Friday, December 16, 2005

The meaning of a free market economy

There is an interesting discussion currently underway in the Indian blogosphere over the liberalization of the Indian economy. The debate is being phrased as "pro-regulation or pro-free market". I, however, feel this nomenclature mischaracterizes the issue.

It all comes down to what exactly the term "free market" means. Wikipedia defines it as "A free market is a market where all exchanges are made without coercion; all trades are voluntary." I had to go look at the Wiki because my knowledge of economics is limited to the law of supply and demand. So basically, a free market is one where production and distribution of goods and services is not affected by forces external to the market itself.

There can be two kinds of forces exerted. One is by the government in the form of regulations, the other in the form of leverage and monopoly by corporations. As I see it, ultimately, the difference of opinion on the issue occurs due to varying perceptions of a threat to the free market. What Vulturo calls "pro-regulation" supporters, are actually supporters of a free market who believe it is under threat from corporations, while what he calls "pro-free market" supporters are people who believe it is under a greater threat from the government.

Again, regulations are of two kinds. The first kind is detrimental to free markets where corporations have to go through a lot of red tape to enter the market or to bring a product to the market. I feel these are redundant and need to be scrapped. The second kind are regulations that make sure the corporation plays fair once it is in the market and thus, are actually, conducive to the free market. For example, anti-trust regulations that disallow a corporation from creating a monopoly based purely on brute force. So it isn't really a pro-regulation / pro-free market debate.

The problem with the free market debate is that it is getting muddied due to a focus on ideology, instead of the ultimate goal. I feel the ultimate goal of both sides of this argument is the same, to reduce poverty in India and improve the standard of living of it's population. But this goal is now being bogged down by rigid adherence to ideology. Clearly, quite a few people are equating the free market with giving corporations a free pass to do whatever they want. But this is actually contradictory to their goals, because corporations are quite as capable of exerting undue influence on a market, just like the government, and encroaching on its freeness.

In order to correctly tackle this debate, it is first necessary to know what it is that we are arguing about as well as find out what the other side is arguing about. And then, more importantly, it is also necessary to keep ideology aside for a while and concentrate on the actual goal of the debate itself.

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