Does “Free Market Ideology Mimic Soviet-Style Communism”?

Mike Valente, writing at “Business in a Sustainable Society,” recently posted a piece on the three ways in which “free market ideology mimics Soviet-style communism”:

1. Central Planning and Control:  Aside from erroneously claiming that Adam Smith’s “invisible hand” was a “theory,” Valente goes on to explain how corporate boards exert enormous control over the market.  That may be; but that is not free market capitalism.  Valente is quick to use Smith’s invisible hand metaphor, but has apparently failed to grasp anything else in Smith.  If there is one recurring theme in the Wealth of Nations, it is disdain for precisely the kind of business-government collusion that is so troubling for Valente.

Here is Smith (Book One, Chap 10):

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty or justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.

And here (Book One, Chap 11):

The interest of the dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public. To widen the market and to narrow the competition, is always the interest of the dealers.

Neither the father of modern capitalism, nor any reasonable supporter of the free enterprise system would accept the kinds of rent-seeking, collusive behavior Valente described as legitimate forms of capitalism.  Businesses are always going to seek political advantages when they can, but unless Valente has found a way to modify human nature, the only way to deal with it is through the rules of the marketplace.  And, no, aside from a few cranks, those who believe the market works do not believe it works perfectly or in the absence of rules.

Valente also mischaracterized Milton Friedman’s views by claiming that Friedman was opposed to “any governmental regulation that prevents a private enterprise from achieving its profit goals.”  Yet Friedman (and Smith, by the way) supported a variety of regulations including 100% reserve banking and deposit insurance.   (Take a look at Hugh Rockoff’s paper for some details on Friedman’s views of banking regulations.)

Moreover, Friedman distinguished clearly between economic and political freedom; Valente’s view that he had a simplistic view of the connection between the two is wrong.

2.  Limited Consumer Choice:  Valente’s students apparently argue (much to his chagrin) that consumers can “vote with their dollars” if they are unhappy with the choices offered to them by a seller. His students are right.

Citing this article by Sara Robinson, Valente argues that big box stores have restricted consumer choice.  Robinson explains:

Back in the 1970s, the American retail landscape was still mostly dominated by mom-and-pop stores, which in turn carried merchandise also made by small manufacturers (many of them right here in the US). Not only did this complex economy sustain tens of millions of comfortable middle-class jobs; it also produced a dazzling variety.

The idea that giant global corporations are forcing choices down the throats of helpless consumers is, well, a bit strange.  If consumers really value the mom-and-pop stores that supposedly offered us so much variety (which, in itself, seems implausible), why have the mom-and-pop stores died?  Is it not reasonable to assume that if consumers actually did value the alleged variety offered by the mom-and-pop stores as much as Robinson assumed they do, that they would be willing to pay a bit more for it?  And, if they were willing to do so, how would the global multinationals ever have squeezed mom-and-pop out of the marketplace?

Valente claims that consumers “have no choice but to purchase appliances that will break down in approximately seven years.”  This is based on some strange “optimality equation designed to maximize repeat revenue” (and here I was thinking the objective might be profit rather than revenue).  He goes on: “Companies make more money if they can sell you a new stove every seven years rather than every 30.” Well, in a strange universe where the costs of making 30 year appliances is the same as the cost of making 7 year appliances, perhaps; but we do not live in such a world.  Besides, if producers can always “make more money” by selling appliances that don’t last very long, why would they make appliances that last 7 years?  Why not 6? Or 5?  Or, better yet, 1 year?

3.  The Propaganda Machine:  The bottom line here seems to be that sellers do more than just pitch their wares to us via marketing; rather, they really make us want those things that we do not need!  Marketing promotes a lifestyle, rather than a product.  Okay, perhaps it does.  Even that form of advertising may not be as nefarious as is claimed in the article.  Here’s George Bittlingmayer:

In a similar vein, “noninformative,” or image, advertising can be usefully thought of as something that customers demand along with the product. Customers often want to see themselves as athletic, adventuresome, or spontaneous, and vendors of beer, cars, and cell phones bundle the image and the physical product. When some customers are unwilling to pay for image, producers that choose not to advertise can supply them with a cheaper product. Often, the same manufacturer will respond to these differences in customer demands by producing both a high-priced, labeled, heavily advertised version of a product and a second, low-priced line as an unadvertised house brand or generic product. In baked goods, canned goods, and dairy products, for example, some manufacturers sell one version under their own nationally known label and another slightly different version under a particular grocery chain’s private label.

So, we certainly have our share of consumerism, commercialism and marketing, but advertising does serve some useful functions, including providing information to buyers (at least sometimes).  Valente claims, “It’s no coincidence that one of the largest expense items on a corporation’s balance sheet today is communications, marketing and public relations. It is absolutely mind-boggling to comprehend the sheer magnitude of capital used by corporations on communications to the public.”  Yet, advertising expenditures as a share of GDP have been roughly constant for a century or so.

In the end, free markets do need to reigned in via rules, regulations, etc; crony capitalism, rent-seeking, and collusive behavior are all very real, and they need to be prevented as best we can.  But, the alleged similarities between free market ideology and Soviet-style communism are completely overstated.

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