Capitalism vs Free Markets

In the 1700s, The Enlightenment saw the rise of a new idea about how government should be done. This held that the citizenry should be as free as possible to conduct trade and the economic activities conducive to it; and that government's sole proper function was to protect this freedom, primarily by providing a just and fair legal framework within which commerce, in all its diverse forms, could be carried on. Proponents of Free Trade held that the natural process of competition would ensure a balancing of the interests of the parties to trade, effectively optimising the economy so as to maximise its capacity for supporting happy citizens. I, like many others, generally find this Free Market political ideology appealing and would like to see it more widely applied; however, I have my reservations about details.

It was accepted that government would need the means to deploy force – in enforcing the law and to defend the nation from those who would interfere with its freedoms – but proponents of free markets were eager to see government's rôle reduced as much as possible, as they saw government as generally prone to suppressing freedom. Another major concern of the proponents of free markets was that government is all too fond of wars as a justification for trampling on freedom at home.

How a free market works

In an ideal free market, goods and services are sold at fair prices because: if they are sold dearer, that would create an opening for someone to go into business supplying them at fair prices, i.e. cheaper, which would give them a competitive advantage over incumbents, who would thus be forced to lower their prices; and, if goods and services are sold too cheap, the suppliers shall suffer economic distress, which shall lead to some of them quitting the relevant industry, empowering those who remain to raise their prices (due to lack of competition). However, the second half of this presupposes that those suffering economic distress have the option of quitting their existing business; and the first half presupposes that it is feasible for new players to enter markets.

Note that I've referred to the notion of a fair price; which is obviously utterly subjective, yet the market (in a sense) gives an objective meaning to it: if those selling something at a given price are unable to prosper, that price is below the fair price; if those buying at some given price are unable to prosper, that price is above the fair price. This doesn't give very definite answers – since any given player in the market buys many things and sells many things, making it difficult to be sure which particular good or service is too dear or too cheap, even when many are economically distressed – and the answers it gives are intrinsically dynamic, but it's the meaning of fair in use in this discussion, notwithstanding the gulf between it and one's subjective intuitions of fairness.

To leave a market, e.g. because you're economically distressed due to selling your goods or services at below a fair price, you need to be at liberty to do so; and you need something else to do instead, from which you can earn at least as well as from the market you're leaving. If you previously agreed to a contract to continue selling your current goods and services to some party, your liberty to leave the market is limited by that contract. If you are renting your home from someone, you need to be able to continue paying the rent, so your new business needs to cover that; worse yet, if your land-lord is also the employer to whom you've been selling your labour too cheaply, your continued employment may be a pre-condition of keeping your home; you'll need to find a new home as well as a new job.

To enter a market (whether as part of leaving some other, or in a bid to stimulate competition in that market), one generally needs the right kinds of property – premises on which to work and trade, plus the equipment with which to work. Those who are entering a market generally don't already have these, but they can be purchased. If you have enough money to purchase what you lack, you can start up in business. Otherwise, you'll be obliged to borrow money – and pay someone interest – or rent the property you need off someone: and this is an added cost, which reduces your scope for competing successfully in the market. Since borrow is commonly used with connotations of no charge, I'll use the term rent for borrowing money at interest, since this works so much like renting the equipment (I could call it usury, but that has emotive connotations I chose to side-step, here). The money and equipment needed to start up business is referred to as capital: if you've got it, you can rent it out to others or use it to start up in business yourself. If you use your capital to start up in business for yourself, you risk losing your capital if it fails; but success shall provide you with an income, and at least you have an advantage over competitors who're paying rent for the use of the capital they needed to set up their business – they pay a cost (the rent) that you don't.

Of course, you also need a place to live, which takes capital: again, if you don't already own it, you can either rent it or buy it using borrowed money. If you have surplus capital – that is, not tied up in your own home, and not tied up in some business by which you generate the revenues you need to live – you can rent it out to someone else. Since that gets you money, you can actually do with capital which isn't, strictly, surplus: your income, apart from renting it out, might not be enough to live on, but the rent from it may suffice to make up the difference. When renting out surplus capital, you have the advantage over your client, since you don't actually need the rent – which, ironically, means you can get away with charging any amount your client can bear to pay. Even if they go out of business, you get your capital back and they've paid you some rent in the interval, so it's all good.

We thus see that those who have capital are at an advantage over those who lack it. Furthermore, those who aren't getting a fair price tend to have steadilly decreasing capital (or increasing debt), which reduces their scope for changing businesses, tending to trap them in poverty.

The industrial revolution

What the industrial revolution did, that made the game more intense, was to introduce spectacular economies of scale. It takes a lot of capital to set up a large factory, but once you've done so you can produce goods much more cheaply than smaller-scale producers. This allows you to make a respectable profit even while undercutting them – which drives them out of business and relieves you of competition, thereby enabling you to keep prices up at roughly the level prior to your entry in the market. Furthermore, the vast amount of capital involved in setting up a factory works to your advantage, since it serves as a barrier to entry to the market.

Profitably subverting the free market

There is a strategy those with surplus capital can play, given the above, in a roughly free market: always lend your capital to the highest rent-payer; use the threat of withdrawing your capital to pressure your creditor to pay higher rent; don't rent your capital out to competitors of your most profitable creditors (since that'd undermine how much rent they can afford) but do rent it out to competitors of your less profitable creditors (since this shall make them more desperate for capital, to grow their business so as to achieve better economies of scale and fight off the new competition).

By the 1800s, Free Market principles had largely gained the upper hand in the governments of liberal democracies; and the nations which applied them were in the fore-front of the industrial revolution, essentially because Free Markets let the industrial revolution happen. However, a problem soon enough arose: trade, generally, depends on capital; and those who control capital were able to arrogate to themselves the vast majority of the wealth created by trade, thereby ensuring they had control of the sources of capital and, thus remained in control of the available capital. Here, capital more or less means money, though other property (e.g. land or mining rights) of significant value also counts as capital. The crucial thing is that businesses need capital to get started; and the expectation that markets shall largely manage themselves is founded on the premis that new businesses can enter markets and compete with existing players; if some business, or group of them, is doing something to the detriment of the common weal, then other businesses which do so less (ideally not at all) shall be able to compete with them, putting an end to their abuses. Because this is expected to be inevitable, government should not interfere in markets.

The problem with the capital-control strategy, from a Free Market perspective, is that those pursuing such a strategy would sooner put their money into an existing business which is exploiting the fact that it has little competition than into a new start-up whose business is to provide that competition. The industrial revolution made it possible to make immense economies of scale, so that a very large factory can produce goods more cheaply than a modest-sized factory; which, in turn, can do so more cheaply than home-production. Building a factory takes capital; and the bigger the factory the more capital it takes. A business with a big enough factory can easilly out-compete all smaller businesses; no-one can set up a viable competitor without a large amount of capital; so a big factory is safe from competition as long as those with large amounts of capital prefer to leave the factory without competition. Thus the Free Market is subverted by the concentration of capital that achieves the greatest economies of scale.

Now, in theory, this isn't a bad thing: the big factory makes goods cheaper, so theory says customers gets them cheaper. However, once the Big Factory has driven all smaller producers out of business, it can afford to raise its prices: it has no competition. In a Free Market, this situation is supposed to provoke, in reaction, the emergence of new businesses that, by competing with it on price, compel it to keep its prices low. However, if those businesses aren't as big as the Big Factory, they can't achieve the same economies of scale, so it can drive them out of business: those who would need to invest in such a business to get it started can see this ahead of time, so know that they would lose money on the venture; so such a venture cannot raise capital to get started. That only leaves the option of a new competitor as big as the Big Factory: but that takes a huge amount of capital, which is difficult to raise when your goal is to start a business deliberately less profitable than the Big Factory – and those who have the kinds of amounts of capital that can make a difference typically already have their money invested in the Big Factory or its equivalents in other industries, so aren't much motivated to help you.

The historic widespread application of the capital-control strategy lead to competition among those with capital – which continues to this day – in which those with more capital had (and have) major advantages over those with less. The problem with this strategy is that it tends to mess up the freedom of markets – because the most powerful players (i.e. those with the most capital) have a strong motive to undermine the process of competition: the game works better for them without it, and they're in control of the game.

In the 1980s, the term supply-side economics became widely-used to describe this: if you control supply, you can drive prices (and hence your profits) up. You can only do that in industries where getting started takes a lot of capital – or where the law is rash enough to grant monopolies. Part of the trick in playing the capital-control strategy is to: identify what kinds of property are pivotal in the wealth-creation process; and concentrate on controlling that kind of property. As it happens, wealth itself turns out to be the pivotal kind of property: the result is that, where this strategy is viable, wealth distributions tend to be hugely distorted. Absent some form of regulation, to impede the capital-control strategy, the upshot is that the Free Market is subject to a natural mode of collapse, in which those who pursue this strategy subvert the market's freedom – and, consequently, everyone's freedom. I understand Marx to have used capitalism to mean the state of affairs that arises when the capital-control strategy has completed that subversion; that he conflated this with the free market is understandable, given its apparent inevitability. It remains that I would sooner pursue the ideal of free markets, pursuing such means as we may to prevent their subversion.

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