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The notion of allowing free markets to operate in modern economies has been in the limelight of economic policy in recent times. There has been vast criticism to allow markets to regulate themselves in the absence of Government intervention; allowing economic agents (consumers and firms) to make decisions based on self-interest. This view has been advocated by many right-wing economists, including prominent names such as Adam Smith and Milton Friedman. On the other hand, opponents of free market capitalism think that some degree of Government intervention is a necessity, in order to rectify the basic problem of economics - the efficient allocation of scarce resources in the economic system. The ideological view that free markets exists is only a theoretical assumption. The real world depicts free markets as having at least a minimum level of Government and political influences. This is deemed necessary in order for the market to operate efficiently - for the price mechanism to determine supply and demand in the interest of fairness among society.
Supporters of free markets argue that it promotes civil and political freedom, leading to consumer sovereignty - the market provides individuals the things that they actually want rather than the market assuming what these individuals ought to have. In essence this ensures that markets are operating competitively and that the equilibrium point where demand and supply equal is at the lowest price for the benefit of the consumer. Adam Smith's belief of free market capitalism is that individuals act upon selfish self-interest, i.e. acknowledging no concern for others in society, (Smith, 1776). However, he also elaborates with a general point of view that if economic agents are free to choose what to buy, and how much to sell and produce; acting upon self-interest, the market will dictate the price and product distribution in turn leading to the benefit of the society as a whole. This is what Adam Smith referred to as the 'Invisible Hand' of the Market. However where the free market fails is when individuals do not take into account of negative externalities, i.e. environmental issues or the failures of the market. Competition within the market may flourish, however it does not mean that prices will always be at their lowest. Given that markets structures vary considerably within an economy, issues may arise concerning monopolistic behaviour - incumbent firms driving out small competitors or the simple case of 'the survival of the fittest'.
As per Chang's view, if individuals' perception of that same market varies in terms of how free that market is, "there is really no objective way to define how free that market is. In other words, the free market is an illusion", (Chang, 2010). The government is always involved to some degree in free markets, and as a result it may be safe to assume that free markets came into existence because of the government. As a prime example the US and the UK Government aim to support freedom in markets in order to promote efficiency and transparency. What individuals' don't see is that the regulations implemented are set up with this in mind.
In a quote from the Commonwealth Club, Raj Patel states that the perception of "liberty is illusionary". He further elaborates the adage - "Give a man a fish and you feed him for a day - teach a man to fish and you feed him for a lifetime", (Patel, 2010). What he implies is that, an individual would benefit in the long-run to fend for himself, than be dependent on others to do it for them. As an assumption, in theory it is necessary that some form of regulatory system is implemented for the sustainability of resources and the equal distribution of wealth amongst society. The "government is essential both as a forum for determining the rules of the game and as an umpire to interpret and enforce the rules decided on", (Friedman, 1962).
According to Ludwig Von Mises Institute, individuals' time is mostly spent revolving around the private sector, because "it is visible and accessible". The institute further argues that:
"The depredations of the state are mostly abstract, and its destructive effects mostly unseen. We don't see ..., the products not imported due to quotas, the people not working because of minimum wage laws", (Tucker, 2008).
One of the problems with our regards towards Government intervention and the view of the free markets is that we only believe that Government intervention into markets always leads to positive effects. We unintentionally fail to recognise the possibility of Government failure. As with the case with minimum wage laws, a free market would set a wage level at which they deem fit, with respect to profit maximisation or other maximising strategy. Without minimum wages, firms would be able to compete effectively in terms of keeping costs to a minimum. However this would certainly lead to the exploitation of labour with no real increase in income in the long-run. The opposite effect is true when minimum wages comes into force. The increasing cost of labour would be a hindrance to the firms' ability to compete effectively in international markets which may lead to some firms off-shoring operations.
Drawing on the work formed by Karl Polanyi in his book, The Great Transformation, (Polanyi,1944), he offered a way to appreciate that markets and society were in fact one, and that the belief that markets and society were separate, lead to the misapprehension of freedom within markets. It then becomes evident, that the market becomes more visible when the economy fails in times of crisis, as was seen in the recent recession caused by the failures of the financial systems. Raj Patel took Polanyi's work further to mention that without the services of the Government, the economy would have been in a worse state than it is now;
The market has always depended on society, which is why the language of "too big to fail" simply means "so big that it can depend on society to pick it up when it topples." The logic of laissez-faire always needs a social base, and this is why Polanyi does not separate the way we live into "government and the free market" - for him, it's simply "market society", (Patel, 2010:18).
To some extent it may be critical to view a different definition of the word free market. As per the view of some; "the free market is when all individuals in the marketplace cooperate voluntarily without the use of coercion", (The Emotion Machine, 2010). The article provides the notion that it is the failure to define precisely of what constitutes as a free market that creates the underlying acceptance of the existence of free markets. In reality it is how economic agents perceive the degree of freedom in markets.
In contrary to Chang's assumption, some perceive black markets to be the free markets in economies. Transactions and the interaction between buyers and sellers occur that are not part of the formal economy; hence activities are conducted in the absence of taxation. There is in essence complete freedom to what economic agents can do; both parties are able to benefit from a particular transaction, whether it is of illegal/legal substance. However it can be stressed that the sheer existence of the informal economy is the result of regulations in the formal economy. The black markets are regulated to the extent that, Governments are always intervening to reduce or eliminate the market altogether.
The term economics was once known as 'Political Economy'; developed through the study of economies in the 18th century. After the publication of 'Principles of Economics' by Alfred Marshall in the 19th century, the term 'Economics' replaced 'Political Economy'. This signifies that the existence of political influences on private institutions was evident then, and still remains the case today. It is therefore clear that Chang's assertion of the free market holds. A free market is only a theoretical assumption when defined as a market that operates with a complete absence of Government intervention. In the context of the real world, political influences in the market is the norm; it is the services and regulations of the Government that economic agents accept which create the illusion of liberty in markets. As mentioned, the US and UK Government intervene in markets to promote freedom, with regulations set to 'determine the rules of the game' as stated my Milton Friedman. On the whole it is the fact that individuals' just assume that 'it's just the way things are' that really leads to the illusion that free markets operates in modern economies.