Many politicians and commentators argue that government regulations hurt company profits and, therefore, hurt the economy as a whole. They argue that government should stop setting rules for businesses in order to create a “free market.” Such statements rely on a patchwork of different ideas that may sound reasonable in theory, but do not work well in practice and have historically harmed the U.S. economy.
“Free market” strategy depends on several connected ideas. It argues that businesses can regulate themselves, and that they are actually forced to regulate themselves in order to keep customers. Companies need to keep loyal customers in order to continue selling goods, so companies that make and sell defective, dangerous, or generally bad products will quickly lose customers. Companies therefore need to sell good, reliable products in order to keep sales up, increase company profits, and stay in business. Companies in competition with other companies, therefore, are thought to be the best source of regulation. Free market theorists call this “self-regulation.”
These free market ideas clearly rely on the fact that businesses are in constant, active competition with other companies selling similar things. Free market theory further assumes that customers have many choices in buying products, have reliable information about the products so that they can make good decisions on what to buy, and that customers actually use that information to punish companies that make inferior goods. All of these assumptions are destroyed in any real “free market,” so the mere existence of a free market undercuts a company’s willingness to regulate itself.
Economists have argued and effectively proved that true free markets destroy competition over time. Even Adam Smith, one of the theoretical founders of market capitalism, argued that big, rich businesses quickly buy out their competition.
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, and absurd tax upon the rest of their fellow-citizens. (Adam Smith, Wealth of Nations. Amherst, New York: Prometheus Books, 1991, pages 219-220.)
Smith warned that free market capitalism encourages companies to monopolize their industry by eliminating competing companies. As one company becomes dominant and eliminates all others, competition amongst companies disappears and customers are left with only one source to buy from. This consolidation of entire industries occurred repeatedly in the 1800s in the steel industry under Andrew Carnegie, oil under John Rockefeller, meat packaging under Gustavus Swift, communications under Alexander Graham Bell, and many others. Many of these monopolies were broken up by Anti-Trust legislation passed and enforced in the late 1800s and early 1900s. However, a new wave of monopolization has occurred over the past forty years. For example, the 1996 Telecommunications Act and recent FCC decisions have eroded the limit on how many media outlets an individual company can own in a certain market. (For more information on these problems, visit www.freepress.net or read their book Changing Media: Public Interest Policies for the Digital Age, which can be downloaded for free through the website.) We cannot expect customers to punish a company for bad practices if they can only buy a product from one monopolistic company.
Companies also seek to stop the spread of information that buyers find useful when deciding which company to buy from. Big, rich businesses use their wealth to stop investigations into their practices. Corporate leaders use bribery and financial threats to force governments to avoid investigating the bad practices and destructive results that companies use to make money. The current American campaign donation system has even been described as “legalized bribery” by former Congressmen (Cecil Heftel, End Legalized Bribery: An Ex-Congressman’s Proposal to Clean Up Congress. Santa Ana, California: Seven Locks Press, 1998). We see this problem lead to catastrophes such the Wall Street collapse of 2008, the 2010 BP oil spill in the Gulf of Mexico, and the Massey coal mine explosion that killed 29 miners in Montcoal, West Virginia in 2010. When big businesses use money to influence politics, we can expect government investigations into unfair or dangerous practices to disappear and become ineffective.
Many monopolistic companies use their great wealth to stop government officials from collecting and advertising even the most basic information about certain products. One recent example is the massive corporate attempt to stop the government from publishing nutritional statistics on food packages. The public won that battle with the National Labeling and Education Act of 1990, but such victories are rare. The American public generally receives little information on the products they buy because government investigations are often castrated on the orders of corporate leaders. This makes it extremely difficult for the public to get any reliable information to base their buying choices on. The customers’ power to threaten a company through boycott is greatly reduced in any “free market.” Monopolistic companies are therefore not threatened, so they often neglect regulating themselves.
Customers often put themselves into an even more dangerous position when they do not make a personal attempt to learn about the products they buy or the companies they buy from. In fact, many customers continue buying products that have been publicly labeled dangerous, defective, or of poor quality. Many Americans today have built up psychological “brand loyalty” to the point that they continue buying from companies they know are harmful. Americans continue to flock to buy from Wal-Mart, BP, McDonalds, Exxon-Mobile, and Coca-Cola even though a great amount of information exists that proves those companies are harmful. Other companies sell similar products, but American consumers continue to buy due to “brand loyalty” and advertising. (The brand loyalty and advertising problems are examined in detail in Naomi Klein, No Logo: Taking Aim at the Brand Bullies, Picador USA, 2000). This causes another collapse in free market theory: companies will not regulate themselves when they see that their customers are not using public information to punish a company’s bad practices.
“Free market” and “self-regulation” ideas will not free us from the evils of our most powerful businesses. These ideas are a fantasy that will only make things worse and possibly send American society back to the problems, mass inequalities, and entrenched powers that controlled the United States in the 1800s. Society cannot rely on “free markets” to regulate companies because free markets undercut the public pressures that are supposed to force companies to regulate themselves. Free markets naturally create monopolies that annihilate customer choice, the spread of public information, and the willingness of people to use information to punish offensive companies. Instead, governments must be empowered to ensure that competition amongst many companies continues to exist. This may require government to break up large monopolies, as the United States government did in the early 1900s.
Machinery of Politics 