The theory of free markets is the economic framework in which the U.S. economy operates and has become apotheosized into an unquestioned presupposition in mainstream discourse. Obviously, free market economies are not black or white options but a spectrum along which different economies are positioned. The real question is the decision as to the legitimate role of government and the legitimate role of the private sector. Without a minimum wage, environmental regulations, health and safety standards and protections for consumers from dangerous or fraudulent products, the American people would be at the mercy of corporations whose sole purpose to maximize profits for its shareholders. After all, ideally, the government is simply representatives of the people acting on their behalf to serve their interests. Hence the government can't just step back and leave the public to suffer from the malfeasant machinations of corporations.
Despite proclaiming its mission to achieve free markets in its purest form in America, political and economic leaders have suffused the economy with non-free market mechanisms.
In theory, a free market economy is one in which all markets within it are unregulated by any parties other than those people in the market who are seeking to buy or sell their labour or products. In particular, a free market can only exist in its pure form when the role of the state is limited to tax collection and enforcement off private ownerships and contracts.
A number of conditions must exist in order for a market to be free. Prices must only be determined by the decisions of buyers and sellers en masse in the market. Although perfect competition is not necessary for a market to operate freely, at least monopolistic competition must prevail. There must be many competing producers, where no single or small number of producers can control the market price and where there are few barriers to entry to or exit from the market.
Virtually none of these conditions exist and, in fact, in some cases the extreme opposite is true.
One of the major factors undermining the freedom of markets in the United States is defense expenditures which causes a major disruption to decision-making pertaining to buying and selling. It is a singular violation of the monopolistic criteria since there is only one buyer and in virtually every case, there are very few sellers. For consumers, there is no utility in the products produced and it is a preposterous stretch to argue that they are protected by the weapons systems purchased by the government.
There is a myriad of private corporations who sell weapons and armaments to the government and the dollar value of the sales is leviathan. For example, in 2010, Lockheed Martin Corp. won almost $17 billion in contracts, Northrop Grumman Corp. won #11 billion, and Boeing Co. won $10.5 billion. Overall, the government purchased a total of $140 billion from the private sector. On research, development and testing, the government spent another $79 billion.
In addition to these government defense expenditures, numerous grants are donated to private labs and universities for the purpose of research into defense-related technology. Since the source of this grant money is from government departments other than Defense, for example the Department of Energy (DOE), the purpose of the money is often hidden from public scrutiny. For example, the Ames Laboratory, located on the campus of Iowa State University, received $30 million in 2008 for defense-related research. Ames laboratory produced the uranium for the Manhattan Project. Researching advanced defense technologies, ARPA (Advanced Research Project Agency) was the recipient of a $400 million grant from the DOE. In 2009, the DOE provided a total of $26.4 billion in funding for Universities and laboratories.
In addition to purchasing weapon systems and armaments, the government spent over $25 billion on the services of private contract companies, constituting another major intrusion into the operation of the private sector.
Both defense spending and subsidies to industries substantially violate the basic principle of limiting the role of government in the market.
Handouts to industries can assume many forms including grants and other direct payments, government credit subsidies and guarantees and market price supports to name but a few. The impact of these handouts is to lower costs for the recipient companies and therefore to reduce the price of their products. Price determination in a free market is supposed to be based exclusively on the actions of buyers and sellers or in economic terms, supply and demand. As in defense spending, handouts are a major form of government interference strictly prohibited in a true free market economy.
For Example, handouts to the energy sector are primarily directed toward the fossil fuel industries rather than renewable energy companies. In the period 2002 to 2008, subsidies to fossil fuel corporations totalled $72 billion while subsidies to renewables totalled $29 billion, half of which targeted corn-based ethanol, a source of fuel which hardly qualifies as a renewable given the quantity of fossil fuels and water required to grow it.
In the agricultural sector, in the period 1995 to 2009, Riceland Foods received $554 million, Farmers Rice Coop $146 million and Harvest States Cooperatives $49 million. During this period, the total subsidies to the agricultural sector amounted to over $246 billion.
These farm subsidies empowered U.S. food exporters to undercut foreign competition, particularly in developing countries, since Europe subsidizes its farmers as well. Government interference determined who was selling at the best price and therefore which exporters were successful.
Agricultural subsidies in conjunction with IMF policies, heavily influenced by the United States and Europe, had a ruinous effect on the agricultural sector in many developing countries. For example, Jamaica was forced by the IMF to raise interest rates to farmers to 23%, ban tariffs and refrain from any subsidies to farmers. Up until that point, Jamaican farmers had been supplying both the domestic population and the tourist industry but were practically forced out of business by the heavily subsidized U.S. products and IMF policies. The fate of the agricultural sector in Jamaica resulted from actions of the American government not from market forces.
Another obstacle to markets operating freely in the U.S. is the external cost of production otherwise known as externalities. Prices in a free market system are strictly determined by the interaction of buyers and sellers but in the case of externalities, some of the costs of production are not included in the price and hence buyers are not reacting to the true price.