In search of a perfect free market

[Isabella]

A friend of mine recently revealed her hardcore free market ideology to me. I was surprised, not least because she works in the area of development.

What exactly are the conditions for a perfect free market; no regulation, no welfare state, any system to protect individuals from physical harm or is the theory that individuals would pay for this privately? national defense? any government at all?

What exatly are considered the drawbacks to an absolutely free market? How to supporters of this theory explain how the sick and physically incapable, as well as single mothers and the old would survive without any welfare system.

I would also like to know if anyone has ever heard of using the mafia as an example of the free market. Surely the coercive aspect is contrary to free market functioning. Plus the high cost of protection surely does not equal contribution to the state for basic judicial infrastructure. Is the illegal drugs trade any better illustration of this? Are the any widely accepted illustrations of free markets that exist?

[gopman]

"What exatly are considered the drawbacks to an absolutely free market?"

Economists generally agree that a government is necessary to enforce the rules of the market. No unfair use of market power- tying, forclosing, etc. Also, price regulation is necessary in natural monopolies. Utilities are a good example. There can only be one firm in an area because that is the only way to produce with any efficiency, but then they could set prices as high as they want if the gov didn't regulate. Also the government can control negative externalities through excise taxes on things like alcohol, and making narcotics illegal. It can create positive externalities through schools and research subsidies and other things. The government can also provide nonrival and nonexclusive goods more effectively in most cases- the military and roads are an example. Some people believe it is "fair" for the government to redistribute wealth.

A perfecly free market would have no taxes, no subsidies, no price controls, no regulation of quality or collusion or anything else. When people are taxed, they can no longer buy what they would have. This hurts both the consumers and the firms.

The advantages would be no efficiency loss to government intervention through taxes, quality control, rule enforcement, subsidies, bureaucracy, or rent seeking. This is generally good because society receives the maximum benefit from the products it produces and sells. The government is inherently a very inefficient entity, but it is also necessary. There is also a way to measure the social benefit of a more free market, but this is a fairly abstract concept that I couldn't explain here.

Also, a free market rewards hard work and innovation. Progressive taxes remove some of that reward.

As for sick and single mothers, free market thinkers would hold them responsible for themselves. It's legitemate- it may not be fair for someone to be forced to support someone else.

I'm not sure about the mafia. Drug purchases would be affected by income like anything else, just not as much, because when you are addicted, your demand is very inelastic.

I am conservative, that is to say I support a relatively free market. I feel this is the best way to provide for a society, and it incentivises people to work hard and create new products to benefit society. I also personally do not think it is fair to take money away from those who earn it.

[Meat Man]

anything free is good for me

[Blueangel]

I would say that a fine example of a free market economy is alive and kicking in the town of Stroud, Gloucestershire, U.K.

Stroud has been running a LETS scheme for almost 20years now, with great success.

http://beehive.thisisgloucestershire.co.uk/default.asp?WCI=SiteHome&ID=1688

My only problem is, I wonder how/if this could translate onto a larger scale?
We all, as individuals have skills or time that we could exchange for the goods and services we require. With the LETS scheme, you decide your own market price for your services...
i.e. 1 hour of babysitting = 2 Strouds
1 hour of plumbing = 8 Strouds

Thus, if you need the services of a plumber, you would do 4 hours of babysitting.
Better still, the babysitting can be for any member of the LETS scheme, and the Strouds can be used to secure the services of any other member.

[gopman]

I'm not sure that's any more free than our current system, there still needs to be a governing body to enforce the rules, but on that scale it's not as necessary and there aren't as many externalities or anomalies like the natural monopoly. I don't see how it's any better than doing 4 hours of baby sitting and making 20 dollars then hiring a plumber for 20 dollars. It's probably more inefficient because the government has to keep track of your credits.

[gopman]

And how does the government get strouds to pay law enforcement? Is there a stroud tax? Maybe I just missed something.

[marv]

There have been over the years a number of "barter" clubs in the US. Usually they involve services only but some butt heads with the IRS when it comes to the purchase of materials.

For example, you paint my house and I'll build you a PC in exchange. What is the value of the paint compared to the value of the parts for the computer? What happens if I trade my labor for your used car?

The clubs tend to keep quiet about the things they do or are willing to do.

[Simon666]

An absolutely free market exists in places were there is hardly any government. You can witness how well it works in places like Afghanistan, Kosovo and Somalia.

[gopman]

One tenet of government that even the most conservative economists agree upon is that there has to be a government to enforce the rules of the market. They also should provide some nonrival and nonexcludable goods that may not otherwise be profitable, e.g. the military, and tax/subsidise to correct externalities. Conservative economists generally feel that there should be very good justification if the government does anything though, becasue it is an inefficient process to work through the government.

[Simon666]

With the latest financial scandals, it is proven once again the market cannot regulate itself and as you claim there has to be a government to enforce the rules of the market. For once we agree.