Does the Free Market have a Genetic Flaw?

A free market is a market in which the prices for goods and services are set by agreement between the Buyers and Sellers with no external intervention. Generally speaking, Buyers favor lower prices in the market. Sellers with lower prices are rewarded, through purchases, by Buyers. Over the long run, Sellers with lower prices will survive while their competitors will fail and exit the market.

Sellers adopt business models that allow them to push prices down in a market that favors downward price pressure. One such model that is employed is volume purchasing. Volume purchasing allows for a Seller to purchase goods from a manufacturer in large lots at reduced prices. This allows the Sellers to bring goods and services to the marketplace where they are reward by Buyers for low prices. There are many such models.

To keep with our example, volume purchasing favors Sellers that can purchase the largest amount of goods and services from a given manufacturer; therefore, the Sellers must adopt an endless growth model that allows them to purchase more goods then their competitors. This competition between Sellers leads to market consolidation and less competition over the long run. The result is that Sellers become to large for the safety of the market. They have become “Too Big to Fail.” Their departure from the market will lead to widespread market failure and loss of confidence.

Falling prices in the market force Sellers to seek ever more aggressive ways to lower prices and maintain profit. For example, perhaps the Seller will seek a lower paid workforce in another country to lower prices. The loss of jobs and income in that market forces Buyers to seek goods at even lower prices to account for the loss of jobs and income further rewarding the Sellers behavior. This is an endless cycle in a free market.

Does this logic infer that the free market is designed to fail?

All economies are cyclical in nature; growth is replaced by recession in an endless circular dance. Inevitably, all financial markets experience turbulence. In a turbulent market, Sellers can fail. If the failure of any one company, that is “Too Big to Fail”, can destroy the market for all Buyers and Sellers is not that market designed to fail?

Ceteris paribus,

Silence B Good