The Case Against the Unregulated Free Market
(or completely laissez-faire capitalism)

by Dan Dascalescu - 2008-Oct-31

This essay presents a case against completely unregulated markets, as often proposed by objectivists. It does not propose that regulative power be placed in the hands of few individuals - that approach would not work either. The conclusion is that best results seem to necessitate a combination of individual decision-making and government oversight.

Completely free markets issue #1: food safety

The free market always "works", if by "works" we understand "achieving Pareto efficiency". Unsuccessful businesses fail and the successful businesses succeed.

But the free market doesn't always work the way we would like.

As exhibit #1, let's look at the recent milk scare in China. The milk companies poisoned their milk to cover the fact that they were watering it down.

"Ingesting small amounts is not thought to cause harm, but sustained consumption can cause kidney stones and renal failure, especially in children." (The Guardian) However, the truth came to light recently when "more than 52,000 Chinese children poisoned by melamine-tainted goods" (CNN).

This is an example of government regulation that didn't go far enough. If it had been comprehensively regulated the government would have caught on sooner.

Please explain how an unregulated, completely free market, would have handled this situation better, given the level of rationality among Chinese dairy producers and the level of consumer awareness in China.

Thank you.

Completely free markets issue #2: the tragedy of commons

The free market always "works", if by "works" we understand that unsuccessful businesses fail and learn a lesson and the successful businesses succeed.

But the cost of failure may sometimes be catastrophic.

As exhibit #2, let's look at Easter Island, a prime example of what widespread deforestation can do to a society. The detailed story can be found in Jared Diamond's book, Collapse: How Societies Choose to Fail or Succeed (2005). A short version of the story can be found at The Independent:

At the heart of the debate is the issue of the island's deforestation. There is no dispute that the island was once covered in huge palm trees. There is also no dispute that something happened that caused the island to become completely denuded over a short period of time. But was it the islanders who triggered this environmental degradation, or some other event beyond their control such as climate change or the introduction of rats?

In his 2005 book Collapse, author Jared Diamond explains why it was the islanders' fault. Diamond says they started to build bigger and bigger ceremonial statues in an atmosphere of competitive rivalry between the island's many different clans. To move the statues from the island's quarry, Rano Raraku, in the south-east, the islanders needed to cut large logs for the construction of long "canoe ladders" to carry the massive carvings to the island's coast. They also needed heavy ropes made from the fibrous bark of the bigger palms.

The scale of the operation was vast. Crews of between 50 and 500 men dragged statues weighing between 10 and 90 tons. Some 887 statues were carved in total, nearly half of which still remain in Rano Raraku quarry, which appears to have been abandoned mid-production. For its transport alone, each statue would have required several trees to be cut down. Other timber was needed for housing, fuel and the construction of the large stone platforms, or "ahu", on which the moai were placed.

"The overall picture for Easter Island is the most extreme example of forest destruction in the Pacific, and among the most extreme in the world: the whole forest gone, and all of its tree species extinct," says Diamond.

As a result of the deforestation, food production fell dramatically as crops became exposed to the harsh winds and semi-arid conditions of the region. Consequently the population collapsed from perhaps as many as 15,000 at its peak to the few thousand that were eking out a living by the time Roggeveen arrived.

Smallpox and slavery killed off most of the people that remained, but the islanders were on the way to total collapse even without any contact with Europeans, says Diamond.

The article continues by dismissing rats as a greater cause of the deforestation than humans.

Easter Island had as free a market as possible. Competing tribes used natural resources without regulation or government oversight. The long-run costs were catastrophic. This is clear evidence that the free marked does NOT function in an imperfectly rational society. It was no stretch of imagination for a tribe to see that if it ran out of trees on the east coast, they'll run out of trees on the entire island.

Therefore, the only way to defend the completely free, unregulated, market here is to prove that catastrophic consequences (which included famine and thousands of human deaths) were better than regulating tree cutting.

Please present such proof.

Thank you.

Completely free markets issue #3: health care

If by "works" we understand "achieving Pareto efficiency", the free market does not work when it comes to health care. Unsuccessful businesses fail and the successful businesses succeed, but the cost of failure or of wrong decision can be fatal for individuals. Indeed, the worst outcome is death.

As exhibit #3, I present Chapter 3 of a very clear explanation of the health care market, The Economics of Health Care, titled "The case against a free market". It can be accessed at http://www.oheschools.org/ohech3pg1.html.

Please disprove every point that "The case against a free market" makes.

Thank you.

See also

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