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A Free Market Misunderstanding


Intervention actually reduces the influence of consumers.


The highway's jammed with broken heroes on a last chance power drive.
Everybody's out on the run tonight
But there's no place left to hide.
-Born To Run (Bruce Springsteen)

A popular view (and one promoted by many politicians) is that, in a free market system, power is held by the producers. Through this lens, capitalists are seen as antagonists and in need of government intervention and control. Thus, corporations such as Exxon-Mobil (XOM) and Chevron (CVX) are blamed for higher fuel prices, and firms like Citigroup (C) and Washington Mutual (WM) are held culpable for high rates of mortgage foreclosures stemming from the housing bust.

Such perspective is misguided. In a truly free market, consumers possess the ultimate power (Mises, 1949; Rothbard, 1962). Through their purchasing decisions, buyers provide critical feedback to sellers on what constitutes value. Customers, not producers, steer economic activity towards innovation and efficiency in a market system (Schumpeter, 1942). Producers who fail to deliver market value don't get paid and are destined to fail.

Bureaucratic intervention distorts this mechanism. Although intervention is often portrayed as reducing industry influence, government interference and control often hands more power to producers. For instance, regulation can erect barriers that discourage prospective entrepreneurs who possess compelling value propositions from entering industries, thus protecting franchises of incumbent firms (Porter, 1980).

Moreover, regulation atrophies the decision-making process of buyers. For example, Federal Deposit Insurance Corporation (FDIC) insurance that backs the majority of U.S. bank accounts has blunted the critical assessment process necessary for customers to determine the financial health of banking institutions they patronize.

Reduced due diligence by buyers increases error in purchasing decisions.

Consequentially, society's scarce resources are misallocated as producers respond to distorted signals emanating from mistaken customer decisions.

Quite ironically, by seeking government-sponsored intervention and control over producers, consumers cede power that was originally theirs in a free market system.


Mises, L. (1949). Human action. New Haven: Yale University Press.

Porter, M.E. (1980). Competitive strategy. New York: Free Press.

Rothbard, M.N. (1962). Man, economy, and state. Princeton, NJ: D. Van Nostrand Co.

Schumpeter, J.A. (1942). Capitalism, socialism, and democracy. New York: Harper & Bros.

No positions in stocks mentioned.

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