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Myth of the "Free Market"

By Dr Albert Ellis with help from Jimmy Walter  Posted by Jimmy Walter (about the submitter)     Permalink
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Front Cover by Jimmy Walter

Back Cover by Jimmy Walter


The Capitalists-Libertarian-Objectivist View of Economics*

6.        "Within every category of goods and services offered on a free market," Ayn Rand asserts, "it is the purveyor of the best product at the cheapest price"" who gains the greatest financial rewards, not automatically nor immediately nor by fiat, but by virtue of the free market, (1966b).   This market teaches every participant to look for the objective best he/she can arrange and penalizes those who act on irrational considerations.   It seems counter-intuitive, but when one tries to maximize any particular thing, everything else must suffer neglect. You never reach the maximum, or not for long, since the body develops behavioral dysfunctions such as alcoholism. The greatest possible long-term pleasure from life comes to those who seek reasonable balance and acceptance, not the most or best. Rand's statement is hogwash, as virtually any reasonably intelligent student of economics should be able to see.   Why?   Because:

a.        Frequently, the greatest financial rewards in a given field, such as the field of producing furniture, are won by the firms that make a shoddy product at a cheap price, or that produce a good product at an inflated price.   For although it may be true that the consumers who buy these shoddy cheap products or good overpriced products are being penalized for acting on irrational considerations, the free market clearly does not teach them to act otherwise.   In some cases--as in the purchase of furniture, which usually lasts for a long period of time even when it is shoddily produced--the free market would rarely induce people to change their poor buying habits; and in other cases--as when cheap toys are purchased and break very quickly--the free market still is not effective enough to teach many purchasers to buy more rationally next time.

The deficiencies of the capitalist system: greediness, and other "irrationalities" of people (who wrongly persuade themselves that they can keep getting something for nothing,) combine to defeat the good "intent" of the free market. Rand refuses to acknowledge either of these deficiencies or irrationalities.   Ideal capitalists, a la Ayn Rand's fictions, would presumably not produce shoddy goods (because they are only interested in fair trade) and would not be greedy or irrational.   Neither would angels be.

b.        The "rationality-producing tendencies" of the free market are beautifully defeated in many (or most) instances by other aspects of the profit-making system.   Thus, it is the aim of commercial advertising, publicity, high pressure selling, and other forms of propaganda to induce the purchaser to buy products that are not the best or the cheapest in their field; and this kind of propaganda frequently pays off.   It could be said in this respect that Rand means the best product of the advertising agency or sales promotion staff wins out in the free market of advertising and in selling!   But this obviously is not what Ayn Rand means.   She really thinks it is the best goods that win out in the free market regardless of advertising and sales promotions; and we all know from real life that she is often wrong about this.   Rand may contend that in a truly free market everyone would be productive, informed, and fair to the greatest possible extent.   But this concept of the truly free market is indeed religious and supernatural--for where is she going to find the human beings who behave as this kind of system demands that they behave? In fact, as Socrates observed long ago, the goal of every trader is "to buy low and sell high" -- not to give equal value for value received.

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c.        The objectivist position is that the free market teaches every participant to look for the objective best "within the category of his own competence."   This may not have been a bad rule several hundred years ago, during the early days of capitalist trading when buyers often were quite competent to select rugged rather than shoddy goods, because they frequently had previously produced rugged goods in their own workshops and homes.   Today, however, the buyer is usually quite divorced from producing anything but the one particular kind of material he may work on in his own factory (and he may even have little experience with that kind of production if he does non-producing work at this factory).   Consequently, he is not usually competent to look for the objective best in what he purchases, and he can easily be misled by various kinds of sales pitches. The main aim of marketing is to sell products at the highest profit, not the best profit or deal for the customer. It is far easier to confuse and convince than produce a high quality product. Moreover, there is a considerable cost in time and travel money to the consumer who would research and be completely informed about every purchasing decision. If such a standard were demanded, people would be spending all their time researching and evaluating instead of accepting, buying, and enjoying.

Rand talks about free markets and about the interaction of supply and demand.   Economic theory teaches us that in order for there to be a truly free market there must exist (among other conditions) many firms, no one of which accounts for more than a small percentage of the total production of goods;   homogeneity--that is, all firms must produce identical products; costless movement of goods, workers, facilities, support, and auxiliary organizations, infrastructure, and buyers (the best goods may be too far away to travel to acquire or the cost of that travel may diminish that superiority); and fully informed buyers and sellers.   If a firm makes a better product, it becomes (with limitations) a monopolist; for, its product being better than all others, it becomes different from the other firms.   Therefore, the law of free markets is rendered inapplicable, and is only likely to remain in force under rare conditions--which certainly do not exist in the complex society of today.

d.        Consumerism, at present, is based much more on fad and fashion than on any "intrinsic" value for the goods that are purchased.   Therefore, the woman who knows that the dress she is purchasing today will be outmoded next season does not particularly care if it is shoddily made and will fall apart at the seams in a year or two.   And even the husband and wife who realize that they must refurnish their house or apartment every few years to keep up with the Joneses will not be too offended if the furniture starts coming apart a few years later.   With advertisers, salesmen, and publicists, again, ceaselessly pushing the individual into making unnecessary, fashion-impelled purchases, and with the average customers having such a dire need for social popularity that they cannot too easily resist purchasing many things for different reasons, Rand's view of the free market encouraging buying and selling for rational considerations becomes ill-founded and unrealistic.   Capitalism, moreover, fosters conspicuous consumption (as Thorstein Veblen pointed out many years ago)--and thereby creates much of the irrational buying that clearly sabotages the rational considerations that are, according to Rand, implicit in the free market.

7.       The myth that quality products win out under capitalism is continually perpetuated in Rand's writings.   Thus, we read that a given product may not be appreciated at once, particularly if it is too radical an innovation; but, aside from irrelevant accidents, "it wins in the long run," (Rand, 1966b).   Does it?   Perhaps--if the producers of this product can last long enough for the customers to finally perceive it to be superior;   But in innumerable instances they   go broke--especially considering the high investment and running costs of production these days--long before their fine product wins a public hearing.   Or someone else beats them out with a poor product that looks better but soon deteriorates.   Or someone puts on a huge sales campaign for a somewhat different product that really isn't as useful as theirs, but which takes over so much of the market that they cannot survive.

Take, for example, dishwashing equipment.   Two gadgets were invented a good many years ago that nicely solve the problem of washing a few dishes at a time.   One is a cleaning brush that attaches to the sink itself and that holds a reservoir of liquid detergent, so that you can conveniently wash a dish without wetting your hands with a dishrag or sponge.   The other is a cleaning brush that is not attached to the sink but which has its own plastic handle, in which you can place water and detergent, and which again enables you to wash a dish without wetting your hands.   Both these kinds of brushes have been manufactured for many years by various firms; but these firms keep discontinuing them because their sale is not sufficiently profitable.   Why?   Because (a) many people, largely because of advertising, would wrongly rather use a huge electric dishwasher for washing a dish or two; and (b) the small gadgets are not profitable enough per unit to warrant large advertising campaigns, while the large appliances are.   Instances like this, where useful and quality products have been unsuccessful under capitalism, can be cited endlessly.

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Rand may object that, under her ideal kind of capitalism, capitalists would only be interested in being productive and not in selling "unproductive" goods by means of advertising.   If so, this ideal capitalism simply does not in the least resemble modern, real capitalism and "should" really be called perfectionism, utopian capitalism, or something similar, to distinguish it from historical capitalism.   Moreover, if this ideal system existed and a single capitalist started to produce shoddy goods, used high-powered advertising, and employed other common capitalistic methods, he would quickly drive most of his competitors out of business, and the system would become the non-ideal capitalism that exists today and that Rand so violently deplores.   Capitalism, the "unknown ideal," obviously needs ideal (and presently unknowable) people!

8.        As might be expected, Rand includes a great deal of nonsense about labor and its value.   For example, she says that the economic value of people's work is determined, in a free market, by a single principle: by the voluntary consent of those who are willing to trade them their work or products in return.   This, she states, is the moral meaning of the law of supply and demand; it rejects two "vicious" doctrines: the tribal premise and altruism.   The supply and demand law recognizes that a person works to support his own life--as, by his nature, he must--that he has to be guided by his rational self-interest, and that if he wants to trade with others, he cannot expect sacrificial victims, i.e., he cannot expect to receive values without trading commensurate values in return.   The sole criterion of what is commensurate, in this context, is the free, voluntary, un-coerced judgment of the traders (Rand, 1966b).   Some of the unrealistic statements in this paragraph include:

a.        No free market has ever existed, (which at least is one point on which I and Ayn Rand agree!)   Or ever will exist, because, as I stated, even if it did, the value of people's work in that market would hardly be determined by a single principle.   Not only would it be determined by the voluntary consent of those who are willing to trade them their work or products in return, but it would also be determined by (i) their innate abilities, (ii) their willingness to work at all, (iii) their willingness to work well or badly, mightily or weakly; (iv) their ability to convince their employer that they were working well, whether or not they were; (v) the number and ability of other people who are available for the jobs they want; (vi) the strength of their desires for various necessities and luxuries, etc.   It is remarkable how Rand often seems to reduce the principles that determine various human behaviors to a single rule.   This kind of simplistic thinking, however, hardly covers the known facts of a much more complex reality.

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