Capitalism & Free Markets

Dum: Alice, we hear frequent use of the term “socialism” by America’s Republican Party. We also hear the term “free markets” bandied about by the business communities, politicians and some economists. My recollection is that what we call “capitalism” is based on ideas put forth by the 18^th Century British thinker, Adam Smith. Was Smith’s view that an unregulated market, that is a totally “free” market, the best situation?

Alice: Smith absolutely did not believe that an unregulated market was best. Smith was focused on competitiveness and efficiencies to be had in the markets. Smith would have been appalled by the non-competitive aspects of the top tier of American business. Oil companies, banks, pharmaceuticals and even food production is dominated to the point of oligopoly by huge companies.

Dee: Remind me what an “oligopoly” is, please.

Alice: A monopoly is the control of a market by a single individual or company. An oligopoly is the control of a market by a few. Monopolies and oligopolies cause problems for a society in that they prevent competition. Suppose an oligopoly has existed for quite some time. It will have exploited its ability to raise prices, as the large pharmaceutical and petroleum companies have done, to create a deep well of money that allows them to drive new competition into bankruptcy by pricing the product below break-even for the new competition. When the prospective competitor has been driven from the market, prices go back up.

This prevents progress because most progress comes from evolution, not revolution. The automobile is an excellent example. Look back to Henry Ford’s Model T. It was a smaller, less comfortable car than today’s version. It was also less powerful and got much worse fuel economy. It didn’t even have a starter motor – a hand crank had to be used. But we got from the Model T to contemporary autos without any huge, revolutionary changes. Engines got better, bit by bit, from a 15 horsepower engine that got ten to fifteen miles on a gallon of gasoline while powering a vehicle of less than 1,500 lbs  to modern beasts that generate more than 500 horsepower and get more than 20 miles per gallon while sending a 4,000 lb vehicle along at 200 miles per hour. There were no revolutionary changes along the way. Manufacturers improved the safety, comfort and capability of the machines incrementally.

If Ford had been able to prevent all others from manufacturing cars, today’s automotive industry would be very different.

Dee: Are you saying that a free market is not an integral part of capitalism?

Alice: I’m saying a market that is totally unregulated will effectively destroy capitalism by allowing monopolies and oligopolies to exist; they will naturally destroy capitalism in their industries by ruthlessly destroying competition.