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The free market is absent both in the west and the rest

Recently Ian Bremmer published a book known as "The End of the Free Market."  The basic premise of this book is that with the collapse of the command economy, a new competitor to western-style capitalism has emerged in China, Russia, and the Middle-East that Bremmer calls state capitalism.

Unlike western capitalism, which is dominated by corporations and the profit motive, authoritarian capitalism involves states controlling corporations and market forces for political gain.  Bremmer says this form of capitalism is a threat to the previously dominant free market (my emphasis) capitalism of the west.

Although I agree with Bremmer's basic premise and fear the prospect of the ruthless state capitalism practiced in Saudi Arabia, China, and Russia becoming the dominant global trend, I am concerned by the false dichotomy that he presents between state capitalism and the so-called free market.  In reality, neither system is free.

One is dominated by a large powerful state, the other by few large powerful corporations.  Neither gives the freedom, choice, and opportunity to the people themselves.

A truly free market requires perfect competition, or at least near perfect competition.  Perfect competition requires six characteristics, none of which are present in western-style capitalism nor in the growing trend that is state capitalism.

Perfect competition needs enough sellers so that all are price takers.  This means no one has enough market share to determine the price and that all firms make revenue approximately equal to cost.  Firms would always be forced to keep their prices low and quality high or else go out of business.  The increased number of firms would also likely result in nearly full employment.

It also requires identical products.  This doesn't mean that there is no innovation, but rather that innovation is quickly adopted by competitors allowing for only short-term profits as a result of it.  In fact, it would encourage constant innovation in pursuit of the short-term profits because no firm could "rest on its laurels."

The next two characteristics are perfect information and equal access to resources.  That means all consumers are aware of the prices and quality of each product on the market and that firms are not prevented from acquiring the inputs they need to operate.

Next, there must be no barriers to entering or exiting a market, so that new firms can enter when demand increases and existing firms can close up if demand decreases without heavy costs to the owners.

Finally, there must be no externalities in production and consumption.  In other words firms must include the social and environmental costs of their production in their price, rather than pawning it off on a third party to pay for.

This vision of a truly free market seems a long way off from both the corporate capitalism of the west and the emerging state capitalism, but I believe it is achievable.  In my next article I will outline a plan for the United States to do just this.


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