in the early 2000s, it was accepted as truth by neoliberals. The dotcom bubble should have killed the theory because, as was pointed out by many observers at the time, the prices being offered for dotcom companies could not be justified on the basis of standard principles of valuation. Even if some turned out to generate the massive returns that the prices promised it was impossible for the sector as a whole to do so. In fact very few such companies turned out to be successful. The theory was finally killed, in terms of intellectual credibility, by the 2008 crash (Quiggin 2010 Chapter 2). Steve Keen has done a very thorough demolition job on the EMH in Keen 2011 Chapter 11.
A truly frightening thing is that the degree of fettering in financial markets is still woefully inadequate, so successful is the unfettered market lobby. If anything has ever shown the need for fettered markets it is surely the 2008 crash, because not only did it do immense and lasting damage throughout the world but it really could all happen again, and next time the consequences might well be so bleak as to cause complete social breakdown across the world. It is deeply worrying that the prevailing sentiment seems to be 'let's get back to normal as quickly as possible', where 'normal' is with world economies racing headlong towards another and much higher cliff edge.
In spite of everything the unfettered market lobby still believe that all market problems arise because markets are too fettered! If only regulation had been even less restrictive there wouldn't have been any crash. This is the hard-science approach in action - if the medicine isn't working then we need to increase the dose!
If this had been true then as regulations were gradually relaxed more stability rather than less would have been the expected result, but it clearly wasn't as evidenced by the frequency of banking crises in OECD countries. John Kay analysed these data[126] and showed that the period after the Second World War was characterised by a very low frequency until about 1968 when there was a slight increase which lasted into the 1970s, but after 1980 it began to pick up significantly. This is illustrated in chapter 50 figure 50.1.
That people can retain a belief in unfettered markets in the face of what happened in 2008 is quite astonishing. It testifies to the ability of people to believe what is in their own interests to believe, especially when those beliefs are shared by many others in the same position.
There is a lot more to be said about banking and financial trading activities. The story is taken up in Part 2.