Wednesday, October 19, 2011

The Free Market and Communication

What if the idealized free market is impossible in the modern world? This thought occurred to me while watching the Daily Show talking about the Occupy Wall Street crowd. I'm not sure about all my conclusions, so correct me if (when) I'm wrong.

So, the ideal free market says that good businesses will be rewarded for being good and bad businesses will be punished for being bad. The businesses that take care of their customers, provide a high quality product, care for their employees and keep costs down, will inevitably rise to the top since customers and employees will gravitate toward them. The businesses that are rude to customers, sell low-quality goods, abuse their employees and charge too much for their products will be put out of business because customers and employees well abjure them.

The key to this, however, is communication. The customers and employees must know all of the facts for the free market model to work. Without the free-flow of information about how customers are treated, employees are treated and the quality of the work, customers and employees can't adequately exercise their free market power. What should be a decision based on myriad factors is reduced to a decision based on one or two. The most common of which are price and availability.

Communication is limited, partly, by the secrecy of corporations. There are secrets that they must keep to protect their intellectual property. And there are secrets that they keep just to obscure what's actually going on inside the company. It might be to prevent stockholder panic or any number of reasons. There are many things that companies don't have to disclose, and so they don't.

The other major limit to communication about the aspects of the companies in the market is the global span of thousands of companies. We just don't have the time and resources to understand all of the companies that are involved in what we consume on a daily basis. The computer on which I'm typing this has components from hundreds of companies that were sourced at the cheapest price and assembled under one brand, but I can't hope to know the practices of all the individual companies that contributed to my laptop.

The ideal of the free market was possible in the small town of Adam Smith's 18th century. The global village of the 21st century, however, makes it impossible for the free market to function as it was intended.

What do you think? How am I wrong?