Examples of externalities include health problems suffered by employees due to inadequate health protection in the workplace or environmental destruction caused as a by-product of production. In both cases, these costs are paid by someone other than the buyer and seller and therefore interfere with the forces of supply and demand.
One of the key conditions of monopolistic competition is the non-coerced interaction of many buyers and sellers neither of whom are powerful enough to influence the behaviour of the market. Ironically, in order to maintain monopolistic conditions, the government must step in with regulations to prevent either buyers or sellers from becoming too large despite the proviso of minimum government intervention. In this case, government regulations are essential since there would be no free market given an oligopoly or monopoly in any sector of the economy. The regulations become the lesser of two evils.
In many sectors of the American economy oligopolistic conditions do exist due to the relaxation of regulations such as the Glass Steagall Act. When a few companies dominate the market in any sector of the economy, the realization of free markets is not possible. These few companies have too much control over prices and can limit the ability of other potential producers from entering the market.
The agricultural sector is dominated by a few companies. For example, three beef packers, namely Tyson, Cargill and JBS controlled 90% of the market in 2008. Similarly, four pork packers, Smithfield Foods, Tyson Foods, Swift & Co. and Cargill, dominated 64% of the market in the same year. Soybean crushing was dominated by three companies, ADM, Bunge, Cargill who controlled 71% of the market.
Increasing horizontal and sometimes vertical integration allows these big companies to set the prices and dictate terms to the farmer. If a farmer refuses to accept a demand imposed by big corporations who control the industry, they will lose their contract. Such conditions are the best described as non-free markets.
While free trade agreements such as NAFTA, on the surface, appear to have no relationship to the functioning of markets, in fact, they have an enormous impact on prices, the cost of labour and the deficit. Trade agreements reduce trade barriers by restricting or elimination tariff and non-tariff barriers to trade. Furthermore, these agreements also reduce investment barriers opening the door for corporations to set up shop in a country with lower labour costs, weak labour unions and poor environmental and safety regulations.
The North American Free Trade Agreement (NAFTA), signed in 1993 by Mexico, Canada and the United States severely impacted the labour markets in the countries party to the treaty. According to the Economic Policy Institute (EPI), by 2010, 682,900 jobs in the U.S. have either been displaced or lost. Flint Michigan serves as an example of how NAFTA destroys jobs. At one time, Flint was the home of about 30 General Motors plants providing decent jobs not only for the auto workers but for the ancillary businesses such as restaurants and pharmacies. After NAFTA was extant, all GM plants were closed in Flint and moved to Mexico and the ancillary businesses suffered as well.
Another trade regime was created through the World Trade Organization whose primary purpose was to facilitate and promote trade and investment among signatory nations. In fact, it has created the opportunity for multinational corporations to seek the best conditions and lowest wages anywhere in the world, particularly in countries desperate for jobs who were willing to engage in a race to the bottom in terms of wages and working conditions.
According to the Alliance for American Manufacturing and the EPI, 2.4 million jobs have been lost as a result of the WTO and 628,000 jobs have been lost just to China. Economic ramifications of these job losses to other nations are widespread and include trade deficits, current account balances and budget deficits. Offshore manufacturing involving very cheap labour has reduced the price of many products but has generated massive external costs.
In a free market system, government would not be setting trade agreements that impact the buying and selling of labour and the levels of prices. Every regulation or dollar spent to influence the price of products is one dollar that is not a part of a free market system.
Clearly, markets in the U.S. are far from free. Government-created conditions that exist to minimize the free market status of the economy in the United States is simply an attempt to serve the interests of large corporations at the expense of the public. Free markets have been one of the pretexts for not creating a single-payer healthcare system and for the race to privatize the educational system. Cuts to social benefits are justified by the need to support the free market system.
The underlying problem is democratic in that political and business leaders, rather than serving the interests of those who elected them to do so, are serving the interests of corporations. The plethora of weaknesses in America's system of democracy needs to be remedied before a socially just balance can be struck between the role of the government and the role of business.
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