The Free Market Model (20th Century Reconstruction)

by Dr. Jan Garrett

October 29, 2010

A market is a context in which people come together for the purpose of exchanging ownership of goods or money. Perfectly competitive markets (a technical term for "free markets") are characterized by these features:

(This list is based on Manuel Velasquez, Business Ethics: Concepts and Cases, Prentice-Hall, Chapter 4.)

1. There are numerous buyers and sellers, none of whom has a substantial share of the market.

2. All buyers and sellers can freely and immediately enter and leave the market.

3. Every buyer and seller has full and perfect knowledge of what ever other buyer and seller is doing, including knowledge of the prices, quantities, and quality of all goods being bought and sold. (We can call this "economic omniscience" for convenience.-JG)

4. The goods being sold in the market are so similar to each other that no one cares from whom each buys or sells. (What can be said for a single market, say, for red potatoes, carries over to a market system in which all single markets are perfectly competitive markets.--JG)

5. The costs and benefits of producing or using the goods being exchanged are borne entirely by those buying or selling the goods and not by any other external parties. (There are no involuntarily incurred costs such as harm from pollution or product defects.-JG)

6. All buyers and sellers are utility maximizers: Each tries to get as much as possible for as little as possible. (All economic agents are motivated in an egoist fashion.--JG)

7. No external parties regulate the price, quantity, or quality of any of the goods being bought and sold in the market.

On the basis of assumptions 1-7 and three rather uncontroversial background assumptions not mentioned here, it can be proven that perfectly competitive markets (if they could exist) would be most efficient in giving every individual the best bundle of commodities per unit of money the individual spends. Without them, the argument likely fails.

#3 is wildly unrealistic in any society, even one much closer to the free market ideal than our current society (the non-slave parts of the U.S. in 1840, maybe). #2 is in fact limited by many factors, such as personal and historical ties to particular communities. #1 and #2 are unlikely to be preserved in any market society where firms may use their economic freedom to merge. #5 requires no pollution without the consent of all those affected and no product defects unknown to the purchaser of the product.

Unlike standard market theory above, in which #5 is a precondition for a perfectly competitive market, Jan Narveson ("For a Free-Market Environmentalism," in Mappes and Zembaty, eds., Social Ethics, 2002) claims that #5 will result automatically from deals made by free adults and economic agents who fear being sued. This is implausible, especially if, as seems likely, adults have very limited knowledge about pollutants created by other economic agents and insufficient time to negotiate with the (large number of) potential polluters of their environment. #6 assumes psychological egoism, which is a debatable theory of human motivation.