Tuesday, July 29, 2014

Economics Tuesday 3: Free Market Fairy Tales and Food Safety

You need to be careful when using the term "free markets."  For those who would check the box "free-market fundamentalist" in a questionnaire about one's religion, the term means a deus ex machina: markets as an infinitely wise and objective ruler of our lives, a divine power, something which manages things better than anyone else.  This religious view is extended to apply to all those things which non-market institutions usually manage, including the government (except for wars and legal enforcement of property rights).

That concept has nothing to do with economics, by the way.  Markets do some things very well, others so-so and fail dismally in some areas.  But markets are never the arbiters of fairness or justice, and those concepts, too, the market fundamentalists would leave to the marketplace.

The economic meaning of a term like "free markets" would perhaps be closest to an unregulated market.  Whether not to regulate a market is good or bad depends on the characteristics of a market.  Take health care, for an example:  How comfortable would you feel if anyone at all could set up a business as a heart surgeon, without any formal training or qualifications?  The extremists would support that idea, arguing that customers (patients) would do the necessary work to find out if a person is qualified or not.  But most countries do not let an untrained person do heart surgery, and that's because of the high costs of poor care, the difficulty for customers to actually learn about someone's skills (given that one could lie about them in advertising in a completely unregulated market) and the great asymmetry of information in those types of markets.

I used that example because those who believe in market-solutions for health care argue by analogy:  If the farmers' markets work, why not something similar for heart surgery?

A different economic term that some seem to confuse with "free markets" is the concept of perfectly competitive markets.  The two are not the same, and perfectly competitive markets are pretty rare in reality.

Here is a fairy tale about free markets.  It's relevant for understanding why food safety regulations matter.  More on that topic here.