Free Markets, Free People

The Farce Of A “Free Market”

We here at QandO are big fans of the free market.  But there are lots of enemies of the free market and they’re not just ideologies or governments.  Sometimes – no, many times – corporations or associations go into cahoots with government to use the power of government to limit competition.  Here’s an example of that:

A lot of focus has been directed toward the destruction of the world’s forests during the past few decades.  The truth is that deforestation is happening with alarming frequency.  Millions of acres of forest land are harvested illegally throughout the world every year, which contributes significantly to global warming and the destruction of wildlife habitat.  Because this activity adversely affects our environment, the National Wood Flooring Association worked diligently with several key organizations to promote the illegal logging ban with Congress. The ban was passed this past summer as an amendment to the US Lacey Act, which originally was mandated more than 100 years ago to prohibit the illegal trafficking of wildlife.  This new amendment has expanded the Lacey Act to include wood and wood products.  Specifically, the ban prohibits the import, sale or trade in the US of wood and other forest products that are harvested through illegal means.

This legislation is significant for a number of reasons.  First, and most importantly, it protects our world’s forests from irrecoverable loss of trees and wildlife habitat.  Second, it protects lumber buyers who verify the origin of lumber when importing wood into the United States from other countries.  Third, it eliminates the influx into the US of low-cost, low-quality wood flooring produced from illegally harvested forests.

The penalties for noncompliance with this new legislation are severe.  Penalties can include the forfeiture of the illegally harvested material, fines of up to $500,000, and jail time of up to five years.  From a consumer’s perspective, however, the ban helps you have confidence that the wood you are buying is not depleting our world’s forests.

This is classic stuff. Let’s look at their three “benefits”, shall we? First this ban no more “protects our world’s forests from irrecoverable loss of trees and wildlife habitat” than a gun ban keeps guns out of the hands of criminals. That’s because those who do actually engage in what this association would label “illegal logging” will simply sell to someone else. It’s not like wood isn’t in huge demand throughout the world or something.

The second “benefit” is a “join our club or pay the price” benefit at best. The obvious implication is if buyers don’t “verify the origin” to the satisfaction of the association (and the law), they’re open to accusations that what they’re bringing in are “illegal” whether true or not.

And, of course, in reality it all boils down to the last “benefit”. In fact it is a benefit only for the industry at the heart of writing this legislation. You the consumer, on the other hand, won’t get what the NWFA considers to be “low-cost, low-quality wood flooring” because, well, they’ve decided it just isn’t a decision which should be left up to you.

This is what passes for a “free market” these days. In this case, restricting the flow of goods to you in the name of a greater good, when, in fact, the greater good is just an excuse not to have to compete in the market place. It places the consumer’s right of access to such goods in second place to the association’s desire to “benefit” from special legislation which restricts that right.

When the price of that flooring you have been planning to buy goes through the roof, you’ll now know why.

~McQ

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24 Responses to The Farce Of A “Free Market”

  • The second “benefit” is a “join our club or pay the price” benefit at best

    This strikes me as a similar tactic to what the unions are doing. In both cases, the object is to use governmental intervention to eliminate lower cost goods and services.

  • “The interest of the dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public. To widen the market and to narrow the competition, is always the interest of the dealers. To widen the market may frequently be agreeable enough to the interest of the public; but to narrow the competition must always be against it, and can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens. The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.

    — Adam Smith, Wealth of Nations I.xi.p.10: p 267; Canaan, p 250 (emphasis added)

  • Like you mention, The National Wood Flooring Association is but one of hundreds of protectionist groups that use the veneer of “some pet cause” to use the power of government to limit competition.  It is the power and threat of force by a much too powerful government that allows this nonsense.

  • Why is the phrase “Anti Dog-Eat-Dog” running through my mind?

  • jmurphy….nice use of the word Veneer in reference to wood flooring.

    Many wood products companies already use FSC timber (which is a third party seal of approval that the products are made with sustainable wood.) Walmart already requires this I believe. So its not as if Chinese companies cannot compete on this playing field.

    It does mean that they can’ t use timber stolen from a national park by a corrupt official though. Since its “free” the price could be much lower than actual timber owned by someone.

    These draconian US laws don’t deter as much as people think they do because companies selling low end flooring probably aren’t hugely capitalized with a famous brand name. If they get caught, they close down and open up again the next week using the sister-in-law’s name. The US importers usually just ask the vendors to sign off on 20 page legal documents in English which is done without thought be the foreign suppliers. I call these MoU’s CYA letters. Sometimes it seems like my job is enforcing US and Chinese laws for the respective governments.

    They do add some cost to legit companies, and make business even more of a pain in the ass. If the consumers would just stop buying on price, it would not be a problem anyways, but the  green-loving consumer keeps buying on price, while also demanding green products…thus they have these laws passed. Then they can buy on price, but its green, and more expensive than before.

  • The U.S. hasn’t had a truly free-market prior to at least 1900. That’s why I always get a good chuckle when I hear Statists and Collectivists decrying the free-market as the cause of the current crisis.

    Free- market advocates must take care not to fall into the the trap of Corporatism. Corporations and organized labor can utilize the government to usurp the rights of the individual just as surely as government itself can do so.

    • I don’t mean to be petty, but “Corporatism” is not as you describe.  Instead, it is much closer to governance by regulatory bodies composed of supposed experts (industry and labor leaders, et al.)  in the field, typically hand-picked by the executive power.  It has nothing to do with corporations or Big Business, but instead with the mechanism by which a centralized, planned economy is run (as in Mussolini’s Italy).

      Notwithstanding the above, your point is well taken.  The combination of powerful companies/organized labor is dangerous to individual rights, but I think better terms to described what you mean are “regulatory capture” and “rent seeking.”

    • Ryan - Corporations and organized labor can utilize the government to usurp the rights of the individual just as surely as government itself can do so.

      Excellent point, and one that I think demonstrates the trap for those who espouse the free market.  Yes, it’s a better mechanism for distributing goods and services than any devised thus far, but the human element – greed – is always operative.  “If I can make a certain profit even though I have five competitors, how much more could I make if I had NO competitors?  Now, how do I set about getting rid of them?”
      Sometimes, “getting rid of the competion” is a natural process because the competition makes bad decisions or is merely unlucky (think about Harley vs. Indian motorcycles).  Unfortunately, it’s usually the result of malicious action.  Government provides a VERY handy weapon to use against competitors if you gain the right kind of power and influence. 
      How do we balance government regulation to guard against monopolies and other unfair practices with keeping the government from distorting and untimately controlling the markets, becoming a monopoly itself?

  • Once again we need only go back to Adam Smith. He warned that no two or more businessmen get together at any time save for to conspire to collude and set prices or to cajole the government to do so.

    You know the rules of sound economics are not difficult.  They are really simple, (1) low marginal tax rates. (2) meaningful regulations on lending so that debt does not get out of control (3) meaningful fraud legislation (4) protect patents and contracts (5) protect property rights (6) keep a lid on monopoly and oligarchy (7) Free trade.

    That’s it, those are the necessary ingredients of prosperity and they never change. But politically, for some reason, they are a hard sell.

    • (1) low marginal tax rates. How will the gov’t develop social programs to buy votes?
      (2) meaningful regulations on lending so that debt does not get out of control.  What you are really saying is don’t let the poor borrow money.
      (3) meaningful fraud legislation.  This would cause us to have to punish the very people who finance our reelection campaigns
      (4) protect patents and contracts.  Only if they belong to companies or individuals who contribute to our campaigns
      (5) protect property rights.  Only if we the gov’t do not have a far superior use for the property in question.
      (6) keep a lid on monopoly and oligarchy.  Only if these corporations or individuals do not support our bid for reelection through campaign contributions.
      (7) Free trade.  Only for sectors and industries which are not heavily unionized by our campaign supporters.

      Who ever is dumb enough to expect the government to solve his problem should be satisfied with the solution provided.

    • You know the rules of sound economics are not difficult. They are really simple, (1) low marginal tax rates. (2) meaningful regulations on lending so that debt does not get out of control (3) meaningful fraud legislation (4) protect patents and contracts (5) protect property rights (6) keep a lid on monopoly and oligarchy (7) Free trade.

      I agree with you on 1, 3-5, and 7. However, I disagree wholeheartedly with 2 and 6.

      (2) meaningful regulations on lending so that debt does not get out of control

      It is not the job of the government to control consumer debt. The only meaningful regulations should be those that encourage more information to come to market (i.e. reduce the costs of asymmetrical information). Regulations that accomplish this best are those which punish fraud severely. Imposing much more regulation than that tends to distort the market by socializing/subsidizing risks to either the borrower or the lender, resulting in riskier behavior that is not properly accounted for in the costs of the service.

      (6) keep a lid on monopoly and oligarchy

      The only true monopolies are those that are either created by the government or those in which the product/service naturally lends itself to monopoly because of economies of scale (the usual example is an electric utility). If you were to take the time to review a smattering of anti-trust cases you would find that virtually every single one is brought on behalf of competitors and not consumers because competitors are who suffer the most when one firm begins to dominate an industry. Consumers are usually better off. That’s because, while monopolies theoretically have the ability to charge prices well above their marginal cost, unless they have meaningful barriers to entry (e.g. legal or physical ones), then raising prices will simply invite competitors into the field. In addition, monopolies also have the ability to innovate in their industries to a greater extent than highly competitive industries because monopolists can take more risks (e.g. pharmaceutical companies). In short, the only lid that government needs to keep on monopolies/oligarchies is stop creating them.

  • I will play the Devil’s Advocate here for a little bit.

    Its one thing to have “normal” competition, but sometimes US businesses (especially domestic manufacturing) face competition that is backed by governments, or has some cost advantage that is not “fair.” In this example, maybe a foreign flooring company gets below cost raw material pricing by paying a bribe to a Chinese state run timber firm who will lose money on the deal but does not care. Or maybe its illegal loggers who take logs without paying anything for them. Note that in these examples, the competitors are NOT engaging in free trade or honest competition.

    In such situations, the US companies face difficult circumstances, and while in the long run, they might be able to wait for illegal logging to be stopped, for an education campaign to work, or for the state run firm in China to go bust for good, they could instead be out of business. 

    I have seen some strange situations where Chinese companies export products at below cost in order to launder dirty money for corrupt officials. This happened with marker pens, where Taiwanese and Hong Kong factories based in China (not exactly spendthrift wastrels) would find the market price to be below raw material costs. Now what can the honest man do, but to leave the industry? (and many did.) I don’t know what the answer is in these situations, but I can sympathize a bit.

    • There’s an old Chinese proverb about what you’re describing that goes something like this:

      A prominent farmer who dominated the market for eggs decided that he could make more money by forcing out his competition.  So he began pricing his eggs below his cost of producing them.  One by one the competition fell, until there was just one competitor left.  The prominent farmer dropped his prices even lower, but the lone surviving farmer just would not go away.

      Eventually, the prominent farmer had to drastically raise his prices in order to recoup all the money he spent driving the others out of business.  Because his prices were so far above the market price (especially considering that he had artificially lowered the price for so long), the lone surviving competitor began to thrive.  Customers naturally went to buy the eggs with the lowest price.  The prominent farmer tried to lower his prices to where he could still make enough money to keep producing, but he just kept losing customers.  Eventually the prominent farmer, now deep in debt, went out of business and sold all he owned to the lone surviving competitor.

      Upon closing the sale of his business assets, the prominent farmer asked the survivor how he had managed to stay in business despite all his efforts to drive the competitor out. 

      “Easy!’ the survivor replied.  “When you lowered your prices I bought all of your eggs.  And when you raised prices again, I sold eggs at a higher price than normal, but still below yours, and recovered all the money I spent on your eggs.  The consumers took care of the rest for me.”

      • And the moral of the story is…

        The surviving farmer was backed by the bigger purse while the unaided farmers got wiped out first?

        • No, I think it’s more along the lines of “if you try to beat the competition through predatory pricing remember that you will one have to pay the piper and the competition will reap the benefits.”  I think also illustrate a point about what happens when someone, anyone really, tries to manipulate prices.  It just ends up creating opportunity for future competitors.

  • Excellent story! Let me know when the economy is only about eggs and not, say, machine tools, a product where you cannot buy and resell like a commodity.

    p.s. eggs don’t keep forever. You can’t buy eggs and wait two months for the price to go up and then sell.

    • The surviving competitor wasn’t necessarily selling the eggs he bought from the prominent farmer.  Or at least, he wasn’t selling them after the prominent farmer raised his prices.

      • “Easy!’ the survivor replied.  “When you lowered your prices I bought all of your eggs.  And when you raised prices again, I sold eggs at a higher price than normal, but still below yours, and recovered all the money I spent on your eggs.  The consumers took care of the rest for me.”

        According to your story, he was. Again, I am playing devil’s advocate in my original comment, because often times it is not a matter of “unfair’ competition, but simply a scam to get protection, but there are weird situations in China that boggle the mind. Like how to compete with someone who is subsidizing their business via money laundering….where they could keep doing it for a long, long time.

        • He doesn’t say he was selling the prominent farmer’s eggs, just that he was selling eggs.

          And, again, I’m not trying to offer the story to explain all situations. It is true that foreign government manipulation hurts domestic producers sometimes, and there may be cases where prohibitions on importing such products is appropriate (e.g. products made from slave labor). I simply wanted to highlight the principle that the price manipulator usually sets himself up to get reamed in the end.

          • He may not get reamed, but someone gets reamed in the end for sure, oftentimes the taxpayer.

          • … someone gets reamed in the end for sure, oftentimes the taxpayer.

            Because of government intervention as you, and Bruce (in the post), have aptly noted.

  • You know, in my example, it required government or illegal backing…I am not concerned with normal market idiocy – that happens sometimes too, but its cut off much faster.

    • That’s a good point, and basically what I was getting at in my comment above about monopolies.  However, I think the proverb is illustrative of what happens when prices are manipulated.  For example, when supply is artificially restricted that creates opportunities for black market profits, and producers are incentivized by the high prices to enter that market.  Where prices are artificially lowered, that creates opportunities for future competition when the prices must be raised in order to recoup the lost revenues.  I don’t mean to suggest that the story offers an exact parallel for every situation, but instead that the principles, when applied, explain how the “bad behavior” actually costs the bad actor more than anyone else.  Notice too that consumers aren’t hurt at all by the price manipulation since the end result is always lower prices.

      All of that and I didn’t even mention David Ricardo!

  • The Chinese seem to have a multitude of wonderful old proverbs; unfortunately it seems they didn’t pay much attention to them.