Free market efficiency and market imperfections: competing viewpoints

Proponents of free market systems argue that free enterprise leads to more efficient production and better response to changing consumer preferences. Others point to the fact that markets are not perfect. Consider both viewpoints and respond to both sides of the issue with your viewpoints.

The 20th century contains many examples of the inefficiencies of purely a 'command-based' economy. Command or planned economies keep employment artificially high and the prices of goods artificially low. There is little incentive to create new enterprises to meet consumer demands, and little incentive for workers to be productive. Scarcity seems hard-wired into the system and corruption and bribery is rampant as consumers resort to the black market to get the goods that they desire.

In a free market system, the 'invisible hand' of the market determines what goods and how many goods are produced. "Adam Smith assumed that consumers choose for the lowest price, and that entrepreneurs choose for the highest rate of profit. He asserted that by thus making their excess or insufficient demand known through market prices, consumers 'directed' entrepreneurs' investment money to the most profitable industry" (Joyce 2001). Additionally, in a competitive market, producers must also provide a higher-quality product than exists in a controlled market economy. In contrast, in a command economy, there is only one, state-owned producer, and there are no quality controls upon the producer other than the state. The leadership of command economies is often highly prone to corruption, which may further interfere with the ability of a planned economy to respond to consumer needs.

However, free markets are not always 'free.' There may be profound asymmetries of information between the consumer and the producer. Companies may misrepresent their products, spanning from cereals with dubious nutritional content to cigarettes. A good example of this was during the recent housing crisis, where people took out adjustable rate mortgages they did not understand that were prohibitively expensive. They also did not understand the self-interested motivation of the bank in extending as many mortgages as possible. Asymmetries of capital can also exacerbate the class system. Capitalism favors individuals who 'own' land and property and can use it for personal enrichment, in the form of rent or using it to produce and sell goods. Labor is not always as mobile in choosing employers as the invisible hand theory would dictate. The invisible hand theory suggests that producers compete by offering wages to workers, and the best workers will select the best wages. But until minimum wage limits were instituted, workers during the Industrial Revolution often worked for very low wages, 10 hours a day, and 6 days a week, without any benefits if they became ill or sick.

Although corruption and stasis are common in command economies, "In a democratic society, there is a strong temptation for 'special-interest' groups to form and lobby the government to provide tax-payers' money to the group in the form of subsidies" such as the types of agricultural subsidies currently enjoyed by farmers which, many argue, has caused the store shelves to be disproportionately stuffed with corn-derived, processed foods rather than less profitable but healthier fresh fruits and vegetables (Joyce 2001).