Dr. Forbush Thinks

With the death of Milton Friedman last week his work has once again bubbled to the surface of political and economic thought. Nearly everyone agrees that Milton Friedman was a great economist. Milton Friedman had many powerful ideas of which the concept of free markets being allowed to work their problems out without government interference was one of his most important. If you were to exclusively listen to or read Milton Friedman you might come to the conclusion that Free Markets can solve every problem that exists. In fact, allowing free markets to work does solve a great deal, but the key is to know when a free market solution is not the answer to the problem.

Let’s imagine an easy example when a free market solution is flawed. Imagine an entrepreneur with a new idea. This is a good thing in most cases, because new ideas are encouraged in a free market system. We most often imagine that the entrepreneur will create a more efficient solution to an existing problem. More efficiency results if cheaper production of a better product, and everyone wins - customer and product provider. This is the best case scenario for society in general. But, the problem is that making society better does not motivate the product producer. Instead making more money motivates him. Sometimes these two motives overlap and both motivations result in a better society and a richer product producer. However, occasionally plans for enriching the product producer does not correspond with making society better.

Imagine that the clever product producer creates a product that is intended to do one thing better than any previous conception. However, imagine that the product, in reality, comes no where near working as intended. On the other hand massive marketing by this entrepreneur tells everyone who is willing to listen that the product works better than anything every created before. Since no one has ever had experience with the new product many people may buy the idea sold in the marketing and purchase the product. Now, the clever entrepreneur is able to cheaply produce a large number of products and predict how many products could be sold before the market becomes saturated and word of mouth finally counteracts the marketing campaign. If this is repeated over and over with many different products the product producer is able to become quite wealthy without any contribution to society.

Actually, what I have described above does not refer to any specific product or any specific company. And, also there are various degrees of how well a product works or does not work. Many people will buy something expecting a particular performance and when the product does not live up to its expectations the person will blame themselves for expecting to much. But, the clever entrepreneur can still make quite a bit of money using the free market to sell garbage to the unaware.

But, when do we decide that a clever entrepreneur is no longer clever, but a clever crook stealing the customers money? A simple rule could be that if the product producer provides something resembling what was advertised for the money taken, then no fraud has taken place. Is this simple rule a type of regulation, or is it still allowing a completely free market to operate? Obviously in the United States we have a set of more complex regulations regarding this type of transaction. And, those regulations can be argued to interfere with the free market. So, who is right? Does the free market solve this problem? Or, does regulation solve this problem?

Free market advocates warn us that the buyer should beware. But, in the real world it is quite impossible for each of us to put in the effort required to confirm the usefulness of every product. Herbs, for example, promise to solve many of our health problems without any scientific evidence. Some additional vitamins do have some rough foundation in science, but not to the degree advertised by some vitamin producers. Other products can not be tested until the product is actually purchased. If enough people purchase a product just to test the product producer may make his profit quota for that specific product. Hopefully this illustrates that some regulation is required in a semi-free market system.

Free markets also depend on the idea that people will only pay the amount that a product seems to be worth to them. Once again the above example illustrates that a person may be willing to pay more based on the promise on the initial purchase. If a product producer is expecting repeated purchases, then the free market system tends to fall in line after a couple of purchases. So, for toothpaste and soap the free market tends to work as a product stays on the market for an extended period of time. But, if a company has a habit of producing a new product every year time and time again, then the new promises of effectiveness might be enough to stay in business for quite some time. So, the idea of a free market requires a consumer to have free access to the “real” product information. Unfortunately in the United States people don’t have access to most “real” information, only hyped up advertising information. The free market then becomes oriented toward the advertising instead of the actually effectiveness of the product.

Then there is the case of many products with imperceivable differences. In this case the customers actually can not tell the difference between the similar products. The free market in this depends on customers to select products based on quality and effectiveness. If there is no difference, then people will be completely swayed by advertising and competition in the free market may only effect the price of a product. Of course, this might be good, or even the point of the free market in this case. Perhaps the free market in this case does the one thing that it does well, lowering the price of production of the product.

But, now assume that there are real differences in the products, but the marketing is so confusing that the general public can not determine those differences in the product. Now, assume that these are not products purchased often. It could be a car or a computer. These products are not purchased often and they can not be tried for a while and returned easily if one is dissatisfied. The point here is not that the free market does not work, but it works in a complicated way. And, the free market is skewed by advertising that distorted ones perception of the product, which is actually the point of advertising.

Advertising isn’t the only way that the free market is skewed. Another is how a person perceives the price they are willing to pay for something. There is no doubt that food is needed, and if the price for a meal is equal to one day’s wages, then a person will certainly pay that price everyday in order to live. The meal might be worth a fraction of that price in another place, but a starving person will pay what he has in order to survive, assuming that he has the price to pay. This leads to the easy exploitation of a person in this situation. If the easy exploitation of a person in this situation results in lower cost for the employer, then the free market dictates that this is the proper solution to this problem. However, it is not the ethical solution. Obviously there is a weakness in the free market system and this is another case where the free market needs some regulation.

If a product is needed as a matter of life and death, then a person will be willing to do anything for the product. This leads us to health care, where a person with a disease will be willing to pay whatever the price for the cure. The free market would have “enough people” receive the cure in order to give the provider the most profit for the least amount of work willing to be done. Under the free market the wealthy will pay their entire savings to be cured, and the poor will not even be able to pay the same in absolute dollars in order to be cured. This would suggest that the price of a cure should be based on another cost benefit structure. One option might be percent of net worth. So, a person worth 1 million dollars might be offered the cure at 10% of his net worth or $100,000 and a person worth $250,000 could have the same cure for $25,000. The problem, however would still result in providers looking for the wealthy people with the disease and the guy with a negative net worth not being cured at all, because the doctor would need to pay him.

The whole point here is that a free market is a good system for many things, but it is not the solution for every situation. We need to remember that for a guy that has a hammer, everything looks like a nail. So, we need to remember that other tools exist as well. Regulations are another tool that needs to be used in the real world. But, then again regulations are not the magic tool either. No tool is magic, they just need to be used in the right way for the right situation.








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Don't forget what Stephen Colbert said, "Reality has a well-known liberal bias."


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