[This is part I of a II part article about free market economics. Part II was published here.]
Talk to the Fish
I don’t have a call to arms, but I’m not ruling out hurling a few rocks – rocks to be hurled at the cooling volcanic flows of Free Market economics that have engulfed us since the late 1970s. Free Market economics is no less incorrect just because it repeatedly claims itself to be the main criteria for economic truth. Yet the more it has become suffused into the language, the more it has defined the nature and focus of economics. When you have been forever going up hills, it can take a mind-shift when someone suggests it would be easier to go round them.
The north American essayist David Foster Wallace gave a talk in 2005 called ‘This is Water’. It told the story of a conversation between a couple of fish. It goes like this: There were two young fish swimming along in one direction. An older fish swam past them in the opposite direction and said, “Morning boys, how’s the water?” The two young fish swam on for a moment in silence until one turned to the other and said, “What the f**k’s ‘water’?” So it is with free market economics.
Free Markets and Economic Freedom is the water that we swim in. ‘Free’ and ‘Freedom’ are sated with positivity and an excellent choice for a campaign. Free markets are those that are free from state interference. But economic freedom is a matryoshka term; it contains meaning that is not explicit. Having political or religious freedom is having a choice of politics or religion. Economic freedom is not having a choice of economics; it is the freedom to buy and sell, to use nature’s resources to meet human wants, to invest, to spend, to work, to earn and to have the freedom to maximise the use of what is earned or profited from. All of these terms require exposition. This is where the seemingly solid platform of economic freedom begins to lose a few floorboards. The Heritage Foundation go on to loosen a few more when they define it further.
They assert that theideals of economic freedom incapitalism are: “strongly associated with healthier societies, cleaner environments, greater per capita wealth, human development, democracy, and poverty elimination [1]”. With an opening orchestral salvo they declare: “Free-market capitalism is one of mankind’s best ideas. It has led to more practical, measurable advances in living standards, health, knowledge, and societal progress than anything else that man has devised in the past 2,000 years [2].”
The Heritage Foundation is confident of the superiority of its claims, believing it can point to recent history as confirmation.
“The massive improvements in global indicators of income and quality of life in recent decades reflect a paradigm shift in the debate about how societies should be structured economically to achieve the most optimal outcomes. This debate has largely been won by free-market capitalism.” They invite an analysis of observable contemporary economics and go on to encourage a ‘return’ to that paradigm shift as an incentive to hold on to the gains. . . . . . . . . In the long run, the proven way to revitalize the economic life of societies in the most broad-based, meaningful way is by restoring what we know has worked best: economic freedom that has unambiguously made our societies strong, vibrant, and flourishing [2].”
I will take up the Foundation’s invitation to analyse the changes in capitalism ‘in recent decades’. The paradigm shift began in the 1970s when the transformation of industrial capitalism into financial capitalism took off. Could this be the restoration of ‘what we know has worked best’? But first, I want to begin by examining some of the terms themselves that is the water we swim in: Price, free markets, buyers and sellers, economic growth all present as neutral terms, just as ‘economic freedom’ does. But these terms are as neutral as a loaded dice.
The core of the free market requires voluntary exchanges between sellers and buyers. But there are certain conditions that have to exist for both buyer and seller to be persuaded they have benefitted from their exchanges. Both should have parity of knowledge of the market in which they are buying and selling. This is the presumption of the rational consumer. For competition to be effective, there also needs to be sufficient traders to provide a variety of similar products and in sufficient quantity so that no trader can dominate. It also requires that each trader/seller must have equal access to capital and technologies. And no buyer can be so wealthy that they dominate the exchange. These are the presumptions behind the doctrine. But how do these conditions compare with reality?
I think of myself as a rational shopper because I always use lists. Despite this, I always come back with more than was on the list. How many of us shop by intellect alone? Who could deny that shopping is a cultural and sentient experience? It is the seller who will know more about her market than I. If it was just a matter of analysing information and making rational purchases, why is there advertising? Advertising’s purpose is to mould our wants; if it didn’t work, I doubt $432.58bn [4, 5] would have been spent on it in the US in 2024.
I cannot step outside my door into an urban setting without being advertised at. Commercial TV and radio are telling me how my life could be improved if I part with my money. I am urged to spend. And the urge comes from creating a want for things I don’t need. Advertisers appreciate that the urge must come first, which is why prices rarely appear on hoardings. The entire basis of our lives is lived through a blurring between our needs and wants that is resolved by affordability. These socially constructed wants stare back at us in denial when price deems they can’t be satisfied, or confirms a status when we know they can. These innocuous price labels set the degree of participation through the quality of our consumption in the market.
We can put a line through buyer and seller having parity of knowledge and a rational consumer is a highly polished stone to be placed on a plinth for admiration; they don’t exist outside that.
Key to both buyer and seller is price. It is also central to Laws of Supply and Demand, where it is described as a key indicator. That’s why it is worth a closer look.
The Neutrality of Price
Price determines a person’s access to the ‘free market’ and resources that capitalism is capable of providing. If you can’t pay, you can’t enter the market. Firstly, to have a thriving market, buyers need to have wage rates that enable them to have a breadth of choice and to have a standard of living that provides dignity. As inequality has deepened over decades, such dignity is available to smaller sections of society. A few years after the Crash, the changes in the Welfare system, especially Universal Credit (in the UK), have driven more into ‘food insecurity’ [6]. Over three million people were reliant on food parcels in 2023/4 [7]. They are not part of the free market. They are ‘priced out’. That is what prices can do.
Secondly, the areas of our lives that have been marketised in Europe since the 1980s has expanded. What was seen as a social cost in the public sphere is now increasingly being borne by the individual in the private. ‘Private’ means access is by permission and access is set according to our capacity to pay. We then pay the price – or we don’t. That is the choice championed by free markets. And the greater the role that markets play in society, the greater the role for those with wealth to participate and shape markets.
Prices are such a part of our everyday lives of consumption that it rarely occurs to us to look behind them. For free market idealists, they carry only positive messages: prices signal where resources should be directed; rising prices help ration supplies when they become scarce and then when producers see there is more money to be made, they make more until the price comes down. The nature of these price movements are contained in the laws of Supply and Demand. But these laws do not carry the inevitability or necessity that laws in natural sciences do.
Take a step back; why should prices go up when supply falls? If my local shop has only one packet of chocolate biscuits left, then the law of supply would suggest that the price could go up. It doesn’t. Because the shop keeper doesn’t put it up. Prices don’t go up by themselves. When supply falls, prices will go up because someone puts them up. The purchaser has no role in this.Prices go up when supply shrinks because the seller believes s/he can get more money out of the sale.By increasing prices at a time when there is a growing need, the seller, by acting in her own interest does so at the literal expense of her neighbours. The unintended consequence might be to slow the depletion of goods, but in doing so, the happiness of mankind is diminished while she becomes wealthy at her neighbours’ expense.
This underbelly of the law of supply has implications for an omission in the analysis of inflation. Inflation is neutralised when it is presented as a target that interest rates are used to control. But there is a legitimate question to ask about where rising prices originate. Who begins to put them up? In 1973 oil prices shot up because OPEC introduced an oil embargo and this was a major factor in inflation then (indeed it created the conditions for the paradigm shift to neo-liberaleconomics). Inflation went up in 2022 when Russia invaded Ukraine because Putin wanted to cause problems for the West and to raise money for his war. Both of these are geo-political pressures and consequently, there is a political motivation to seek to attribute blame for price rises in the Global north. However, if other factors are at work, blame is harder to find due to commercial confidentiality. For example, in 2022 prices were already going up; it didn’t start with Russia.
Prices began to rise in 2021. This was due to the aftermath of developing economies emerging from Covid. Supply-chains were disrupted so goods were not available for markets. But there wasn’t a shortage; the goods just weren’t in the shops. What is at play here is that someone is making money out of a shortage. Instead, the law of supply is invoked to explain it – when supply falls, prices go up. Whereas, in these sets of circumstances, the law should be expressed actively i.e. that when supply falls, someone seeks to profit by it. The question then to be addressed is the legitimacy of the profit-taking. Sellers are making more profits without any extra input. When oil and gas prices rose significantly in the UK, the profits that oil companies made were huge and in stark contrast to the inability of many buyers to pay them. Why is there rarely an analysis of the profit-taking or how much extra beyond immediately previous profit levels is being charged – solely because they can? If a criterion for free markets is both buyers and sellers should have all market information to enable them to make a choice, should we not know what profit margins companies are operating by? If this were the case, why companies are putting their prices up and by how much would become a mainstream media line of enquiry and legitimate data for consumers to make decisions about which companies have ethical practices. For example, food prices shot up significantly in 2022 and we all noticed, but the large food retailers did not make significantly more profits (beyond altered market shares). During Covid, the demand for toilet rolls increased incredibly, but the large retailers didn’t increase their prices. The law of supply would suggest they should have, but instead, they rationed them. Rationing is an ethical alternative to making money out of a shortage.
Ethics in Pricing
Ethics in business practice does feature in media coverage. If cotton clothing is made by Uyghur forced labour, there are campaigns to boycott their imports (Calvin Klein has allegedly boycotted cotton from Xinjiang for this reason [8]). If it became known that vacuum cleaners were to be made by ten-year-olds for 2p/day, these would be boycotted too. But if a vacuum cleaning manufacturing base is shut down in one country causing unemployment there and re-opened in another because the cost of labour is cheaper, this is lauded as economic efficiency. And it is rational in terms of costs of production, but whether it is ethical is sometimes only raised outside business circles.
Operating profit margins are considered signals of demand in the market. This impacts who can buy them and how much remains in people’s pockets after the purchase. Prices contain profit margins and are therefore have ethical consequences. Where they become excessive, they cross a moral line. Yet operating profit margins are rarely available to ‘we’, the consumer. As ‘commercial in confidence information’ this would breach their competitive trading position. However, by not having this information, no matter how rational a consumer I might be, I do not have the full data that would enable me to choose how I spend my money. However, if how much profit companies are able to extract from consumers is not part of free markets, there are other freedoms to be sought. National governments could insist that all global corporations publish what they earn in each national territory and the tax they pay on it. That way it would shed some light on corporation off-shore accounts.
I am arguing that at the very heart of mainstream economics’ laws of Supply and Demand, market neutrality is a fallacy. They can be depicted as neutral because the practice of price and operatingprofit-margin-setting exclude cultural and social inputs. In addition, the mainstream model of quantification e.g. inflation-rate announcements, denies the social element of the impact of price movements and, by implication, fluctuations in supply and demand.
Increasing parts of our lives are now governed by price. We’ve been able to buy more things that have enhanced our standard of living. For a great majority of the working-class at the start of the twentieth century, 80-90% of their wage went on food and other necessities [9]. This could not have taken place if wage rates in relation to prices had not increased. With regular income, payment by instalments became common. This was particularly obvious in the US in the 1920s [10] for male earners. However, the most significant expansion of relative wage rates occurred in the Global north after the second world war. This inspired the VP of Ford Motor Co to coin the term ‘consumerism’ in 1955 [11].
The differentiation of products through design and increasingly sophisticated advertising grew throughout the twentieth century, but especially after the second world war. Accompanying mass consumption, obsolescence [12] began to be built in to an increasing number of goods to ensure a persistent market [13]. There were more ‘things’ to go out to shop for and our wants for them were expanded by marketing. To ‘go shopping’ became a social activity. In this sense, the economic sphere became absorbed into the social.
With the economic paradigm shift in the 1970s, that expansion of the economic sphere became qualitatively different. Deregulation and privatisation meant that what were public goods then became private. In the 1990s, a judgement had been made on the sectors that had been considered the ‘Commons’ of the economy; Aerospace, telecommunications, steel, coal, transport, water, energy, Local Authority social housing were all sold into private hands. Privatisation makes wealth an access factor for the use of resources that the entire population rely on. Since 1997 private healthcare expenditure has quadrupled [14], while the number of children receiving private education is at its highest since records began in 1974 [15].
As the sphere of consumerism expanded, our participation in our society became increasingly dependent on our capacity to purchase. Not being able to participate becomes a value-neutral outcome. If you can’t pay, you disappear. This reflects the nature of a market exchange; the social nature of producing and acquiring goods to satisfy wants and needs is obscured by exchange values. Price, with the neutrality it dispenses, is expanding into many more areas than was the case in 1970s.
It is in social services where this has direct impact and therefore more obvious. Child care and social care are two services at either end of life that now require payments greater than some mortgages. In primary health care, GP surgeries have had to reduce the services they previously provided; Audiology, podiatry and physiotherapy are no longer available at my surgery. Up to December 2023, 60 GP surgeries in England were run by a US private healthcare corporation. Although they did not charge fees, they were paid from NHS public funds [16] (on APMS contracts). In referrals, the waits have introduced a two-tier access to surgeries such as orthopaedics and certain cancers where payment gets you treatment within weeks.The process of permitting privatisation has been described by Graham Scambler as taking place in three stages: “if you want to undermine a public sector institution, first underfund it to, second, create widespread public dissatisfaction, and then, third, insist on the need to reform an ailing service by calling in for-profit providers [17].” The dilemma for free-marketeers is that we now see what ‘calling in for-profit providers’ can lead to, as it has with English railways and water companies.
Putting a price on our illness means it is transformed into a commodity, like a new car. Health, which after the Second World War was argued to be a national and social concern, is becoming a private and costed provision. To have your cancer treated in time becomes a matter of whether you have the money to pay for it; on par with buying a new car.
Is this so bad? Does this not mean that those who can afford to pay, do so, thereby freeing up the scarce resources for those who can’t? How does paying for something change it? And what implications does removing essential services from the public sphere have on how a society functions?
For an answer to this, consider the recent Covid pandemic. This was a virus that impacted most of the globe, but coping with it was dealt with on a national basis. The virus posed a threat to the lives of the vulnerable and to the working routine of the nation. There then had to be a consideration for ‘essential services’ and ‘essential workers’. These were identified as medical staff, food distributors (lorry drivers and food-store staff), refuge disposal (bin ‘men’) and social care staff. European nations applauded them [18] and the UK did that literally at an allotted time ever week . . . for a while.
It was an acknowledgement of an issue that needed to be addressed collectively because it was one that impacted everyone although the impact varied individually. An assessment had been made about how much of society would be affected, together with the nature of the response needed to deal with it. Like the 2008 banking crash, this was not something that was priced first, rather the social cost of lives being lost and lives disrupted, required a solution be found first and then paid for later. That the state intervened, was itself an acknowledgment of society’s social interdependency. That intervention stressed that care for others was a means of taking care of ourselves. We were asked to re-evaluate what ‘value to society’ meant by reassessing NHS medical staff, care workers, shop staff, lorry drivers and waste disposal workers.
Price is more than numbers on a price label. It is more than an equilibrium point where quantity supplied meets demand for it. Price marks access to the material benefits of capitalism. The standards of living that people enjoy are determined by that access. The greater the inequality, the more unequal is that access. But price goes beyond this.
Price is the part of the iceberg we see. It is quantity supplied and quantity bought. The market presents society as a set of interacting pieces, selling and paying. Price emphasises the individual. Each of us enters the market as a consumer unit. The onus for acquisition is on each of us. Our lifestyles reflect our purchasing capacity and therefore our place in society. How that place is allocated is of concern for free marketeers, but their focus is on creating the conditions for perfect competition. Inequality is not a branch of mainstream economics; it is an externality. Where free marketeers are asked to explain it, it is the invisible hand that allocates. Inequality is attributed to differences between individuals. Some are more intelligent, dynamic, determined and capable. Therefore, whatever anyone achieves in life is a measure of their qualities as an individual.
The striving of individuals is what free markets emphasise. Buying and selling imparts a view of individual transactions. In this way it makes economics a reductionist social science, indulging in excessive individualism. What this omits is the systemic nature of capitalism. For example, the biggest cost in any product or service is labour. In the constant search for ways to maximise profits and extend markets, technology to reduce labour is one strategy. This creates a tension at the heart of markets when consumption is reliant on labour to purchase. If labour is increasingly deskilled and cheapened, products and services will become the province of the wealthy. This will shrink markets. An expanding capitalism must contend with this contradiction. Add to this the almost blind pursuit of economic growth when that very pursuit is depleting the planet of its capacity to achieve it and contradictions are compounded. More productive thinking would derive from systems theory that examines dynamism and interconnections rather than the unilinear thought that free market economics promotes.
That buyers will have similar purchasing capacities is a depiction of a floating stone. With its focus on individual acts of buying and selling, wage and salary levels vanish. Instead, discussion of markets assumes a neutrality in the engagement between buyers and sellers who are exercising choice. But there is a direct relationship between the choice and level of engagement in markets and social class. At its most basic level, you have no choice if you have no wage. Marketing is fully aware of this. There is a reason why there are £20,000 Cartier watches (no price in the ads) and £10m apartments advertised in the Financial Times and not in the Sun. As early as 1899, Verblen referred to ‘conspicuous consumption [19], where purchases are made with the intention of creating social distinction. This is far removed from the image of either the rational purchaser or equality between purchasers. By ignoring inequality, a society that places market economics at its core is implicitly accepting that some of its citizens will be more significant than others. The more money at one’s disposal, the greater is one’s potential participation and control. Such a presumption raises concerns about differentiated levels of participation in daily life in free-market capitalist liberal democracies. The more markets are lauded as the source of progress and wealth, the greater is the alienation of those who can least participate. The impact is to undermine any sense of communal engagement or of the sharing of broadly similar experiences and dilemmas. The greater the degree of inequality, the less those who benefit from that inequality are able to appreciate the struggle of those who don’t. This growing rift fractures commonality until many become so hungry for belonging and fearful of not, that nationalism provides a cloak of welcome.
My intention in part I was to unravel the threads that have been woven by those who espouse Free Markets. The economic freedoms they championignore the economic restrictions that accompany them. Inequality is a structural component of capitalism and not to be explained by character traits. A free market does not bring those on two sides of a sale on equal grounds. This is an image of stall holders selling to shoppers. The sophistication of markets as a result of deregulation and financial innovation has moved us way beyond that simplistic representation. In part II, I want to examine how capitalism has been transformed by the very people who drove the changes and now face contradictions those changes have thrown up.
References
1 https://www.heritage.org/index/pages/about
2 https://www.heritage.org/index/pages/report#indexHumanFlourishing
4 https://www.oberlo.com/statistics/us-digital-ad-spending
5 https://www.marketingcharts.com/advertising-trends/spending-and-spenders-231961
6 https://bmcpublichealth.biomedcentral.com/articles/10.1186/s12889-022-13738-0
7 https://www.statista.com/statistics/382695/uk-foodbank-users/
8 FT Weekend 14/5th Dec 2024
9 https://en.wikipedia.org/wiki/Consumerism
10 https://library.fiveable.me/key-terms/united-states-history-since-1865/installment-buying
11 https://en.wikipedia.org/wiki/Consumerism
13 https://en.wikipedia.org/wiki/Planned_obsolescence
15 https://inews.co.uk/news/education/number-privately-educated-pupils-reaches-record-levels-61899
16 https://www.mytribeinsurance.co.uk/treatment/who-owns-a-gp-practice-in-the-uk
17 http://www.grahamscambler.com/the-nhs-and-private-equity-companies/
19 Veblin T. The Theory of the Leisure Class (1899). Created the term to describe the behaviour of the nouveau riche who benefited from the Gilded Era at the end of the nineteenth century and before the First World War. A new nouveau riche that benefited from economic deregulation started in 1980s has emerged in this era.
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