I’ve heard this criticism of a free market touted very often. It’s often used after I claim that a price system allocates goods to where they’re most valued. It goes something like this:
“The free market can only work if all individuals have a similar purchasing power, if they do not, production will always be geared towards those with the highest ability to pay, not to where they’re most valued.”
It’s a tricky one for me…thoughts?
It’s simplistic garbage. Wherever there is purchasing power, i.e. effective demand, there is a profit to be made and a market to serve. The wealthiest firms are those which serve the common man, i.e. those whose purchasing power is mediocre. So all I can say about this statement is that it is horrendously ignorant. The market caters to all, rich, poor and in-between alike, so unless more is said in the way of how this is supposed to hinder the operation of a market, dismiss it as blather.
Just tell him about this little-know company called Wal-Mart that became one of the most profitible companies in the world by producing for lower-income consumers
This is the problem with “socialists”, their brains do not work very well.
Is not those that have the highest ability to pay those that are most valued? Generally, those that are wealthier in a free society are those that are the most productive.
“The free market can only work if all individuals create their own purchasing power, if they do not, production will always be geared towards those with the least incentive to work, not to those who value work the most.”
What they are saying is basically that free markets can only work if they do not exist.
Here is Mises on this matter from “Planned Chaos” (http://mises.org/web/2714#Ch.3)
“The market is a democracy in which every penny gives a right to vote. It is true that the various individuals have not the same power to vote. The richer man casts more ballots than the poorer fellow. But to be rich and to earn a higher income is, in the market economy, already the outcome of a previous election. The only means to acquire wealth and to preserve it, in a market economy not adulterated by government-made privileges and restrictions, is to serve the consumers in the best and cheapest way. Capitalists and landowners who fail in this regard suffer losses. If they do not change their procedure, they lose their wealth and become poor. It is consumers who make poor people rich and rich people poor. It is the consumers who fix the wages of a movie star and an opera singer at a higher level than those of a welder or an accountant.”
–Mises
In essence the free market recognizes all purchasers power to purchase, that is the free market looks at the medium of exchange equally, the misconception that the socialist has is that the market will shun the people with less medium of exchange.
This is a logical paradox, the customers with the most medium of exchange are always in the minority, it is illogical that the market would shun the majority because individually each member has less meduim of exchange than an individual in the minority, this is because the majority in total has more medium of exchange than the minority does in most cases.
This also does not take into account that those that produce more are abused when they are granted the same amount of medium of exchange as those who produce less or none at all…
Excellent quote
I wanted to write something about this for a few weeks now. You gave me the inspiration to upgrade Wordpress and do it today. Thanks.
Here is my blog post.
I don’t care if folks comment on it there or here. If you have a site of your own, you are welcome to comment there and leave your backlink. Otherwise, by all means keep it in this forum discussion.
I agree, with your blog, specifically that the market is not a democracy, but there is much contention with Panarchy as it is used for global governance, or should I say misused, you might want to explain that better…
I linked it to Rozeff’s article which I think does an excellent job of laying it out.
My audience are mostly liberty nerds, I don’t write for laymen.
I looked at it, how do you think I knew you were nto talking about the UN?
I may be a back seat economist, but I try to keep up [:D]
You’re doing great Harry. I told you we were gunna mess you all up. Of course, I wasn’t counting on you giving back so good.
[:D]
I had training with others much more belligerent than I have seen here…
You quote should begin:
“The free marke is the ONLY system that can work if individuals have different purchasing power…”
The reason is simple, the free market is the only system where suppliers have incentive to service people with less purchasing power. Yes there will be some supplier who focus on rich buyers but there will also be suppliers that focus on the poorer folks.
The best example and the only one necessary to debug the myth is the existence of Walmart. The other is the existence of Hundai and KIa in the US market who have focused on poor folks first and have focused on progressively wealthy folks later.
So I guess I’m a non-progressive poor guy since I own 2 Hyundais. No wonder I’m for free markets.
Yes, those with most purchasing power have a bigger say in directing the factors of production than those with less but the reason they have more purchasing power is that they have previously been better at serving the consumer than others. And they only continue to maintain their higher purchasing power by continuing to serve the consumer well.
Hence why the market economy is more meritocratic than a democratic socialist economy where the weight of your “vote” is not determined by your previous success.
Note, a common objection to this argument is the existance of inhereted wealth. Their purchasing power is not determined by their success at serving the market. However, it is important to bear in mind that they will only sustain their high purchsing power by beginning to serve the market well or else they will face an ever diminishing pool of wealth to draw from.
Pretty much the difference in purchasing power isn’t the issue. Rather, the issue is that the disparity in purchasing power means a disparity in who is willing to buy and their given populations in comparison to those who are less willing to buy and their populations. In this case, the extremely rich aren’t likely to buy a new car every other year, or a house on every corner. They didn’t get extremely rich by spending, but by saving and investing. Compare that to the populations who are less rich (and even extremely poor in a few circumstances) in which they’re more likely to buy rather than save. That’s why the free market works, the sliding scale of time preference that can be leveraged in the market insures there’s always some buyer, even if that buyer isn’t Bill Gates or Warren Buffet. Catering to the extremely rich is very hard to do as they’re more price-to-[subjective]-value conscious than the not-so-extremely rich (due to lower time preference). So, even the niche of the extremely rich is going to be harder to sell to in general. They’re not likely to buy a Wal*mart brand pair of shoes, that’s for sure.
Production is not geared towards those with the highest ability to pay but is geared towards the highest demand. A rich man may have the ability to purchase 10 gallons of milk but his demand is equal to a poor man’s, one gallon. So a rich and poor man have an equal “vote” with their dollars on which brand of milk best serves their needs. A poor man can’t buy a yacht so he has no “vote” on which yacht is the best but the rich man does which makes sense because the rich person would be the only one of the two owning a yacht. The best way for a yacht company to get more “votes” than its competition is to lower prices and allow people with less income a chance to “vote”. It really is a beautiful system.
That is what I said, but you said it easier to understand I suppose…