The Consequences of a Free Market System: ‘This House Believes in a Free Market’

By Janice Kenny

On 23rd January 2015 the University of Exeter’s debating society brought economic theories to the forefront of political debate. Conservative Member of Parliament Chris Heaton and campaign manager from the Tax Payers Alliance Andy Silvester formed the proposition. The opposition consisted of Modern History Professor Richard Toye from the University of Exeter and Trade Union and Socialist Coalition member Ryan Aldred. This debate examined the attributes of a ‘free market’ system and the subsequent social and economic consequences inflicted on a country. After an initial vote resulting in predominant support of the proposition, Toye and Aldred were faced with the task of influencing Exeter’s undergraduates to understand the true meaning of what a ‘free’ market consists and whether this would be the most credible economic theory countries should abide by.

A free market is an economic system where prices are determined by unrestricted competition between privately owned businesses due to the supply and demand of certain goods and services.[1] Nonetheless, the very existence of a ‘free market’ system had been brought into question by a number of leading historians including Toye no less than two minutes into his speech. He argued that although capitalism and market mechanisms inherently exist, it is unrealistic to assume, as idealists do, that a genuinely ‘free’ market can occur with no apparent regulation from political authorities whatsoever. Polanyi strongly supports this thesis stating that there never was such a thing as a ‘free market’ and there never will be, because a lack of regulation would create a vision of ‘stark utopia’ causing dystopian consequences within a society.[2] Although free market systems would be ideal if they could be effectively implemented in society, Toye stated that the reality is that it is non-existent in our society, much like ‘Santa Claus’.[3] Can any society be truly representative of the free market system?

Adam Smith was the Father of Modern Economics who laid the foundations of the classic ‘free market’ economic theory. His thesis was that individual self-interest and competition generated prosperity and wealth. Hormats was an ardent supporter of this, supporting championing how lack of regulation helped deprive governments of the powers it previously had in determining who worked where, what was produced and what price it was sold on for. This reform supposedly ‘empowered millions’ in having freedom of choice, previously restricted under government control.[4] Hayek also supported this assumption. However with close analysis, this is a complete contradiction in its context. Although lack of regulation does expand our economic opportunities promoting further freedom of choice and individualism, this is one of the fundamental factors in prompting inequality. As Aldred stated, ‘We are all free to dine at the Ritz. But can we afford to do so?’ This exemplifies how although we have this freedom in an unregulated capitalist society to buy and sell, if we don’t have the money then we cannot enjoy the benefits associated with the free market. Instead, monopolisation will prevail, favouring big business agenda. This is most explicitly shown in the banking crises of 1930s and 2008 which effectively resulted in economic catastrophe, depreciating the strength of the country due to the ‘laissez faire’ approach that continued to be adopted.

The cause of the Great Depression of the 1930s was due to a culmination of factors. The under consumption of commodities and goods, the enforcement of consumer credit enabling the majority of individuals to take out loans who in the long run had no feasible way of paying them back and the disorganised buying and selling of stocks are to name a few. Truman’s strong support of individualism led to such a significant lack of regulation within the economy which created such economic catastrophe, and this closely mirrors the 2008 banking crisis. This is supported by economists such as Paul Krugman who championed how lack of regulation was key in regards to bank foreclosures and the decline of economic activity in the country.

Not only did lack of regulation cause such intense banking problems, but it also favoured big business agenda at the expense of smaller corporations. This was the case in the 1930s where Roosevelt’s New Deal policy created the National Recovery Administration codes as a way of tackling the economic hardships prevalent throughout America to increase employment, enforce a minimum wage, and working hours to revive economic growth. Nonetheless, the codes implemented were solely voluntary and self-regulated by big business corporations who also were in charge of forming its content due to their expertise in this field. This was because of the separation of powers and checks and balances enforced in the American constitution which must be abided by within the political administration to maintain a true democracy which the United States represents. However, the content of the codes were tailored for big business self-interest. No price controls were set on consumer products or wages, and so monopolisation of industry occurred prompting significant inequality among business enterprise. Toye echoes this viewpoint in the debate by expressing that this is still the case in society today. Businesses try to shut down their competitors through removing price controls and enforcing the cheapest price possible to attract the highest sales figures and percentage of profit. As a result, smaller businesses suffer because they cannot financially afford to maintain these low prices their competitors are enforcing through self-regulation. Tesco is a perfect example of this in action where profits were hidden because of their activity in rigging foreign exchange markets all with the intention of their own corporate greed and self-interest.[5] This notion of ‘self-interest’ at the pursuit of economic profit has been a recurring theme when expressing the issue of monopolisation in corporations, following free market ideals at the ‘expense of the public good’.[6]

Although the primary aim of the free market is to help achieve economic growth, it has had little relevance to social factors such as education or healthcare.[7] Aldred and Sweetland both argue that the impact the free market had in education was creating serious problems. Private schools were being introduced which started to develop this theory that private education would constitute your chances of success. Those who were not able to pay these fees were putting their children at a supposed disadvantage of ascertaining a good job and subsequently a good standard of living.[8] Similarly, profit motives were occurring in the Hitchenbrooke hospital which was recently privatised, resulting in healthcare service deteriorating and the need for government intervention. Without government intervention, the Hitchenbrooke hospital would have had to be shut down. This was similar to the 2008 recession where banks were bailed out by the government in order to avoid a serious economic catastrophe, affecting global markets and greatly altering the current economic and social standing of individual countries. This emphasises how a complete removal of government intervention is not necessarily espousing capitalist credentials. Some intervention is necessary by the government to ensure that all sections of society benefit economically from a free market. But as self-interest and greed have been engrained so deeply in this economic system, it has greatly overridden the positive values the market can attribute to society.

The biggest issue of the free market is the self-interest of individuals leading to the corporate greed and inequality of wealth in society. Social systems should not have the responsibility of making individuals happy, all it can do is ‘provide the conditions in which individuals can pursue happiness’.[9] Similarly, it is questionable how far the quality of individuals’ lives have really been improved by the expansion of output the system created.[10] As individuals, we buy commodities we feel we need or would like, although this could provide elements of happiness, we should not become accustomed to interlink consumption and happiness together. Overconsumption of goods could damage our moral values through a continued cycle of self-interest and greed. Similarly, the Free Market is for economic purposes and should be monitored so that values higher than the markets are not corrupted.[11] This philosophical aspect was absent from the debate but is thoroughly analysed by philosopher Michael Sandel who notes how ‘intrinsic’ values should not be overwritten by ‘monetary incentives’. This was clearly illustrated in his example of school pick-ups, where the percentage of late pick-ups actually increased after a fine was imposed to combat this measure. This was because parents felt that they were now paying for a service and therefore did not feel embarrassed in making the teacher wait, as they were financing this responsibility. Nonetheless, as a result, moral values were being eroded as the parents no longer felt obliged to pick their children up on-time which arguably should be their number one objective in their daily routine. Instead, they had the ‘freedom’ espoused in the free market doctrine to arrive late, obligated to conform to the verbal contract they agreed to, financing their incompetence of time management. Although they were paying for a service through freedom of choice, this emphasises how the market system was becoming so engrained in society, that civic renewal was needed to regulate the free market policies and prevent further encroachment on these moral values and the subsequent erosion of social relationships.[12] However, as Lawsett has suggested, self-interest has always been a ‘characteristic feature of rural life before industrial capitalism’. Despite the free market being projected as the proprietor for creating this corporate greed, self-interest would most likely have prevailed despite the enforcement of economic competition.[13]

Inequality was the main issue debated regarding the impacts the free market had on a global scale. The proposition espoused the view that free market policies have been invaluable in alleviating poverty and Silvester did not even regard inequality as an issue. Instead, he believed inequality was just the product of effective competition and if you worked hard you would be able to be in the sector where real economic growth was prevailing. Following on from this statement, a number of statistics were quoted such as the 15% decrease in poverty globally according to World Bank data. Moreover, Since World War Two, GDP per capita has risen from $2388 in 1965 to $3616 in 1989, where many poorer countries have also shared in this growth.[14]Similarly, following the oil crisis of the 1970s, on average the economies of developed capitalist countries have increased by 2.2% between 1975-1990, with less developed countries also having an improved GDP by just over 1.1% each year. Although this is still an improvement, the gap between the rich and poor is still widening, and thus inequality is present today under a free market system.

Is it fair to make an assumption that capitalism will be able to revolutionise the standard of living of 80% of the world, like it has done for the top 20%? This was a question put forward in Saunders’ Capitalism: A Social Audit which encapsulated how despite a reduction in poverty, inequality can still prevail because of the improvements in social and economic welfare of the middle class at the expense of the working class. Since the 19th century, the gap between ‘developed’ and ‘undeveloped’ continued to get larger.[15] This was what Marx had feared. His ‘immiseration thesis’ displayed how richer countries situated in the West got richer at the expense of poorer ones globally. However, full blame cannot be asserted on MEDC’s (more economically developed countries) for the greed of advanced capitalist countries if they developed their resources first despite other countries’ misfortunates of lack of clean water supply for example. Although usually those capitalist nations who do exploit other parts of the world have remained poor today because of this very reason.[16]

Even though Andy Silvester used the example of fair trade’s improved standards of living for those previously subjected to free market misfortunes, sometimes the Fairtrade farmers are actually worse off, as shown in the case of Mexico. Adjustment of world supply could lead to the prices of certain produce falling in some areas whilst stagnant in others.[17] Similarly, some farmers fall outside of the regime having to find work in other exploitative coffee sectors, with 90% of the premium paid actually going to the retailors.[18] Silvester fails to address how the wealthiest 1% of the population is soon to own more than the rest of the world’s population by 2016, nor how the richest 1% of the population owns 48% of the country’s wealth as of 2014.[19] As a result, Oxfam has called on the government to adopt a seven point plan to tackle this inequality, including stronger implementation on those who evade taxes such as Starbucks, and the prospect of adopting ‘inclusive capitalism’ under the Democrats. [20] This policy was a market orientated agenda to counter inequality and restrain the vast wealth residing at the top with the objective to alter the rules of the market place by removing negative attributes of the free market and maintain those which promote healthy competition, evolved standards of living and quality of life. The proposition was more persuasive in the argument they put forward of the negative connotations connected to the free market, nonetheless according to opinion polls recorded from the audience the proposition still remained victorious that the free market was a positive economic ideology benefitting society. It is important to note that there are many commendable characteristics embedded in a free market, but overall the negative attributes seem to override those positive. The expansion in inequality, the destruction of morality and the lack of regulation affecting banking structures all emphasised that in essence, the free market is not completely ‘free’ with price controlling and monopolisation. Can we ask ourselves that even if it were ‘free’, would inequality still prevail through self-interest under such a deeply competitive economic structure?

[1] R. Aldred, lecture on ‘This house believes in the Free Market’, consulted at The University of Exeter (23 January 2015) 13.37 minutes.

[2] Karl Polenyi, ‘The Power of Market Fundamentalism’, Harvard University Press (April 2014) pp. 101-108.

[3] R. Toye, lecture on ‘This house believes in the Free Market’.

[4] R.D. Hormats, ‘Emerging New Democracies and Free Market Economics’, Presidential Studies Quarterly, Vol 22. No.4 pp.745-755.

[5] R. Toye, ‘This house believes in a Free Market’.

[6] Ibid.

[7] R. Aldred, ‘This house believes in a Free Market’.

[8] S.R Sweetland, ‘Theory into Practice: Free Markets and Public Schooling’, The Clearing House, Vol. 76, No.1 (Sept – Oct, 2002) p.8.

[9] P. Saunders, Capitalism: A Social Audit, (Buckingham 1995) p. 77.

[10] Ibid.

[11] M. Sandel, lecture on ‘Morality and the Free Market’ consulted at http://library.fora.tv/2009/07/20/Michael_Sandel_on_Markets_and_Morals last accessed on 17th February 2015.

[12] Ibid.

[13] P. Saunders, Capitalism: A Social Audit, p.13.

[14] Ibid. p.31.

[15] S. Amin, Imperialism and Unequal Development, (Monthly Review Press, 1979) p.1.

[16] P. Saunders, Capitalism: A Social Audit, p.31.

[17]http://www.adamsmith.org/sites/default/files/images/pdf/unfair_trade.pdf, last accessed 17th February 2015.

[18] Ibid.

[19] http://www.bbc.co.uk/news/business-30875633 last accessed 17th February 2015.

[20] http://www.bbc.co.uk/news/business-27517577 last accessed 17th February 2015.

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