This free market thing works internationally. Credit- Michael Kramer

As we all know a pure free market does not exist and never has existed. The question then becomes, well, is that pure free market a useful model for understanding what happens in those necessarily impure ones? Opinions differ here. The Senior Lecturer at Islington Technical College thinks that market imperfections are such that all must be in the state, all of the state and nothing against the state. Steve Keen insists that the failure of the purest of pure models means that all must be treated as oligopolisitc competition – amazingly, something which demands that his friends in the state get to decide things.

Or we might just think for a little.

We can make predictions about what will happen in a free market. Where we’ve got free entry and exit from the market then we’d expect, well, entry and exit. Where we’ve got a change in technology we’d expect significant disruption and lots of that entry and exit. And a central prediction of a free market model is that no one has market power. Everyone is a price taker. That in turn leading to the average profit margin being around the cost of capital, no more. And lots of people going bust as they’re on the wrong side of random variation around that average.

Hmm:

Electricals retailer AO World has seen “no indication of confidence picking up in the near future” as shoppers remain cautious and its losses nearly doubled amid stiff competition.

Chief executive Stephen Caunce said waning consumer confidence and a slowdown in the buy-to-let market had put UK white good sales under pressure.

He cheered AO World’s resilience to the challenges as total UK sales rose 8pc to £681m.

Pre-tax losses expanded to £13.5m for the year to March, compared to a £7m loss in 2017, as it spent more on marketing and grappled with rivals cutting prices.

Mr Caunce said the company had protected its portion of the market despite the pressures.

No, don’t look at the excuses they’re making there. Look at the reality. We’ve a very competitive market here. Even the new technology players are price takers – they’re not able to create a profit, let alone an excess one. We’ve most certainly substantial entry and exit from the market.

That is, we’re seeing what we would see in a pure free market. It’s thus an entirely reasonable assumption that the pure free market model is a useful one to use at times. The absence of a pure, pure, free market doesn’t matter, we’re close enough to reality that the model is useful.

Subscribe to The CT Mailer!

2
Leave a Reply

Please Login to comment
2 Comment threads
0 Thread replies
0 Followers
 
Most reacted comment
Hottest comment thread
2 Comment authors
Nautical NickSpike Recent comment authors

This site uses Akismet to reduce spam. Learn how your comment data is processed.

  Subscribe  
newest oldest most voted
Notify of
Spike
Member

Yes. It is not a “pure free market” because there is indeed prior restraint by government, including complete regulation of the market for employees, and for some industries, subsidies and dictation of exactly what to produce (such as insurance policies). But in most industries, producers react so quickly to the preferences of the customer (including lowest price, best value, non-use of exploitation/GMOs/trans-fats) that one cannot argue for more regulation assuming that businesses will otherwise disparage, ignore, or seek to harm their customers.

Nautical Nick
Member
Nautical Nick

The “pure free market” is the starting point. One then adds other factors eg barriers to entry, changes in taxation, which lead to variations which can be observed. That’s the benefit of modelling, to be able to deduce in order to formulate policy.