The professional blogging world is full of these insufferable right-wing pundits running the same Bush /Reaganite/stupid white male/grumpy old men tune. These men, even the ones I like, see Mickey Kaus (www.kausfiles.com) and Andrew Sullivan (www.andrewsullivan.com) annoy me and my original idea for why I was doing this blog was to be able to respond to them. Even if no one read it.

Over the weekend amongsta fun night at the bar and insufferable heat, I have been thinking, of course as this late summer warrants, about economics. Specifically, I have been perplexed about the free market and why people think the free market is good for business. Because people, especially the conservatives, talk all the time about how great the free market is and how creates all this wealth. On any issue, the problem is big government and over regulation, and if only if things were more deregulated, everything would be perfect. I don’t understand. I myself don’t have any problem really with the idea of a free market—I think it’s one of the fairest ways of dealing with something that is inherently unfair—but I don’t understand how it creates wealth.

Making a profit requires that there is some sort of imbalance in values between the buyer and the seller. In a real free market, it strikes me that profits could only be a fleeting, temporary thing. If a company were making a profit on some good, other producers would enter into the market and undercut the profit margin. Producers would then keep undercutting themselves until they were selling at cost. This is my high school economics understanding of it, but it does seem to work in real free market situations. Third World food bazaars are a perfect example of this. There is no regulation, all the goods are in one location, and prices, except for those who are dumb tourists, tend very quickly to settle so that the farmers make no or little profit. This is free market economics at its purest—very fair if you’re on your toes, very cheap, and nobody makes any money, except for one guy who got in on the ground floor.

On the other hand, heavily regulated industries where there still is competition seems to create sustaining wealth. For a poor but amusing example, think of drugs. Can’t get any more regulated than that, it’s illegal even to possess the product. But as the enforcement of the regulation grew, prices went up, profits went up, and supposedly even the quality went up. Legal drugs can fit into this category. Cigarette companies, for instance, make significantly more money in heavily regulated countries than they do in open markets. Canada’s 5 million odd smokers produce significantly bigger profits for the tobacco companies than tens of millions of smokers in, say, South East Asia. Pharmaceuticals are becoming more and more profitable, profits that are based on government safety regulations and regulations that protect intellectual property rights (a horribly anti free market regulation if I’ve ever seen one.)

It also seems that countries that are free market tend to be poor than those that are heavily regulated. There no way that you can tell me that the US or Canada is free market the way a place like Tanzania is. In North America, the government makes companies pay all sorts of taxes, obtains licenses, conform to all sorts of building and safety regulations, pay for EI and other payroll taxes on the employees. These are all barriers to competition; they make it harder to set up a company, harder for the producer and consumer to meet on a fair playing field, thus raising prices. In many places in Africa, even in those places that would be considered closed markets/ state dictatorships, the average person can basically do whatever. Some people in a free market makes tons of money, either through illegal means, unsustainable exploitation of natural resources, or just being at the right place at the right time. But the average business experiences no growth and no profits, creating a ever widening gulf between the lucky and strong and every one else.

Even real economists believe that closed and regulated economies may lead to more wealth. From the NY Times: “Dani Rodrik of Harvard used Dollar and Kraay's data to look at whether the single-best measure of openness -- a country's tariff levels -- correlates with growth. They do, he found -- but not the way they are supposed to. High-tariff countries grew faster. Rodrik argues that the countries in the study may have begun to trade more because they had grown and gotten richer, not the other way around. China and India, he points out, began trade reforms about 10 years after they began high growth.

So I’m still confused how the free market can create wealth. It can be fair. It lowers prices. But I haven’t seen a satisfactory model for sustained growth that uses the free market, except the wild west/first one in/grab and dash system. So until then, I have to conclude that the free market is bad for business. Hear that conservative pundits!