Last week, I received an email saying we shouldn’t blame capitalism for the climate crisis. “What we have isn’t capitalism, it’s corporatism,” it said. “Under real capitalism, the free market would prevent the destruction of our environment.” This isn’t the first time I’ve heard the argument that our problems would be solved if we just returned to the good competitive capitalism of Adam Smith’s day.
I was going to respond but, by coincidence, this week Kerry-Anne Mendoza published an excellent reply to exactly that argument in her blog. She has kindly given permission to repost it here. —Ian
THE MYTH OF THE FREE MARKET
YOU’LL FIND A UNICORN BEFORE YOU FIND A FREE MARKET
Scriptonite Daily, February 27, 2013
I wrote an article recently about Capitalism’s Top 1% becoming the new aristocracy, based on the news that social mobility is no greater under capitalism’s meritocracy, than under the medieval oligarchy. Some responded, in line with a wider misconception, that if we only had ‘true’ free market capitalism these injustices would be a thing of the past. Today’s piece is a response to that argument. There never has been, is not and never will be a capitalist free market economy – and here is why.
The myth of the free market
Capitalism is meant to pivot around the free market. The theory goes that if only the market were rid of government meddling (regulation) then true competition would reign, with corporations battling it out to provide their goods and services to rational, all knowing consumers. This, according to supporters, would provide stable and accurate prices and quality for goods and services as competition would aggregate supply, demand and pricing.
Corporations who provided a good or service which was not wanted, was above the market price or below the market quality demanded by the rational consumer in this open, free market would simply fail and those who met demand would win. Therefore the success or failure of a company would be directly proportional to its ability to meet the needs of its consumer.
So, some might argue that recent failures assigned to capitalism – the bankers bailout, the corporatisation of government, the decline in social mobility – are because we do not have REAL capitalism as outlined above. They might argue we are in fact in a post capitalist, state capitalist of fascist state. There are valid arguments in favour of all these possibilities. But whatever state we are in, it is as a direct and inevitable result of capitalism. These outcomes are not aberrations, but natural and logical given the reward mechanisms of the system itself.
It’s the monopoly, stupid…
While arguments in favour of inviting private interests into the public services rests on the idea of competition, corporations themselves are rabidly anti-competition.
If a McDonalds opens opposite a Burger King, Burger King aren’t over the moon that the capitalist theory of competition is being exercised, they’re figuring out how to kill the opposition. The argument goes that the consumer is the ultimate beneficiary of this struggle, as the consumer will be tempted by lower prices and better quality goods to win them over.
These arguments overlook some key issues. They ignore that it makes sense for the corporation to seek out a monopoly – so a free market gained monopoly would have no different traits than a socialised monopoly – except democratic accountability would be removed.
They also fail to consider that the consumer is not solely a consumer, they are also a member of their society so may well be impacted by the competition in more than one way (i.e. they might benefit from a price cut as a consumer, but lose their job as a result of the bigger corporation pushing their employer out of the market).
The facts bear this theory out. With the rise in ‘free market’ policies of the Thatcher and Reagan governments in 1980’s US and UK, perhaps we would see a dramatic rise in competition? Surely this new, free market would end monopolies and usher in a new era of dynamic, consumer responsive businesses vying for attention.
Let us use food as a case study. In 1990, only 10-20 percent of global food retail was delivered by supermarkets. Today, that figure has soared to 50-60 percent. That is, over half of all food sold in the world, is sold through supermarkets.
The UK has lost 90% of its specialists food retailers – that is butchers, bakers and fisheries – since the 1950’s. In Britain today, 97% of food purchased, is bought in supermarkets, with only four corporations making up 76% of those sales. In the US, 72% of food is purchased in supermarkets. As these figures continue an upward trend, we can see that monopolies are being created in food production.
If we take a look and test the theory that the consumer would benefit from this process of corporate battle, proponents of the idea point to the drop in the proportion of household budgets in developed countries spent on food.
During the rise of the supermarket since the 1950s, the percentage of the US household budget spent on food dropped from 32% to 7%. In the UK the proportion spent on food has dropped from 33% to 15%.
But, with supermarkets making record profits, and household food budgets down, who is paying the price for our food?
The answer is the farmer and the environment. In Brazil, more than 75,000 farmers have been delisted by the big supermarkets. Thailand’s top supermarket chain has carved its supplier list from 250 to just ten. The tiny country of Lesotho has actually all but killed off its domestic farming industry with 99% ofits food purchased through supermarkets utilising foreign agri-business.
Seventy years ago, there were nearly seven million American farmers, today there are two million. Between 1987 and 1992 the US lost 32,500 farms a year and now 75% of US produce comes from just 50,000 farming operations.
Family farming and smallholding has been the big victim of the supermarkets. This means farmers in developing countries being exploited, and consumers in developed countries so far removed from their food chain that they could not tell the difference between beef and horse.
The inflation in food prices in recent years has been masked not only by supermarkets pressurising food producers to ever decreasing incomes and unsustainable farming practices, but the makeup of our food is being diluted…in short, the price might stay the same but we are getting less for that price. The still breaking horse meat scandal is just one example of this.
So when it comes to food as an example, the free market has seen a few corporations rise to dominate the market, set their own prices and lead to negative social impacts. While some consumers might see a fall in the price of the food they are buying, they cannot be sure that they are comparing apples with apples and while perhaps benefitting as consumers, they are losing out as producers.
In fact if we zoom out to what is happening in business overall, for the last three years the US has seen a consistent fall in the total number of businesses. In the US, start ups (new businesses) have fallen as a share of businesses in the economy from 12% to just 7% in just the last few years, whilst still on average employing not more than ten people each. These patterns are reflected across developed economies globally.
The market is being constituted by a decreasing number of businesses, fewer new businesses are being launched and the monopolies created that produce negative impacts on communities across the globe.
What keeps the free market free?
What keeps a free market free? As we have seen above, it is not in the interest of the corporation to maintain a free market.
The corporation has no reason to apply any kind of ethics whatsoever. Adidas employs child and sweatshop labour in the Far East because it is cheaper than employing people on a living wage, with decent terms and condition.
So, historically the government, as the purported servant of the people has been the enforcer of rules necessary to restrain the ‘market’ from behaviours which, while logical from point of view of the corporation, lead to undesirable social outcomes.
However, the logic of the corporation is then to seek maximum influence over the regulator. In this case, corporations use their vast wealth to buy influence in houses of parliament or government across the globe.
In the US, by 2011 the largest thirty corporations spent more that year on lobbying government than they spent on taxes. Big oil alone spent over $169m in lobbying the US government in 2009. Between 1998 and 2008 (the year of the bailout) the US Banking Sector spent $3.4bn lobbying for deregulation, reduced capital requirements and avoiding the regulation of derivatives (which caused the financial crisis). When they aren’t lobbying, they are simply gaining positions of power within the government itself to directly redraft legislation to suit them.
In the UK, corporations with outstanding tax issues with the HMRC (the tax collector) are currently in working groups with the HMRC to redraft the very tax rules they are doing their best to avoid. The largest accountancy forms are also using consultancy positions within government as tax policy advisors, to market themselves to tax evading corporations to help break the rules they wrote.
In the US, there appears to be revolving door between Monsanto (controversial purveyor of genetically modified foods) and the Food Regulating Agencies. Islam Siddiqui, vice-president of Monsanto-funded lobby group CropLife is now a negotiator for the US Trade Representative on agriculture.Roger Beachy, a former director of a Monsanto-funded plant science centre has become the director of the National Institute of Food and Agriculture. Michael Taylor, former vice president of Monsanto, is now the deputy commissioner of the Food and Drug Administration (FDA – the US’s food and drug regulator).
There is a major problem here. The outcomes of the above are that when corporations break the law, they are either not tried or given a fine which comes nowhere near the profits reaped by breaking the law. And worse, corporations are buying the drafting of laws which make their unethical and damaging behaviour legal.
We have seen recently that banks have instituted fraud on a global scale by simply making up the LIBOR rate, the base interest rate, at the cost of savers and pensioners and to the benefit of their traders who specialise in debt, not capital.
In 1950, corporate taxes made up 30% of federal revenues in the US. By 2012, this had fallen to just7%. In the UK, Corporation Tax rates were cut from 52% to 35% over just two years between 1984-6 and has continued to be cut until it stands at just 21% today.
Corporations do not want any rules which stand in the way of making profit. Left unregulated, they would simply operate in ways which maximised their profits regardless of social outcomes. When we introduce a regulator, corporations seek to and succeed in compromising them. The issue is not to blame one or other of the players, but the game of capitalism itself.
Pulling our heads out of the sand
It is time to get real. There are a number of sheer economic realities which also undermine the idea of the so called free market. I would recommend reading Professor Steve Keen’s Debunking Economics to get a better handle on those.
But whether it be sheer mathematical reality, or social reality, the free market myth is nothing but a nonsense. It is a self serving nonsense propagandised by its beneficiaries.
In 2008, the banks did not uphold the principle of free market values and keeping the state out of the market – they begged the state to use tax payer money to cover their debts whilst only they enjoyed the profits. The IMF recently estimated that this bailout has so far cost the taxpayers of the world £7.12 trillion ($11.9trn). That is the equivalent of a £1,779 hand out to every last human being on earth.
The truth is that most of the globe now labours under corporatized states. Every new policy is tested against the reaction to it by ‘the market’, as if it were this free, independent aggregated assessment of the worthiness of state actions. It is not. It is simply big businesses reaction to the action of the state. All the market reaction tells you is whether or not a cabal of corporations think they can make a profit from it.
In conclusion, not only is the market not free, but it never can be. It requires legislation to prevent rational corporate behaviour which would undermine it, and any regulator (state or otherwise) will be corrupted by corporations seeking to influence them.
The sooner we abandon this madness, the sooner we can answer the bigger question: how do we create a means of economic organisation which has the highest chance of meeting our social goals?
Surely, underneath all this GDP growth nonsense is a basic ambition to increase living standards around the world, to raise the levels of health, education, social cohesion and progress (technological, scientific etc) across the globe such that we can all benefit from it whilst not destroying our planet.
We labour away under a system which forces us to abandon ideas and aspirations to deliver these goals for the sake of a limited number of overbearingly powerful people and corporations to increase their profits.
The answer cannot be to unleash these people on the world without even the token regulation they have now, but to fundamentally transform our social, political, economic and environmental organisation.
We must abandon the myth of the free market, just as we gave up on Santa Claus and Unicorns – it is time to put away childish things so we can become grown up caretakers of ourselves, each other and the planet.