Saturday, 21 July 2012

The problem with the "free" market

If you're like me you might well have seen the pictures doing the rounds on social media about the plight of British dairy farmers. They look something like this:

Source: the BBC
And this prompted a discussion on a facebook group which I'm a member of and someone asked why it was that, given the high profit margin of a pint of milk, no one had increased the price paid to the farmers while cutting the retail price and therefore undercutting the supermarkets.

Now, the thing is that this is a fair question. It's exactly what's meant to happen in the marketplace - when you get a company making high profits and underpaying their suppliers then an entrepreneur or a rival comes in and offers the suppliers a higher price and a lower price to consumers, taking business away from the first company and making both the supplier and the consumer better off. That's what's great about capitalism and about competition - it drives innovation and gives consumers better quality products at lower prices.

The problem is, however, that, when it comes to supermarkets, there isn't that kind of competition. People shop at supermarkets for convenience - there might be a shop selling the same milk at a much lower price while paying their suppliers a fairer price but why would the average shopper go there just to buy milk and then have to do their other shopping elsewhere when they could just go and do it all in one go at the supermarket? Sure, they might wind up paying over the odds for milk - but what's an extra 20p or so compared to the convenience of only having to do one shopping trip?

Which means that it's impossible for a small shop to compete with the supermarkets - other than perhaps as a small, niche business. So the only way it would be possible to undercut the supermarkets on milk and compete with them would be if you were another supermarket. But, if the big supermarkets aren't already competing with each other when it comes to milk, competition can only come from a new supermarket chain entering the marketplace and undercutting them - which is nigh impossible due to the way in which existing chains have already sewn up the suppliers and the good store locations between them. And, since no one can enter the market to compete with them, there's no incentive for them to undercut each other on milk by reducing profit margins as it's not going to win them a large number of new customers but would reduce their profits.

So what we're left with is, effectively, a cartel. The supermarkets keep their profits on milk high because they can and consumers and suppliers lose out as a result.

And that's the problem with the libertarian wet dream of a "free" market - by which they mean little to no market regulation at all. Without a sensible level of regulation then you end up with situations like the one we have with milk at the moment where lack of regulation leads to effective or actual cartels which completely undermine the whole concept of competition which is meant to be the best thing about a free market - with the result that everyone else, including smaller businesses, suffers for the sake of a small group of big businesses.

And this, I think, is the key aspect of the role of liberalism when it comes to the markets. As a liberal I believe that the job of the government is to regulate markets in such a way as to produce the kind of level playing field that unregulated markets fail to produce on their own. And, by providing a fair and level playing field it's then possible for competition to take place - to the benefit of everyone - instead of the crony capitalism we see at the moment.

In fact, in many ways, this is also the same as liberalism's attitude to the role of government in society as a whole - creating a level playing field so that everyone has a fair chance in life, with the rest up to themselves (and also to make sure that no one starves or goes homeless or lacks basic sanitation or medical care of course).

So, the next time someone argues that we should deregulate the markets and that libertarianism, with it's blind, unflinching and misplaced belief in the sacred "unfettered free market" is the answer, I intend to answer by asking them how they think anything other than regulation can tackle problems like the one we face at the moment with the market paying farmers less for their milk than it costs to produce.

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