“Haitian rice farmers are quite efficient, but they can't compete with US agribusiness
that relies on a huge government subsidy, thanks to Ronald Reagan's free market enthusiasms.”
Many proponents of capitalism say that although our current system looks a little bit like
capitalism, it really isn’t in that businesses with lots of money can essentially buy government
favours, that is, they can “lobby” the government to give them an unfair advantage
in the marketplace.
This is often in the form of subsidies, grants, tariff protection, tax breaks, and so on.
Whenever you hear somebody say, “The market is rigged!”, this is typically what they
are referring to — so called “crony capitalism”.
Technically, most of us live in what we call a mixed economy, an economic system with some
elements of freedom, but one which is heavily controlled and regulated by the government.
Just look at any of the tax laws in your country — they’re unbelievably complex.
They incentivise some industries while penalising others.
It’s certainly not a free market.
In this environment, it’s only natural that businesses try to manipulate the government
through lobbying, and so on, to acquire some kind of advantage in the marketplace.
Crony capitalism is just an inevitable consequence of the system that we have set up.
To be fair to capitalism, however, there is really no such thing as “crony capitalism”.
There is either capitalism, which is about free markets and the separation of trade and
industry from government intervention, and then there’s cronyism, the practice of awarding
friends, family members, and trusted colleagues with unfair advantages in business and politics.
We’ve come up with this term “crony capitalism” to try to describe the current state of capitalism
in the world today.
So in this video, I’d like to run through a simple scenario of what a true free market
economy might look like.
How would it play out?
Imagine that all the cronyism and government intervention disappeared and the market became
truly free.
Pure capitalism as some might describe it, or Laissez-faire.
Would this fix all of our problems?
Let’s take a look.
Imagine that in our little free market economy, there are 10 businesses.
They’ve all started from scratch and are of equal value, at least initially.
To keep things competitive, we’ll say there are two companies in each industry.
There are two companies that produce tools and machinery; There are two food and agricultural
companies; Two mining and forestry companies; Two electronics companies; and Two major retail
and entertainment outlets.
Obviously in the real world, there are many more industries (health and education come
to mind), but let’s just keep things simple.
In this scenario, let’s assume the government’s only role is to maintain peace and order so
that the economy can work without interruption.
Laws still exist to prevent parties from stealing and destroying each other’s property.
Let’s also assume that everyone in this simplified scenario acts within the law and
plays nicely.
“O’Toole Tools — The Best Tools!”.
It turns out that Jimmy O’Toole’s tools are slightly better than his competitor Maker
Tools, and consumers prefer his slogan to that of Maker’s, “Don’t Be a Tool…
Maker Tool!
Over the upcoming years, O’Toole Tools gains in market share.
It’s only natural.
Most people prefer his tools to Maker Tools and nearly everyone has an O’Toole tool
box sitting in their garage.
Although his tools are about the same price, they’re of slightly better quality and look
nicer.
As Mr O’Toole’s company gets bigger, he’s able to start offering more discounts and
undercut his competitor.
90% of consumers are convinced and give up on Maker Tools.
Mr Maker, however, isn’t going away without a fight.
He still has a long line of loyal customers who think that his tools are better than O’Toole
Tools.
He gives in to market pressures and starts reducing the prices of his tools so that he
can claw back some of the lost market share.
Jimmy O’Toole sees what is going on, so decides to bring in the big guns — he pays
some celebrities to advertise his tools.
Mr Maker simply doesn’t have the finances to compete with the giant that is O’Toole
Tools.
He resigns himself to the fact that he can’t compete with O’Toole and accepts that he
will only have a small fraction of the market share.
However, Jimmy O’Toole doesn’t like the idea of having any competition.
He decides to make Mr Maker an offer he can’t refuse — $100 million.
Mr Maker begrudgingly accepts knowing that this offer will make him and his family super
wealthy and they’ll never have to worry about working again.
Jimmy O’Toole decides to keep the Maker brand name just so he doesn’t upset the
loyal Maker Tool fan base.
A monopoly has been formed.
The other industries soon follow suit.
People prefer Banana electronics to its major competitor Peach.
Peach computers are known to shutdown unexpectedly, and nearly everyone prefers Banana smartphones
to Peach ones.
Anyway, Banana take over with their Monkey Business advertising campaign which features
celebrities dressed up in monkey suits squashing peaches and eating bananas.
The TV commercials are a big hit and always end the same way with the celebrity staring
into the camera holding a banana in one hand and saying, “Only Banana brings me happiness”.
Likewise, the Big Food Company buys out its competitor; Timbersteel Mines become the dominant
mining company, and Clothes ‘n Stuff are by far the most popular retail outlet.
Now there are five distinct monopolies in our little scenario.
Jimmy O’Toole is starting to get old, however, and realises it’s time to pass on the family
business to his only living heir, his son, Timmy O’Toole.
Timmy is a little bit brash.
He’s grown up in a life of luxury and has never had to work a day in his life.
Now that his company is the only major player in town, he decides that it’s time to focus
more on profits.
He offshores a lot of the manufacturing to save on costs, but consequently, the quality
of his tools go down.
He doesn’t care though and starts jacking up the prices.
He knows that there are no other options for his customers and they are essentially forced
to buy his tools.
He’s now raking it in, but the market has had enough.
A couple of startups emerge promising their customers better tools and better prices.
Initially, they are quite successful.
The customers love their new tools are start giving them rave reviews online, but Timmy
O’Toole is not having a bar of it.
He decides to do what all big businesses do — he buys out the competition.
All the startups are scared that they’ll eventually lose out to the big players anyway,
so they accept their multi-million dollar payouts.
O’Toole Tools, although they’re s**t now, remain the dominant tool company.
In our little scenario, it turns out that consumers spend more money on electronics
than they do on food.
Head of Banana Electronics, Herb Plantain, notices this and decides that Banana should
start branching out into different industries.
He thought it was only natural that Banana should also produce food.
He makes a multi-billion dollar offer to buy out the fruit and vegetable arm of the Big
Food Company, and the offer is quickly accepted.
Their new commercials feature celebrities in monkey suits walking around munching on
carrots.
The commercials are well-received by parents groups and the like as they encourage children
to eat healthily.
Eventually, however, the price of carrots start to go up and Banana becomes so big,
that it can afford to buy out the rest of the Big Food Company.
Not only does it have the biggest market share of any corporation now, it also owns most
of the prime agricultural land.
The company has become a behemoth, and there’s nothing anybody can do about it.
Banana have done everything legally, and despite complaints, the government are not allowed
to intervene.
In this free market economy, the government have no legal power to regulate the economy.
The remaining three companies eventually are sucked into the black hole that is Banana.
We now have Banana Phones, Banana Mines, Banana Perfume, Banana Tools, and even Banana Bananas.
We are left with one massive conglomerate that owns everything.
People are understandably sick of the word Banana, but any new competitors are just swallowed
up.
The free market failed us.
My question to you.
Is there any other way this could have panned out?
Without some sort of regulation, how could this not be the inevitable result?
What’s stopping one big company from becoming the only company?
We currently have laws to prevent such monopolistic and anti-competitive behaviour, but advocates
of the free market insist that these laws should be done away with.
Ideally, the market would be self-regulated with prices for goods and services set freely
by the forces of supply and demand without intervention by government policy.
Unfortunately, as we’ve seen in my little scenario, what’s to stop one big company
from buying out other companies and dominating the market?
If profit is the only objective, then this is the inevitable consequence.
In the real world, there are no real examples of the free market, except perhaps one — the
black market.
Sellers on the black market produce wholly unregulated goods, and these goods are purchased
and consumed in an unregulated way.
Anyone can produce anything at any time and anyone can purchase anything available at
any time.
Of course, there’s the constant threat of police intervention, but the police are not
directly regulating the market.
They cannot decide what is produced or what isn’t produced, and they certainly can’t
set the prices.
Although indirectly, the very presence of the police potentially increases black market
prices as there is additional risk to sellers.
However, as we’ve seen in the past, government laws can still impact the black market.
For example, when alcohol was made illegal during periods of prohibition, a black market
grew.
When alcohol was legalised again, all the black market sellers went out of business.
So even the black market isn’t immune to government intervention, and therefore, one
could argue that it’s not really a free market.
Anyway, from my little free market scenario, we can see that monopolies will form.
Inevitably, prices go up.
Competition is stifled.
And the consumer pays the price.
And all of this is assuming that companies play by the rules.
What if some bad actors decided to play unfairly (as what would probably happen in real life)?
Then the effects of these monopolies would be amplified.
I’m not saying that our current system is perfect — far from it, but without some
form of regulation, capitalism and the free market will just end up gobbling itself up
and destroying everything and anyone who chooses to get in its way.