Matti Hyryläinen

 

MARKET ECONOMY SOLVED

 

In this article I am addressing the idea and contents of a market economy; what is it for and how is it built. The theory I offer solves the main problem of today's globalizing economy: what has to be done to prevent the gap between the rich and the poor from deepening and breaking the collective confidence the whole economy depends on.

 

There are two main reasons to want a market economy. On the other hand it is considered as an ideal of liberty. Market economy is good because it maximizes individual freedom. On the other hand it is considered as an economic tool. Market economy is good because it speeds up technological progress and economic growth.

The first important thing in understanding the market economy is to realize that these objectives are separate and we cannot aim at both. We are either looking for a larger individual freedom even if the outcome doesn't favor economic growth or we are looking for a faster economic progress even if it called for violating some people's freedom, or, as is usually done, we are defining freedom in a way which serves economic growth.

Although the two above reasonings seem parallel, especially when compared to the socialist economy, philosophically they point at totally opposite directions. Choosing the economic growth first is an ideological statement: economic growth is a general good; so any individual who is not working for the growth is to be ignored or punished – which attitude was typical to socialists too, although they chose different means to speed up their economy. Choosing the individual freedom first suggests a nonideological attitude: there is no general good but, of course, to develop social norms and legislation toward an ideal which maximizes everyone's individual freedom to choose his way of living and understanding the collective good.

Needless to say that today the ideology of economic growth is taking the lead. It is clear that it dominates everyday politics and economy because nations and firms compete in economic growth, not in freedom. Still, it is surprising that the ideological aim of growth is taken as given in scientific discussion too. Economists are not prized for searching for a road to perfect competition, corresponding to nonideological economy, but for searching for optimal market imperfections or even optimal dishonesty the optimum being that of economic growth.

In this article I choose the other road and examine how the market economy has to be built in order to optimize individual freedom. I must emphasize that this choice is a fundamental one and cannot be changed later. Wherever the road leads, one can no more criticize it by any argument derived from any public good a market system supports. This road by definition leads to the right mixture of public goods – scientific progress, economic growth, healthy environment etc. – being reached by a market system when every man is free to want and work for whatever public or individual good he appreciates. However, this does not say much about the part of economy that is totally owned and controlled by a society.

 

I have to start from the very beginning and ask what economic freedom actually is. Again, there are two different roads to advance. It is possible to see this freedom through the concept of a perfect market. Economic freedom is at its freest when every individual has a free access to sell his property and to buy anything anyone sells. Another way to consider economic freedom is as freedom from political regulation. Economy is free, if government does not intervene. The second important thing in understanding the market economy is to realize that these freedoms are not the same. They look alike when compared with the socialist, heavily regulated economy but conceptually they are two separate cases which must be kept apart.

Not surprisingly, it is the freedom from political intervention which is the main concern today. This is because of the very central role that companies have in our society. Money and media are in the hands of firms whose owners and managers consider government as the one who restricts free trade. They do not want to speak about the freedom in a perfect market because in there the theoretical unit is an individual, not a firm.

Most economists and law scientists have, of course, taken the present reality as a defensible situation and consider a firm as a unit of freedom and government as its enemy. However, this reasoning leads to a severe inconsistency. If it is assumed that a firm is, as a voluntary contract or union, a true manifestation of individual liberty and hence its possible privileges or power over people do not really narrow the individual liberty, logically we have to give the same status to other voluntary unions too, for example a socialist party that regulates national economy. If it is required that a voluntary union must not have privileges or use pressure on people, the question rises who defines the concepts of privilege and pressure. If it is not the union itself – saying that the privileges and pressure it uses are not really privileges nor pressure but means for the common good – there is no answer to this but some kind of intervening power. Thus the road away from government intervention leads to some other pressure or intervention, not to a free firm nor a free individual.

 

This is why it's more logical to take the other road and consider economic freedom as an individual freedom on a perfect market. What does this freedom actually mean? Usually the concept of perfect market is used as a tool for economics. It defines an ideal situation where prices are "fixed” by the equilibrium of free supply and demand, i.e. selling and buying are premised to be free. However, this premise is not enough to solve the fundamental question of free trade. The question has to be divided and asked what is free selling and what is free buying. Can trading be equally free from the viewpoint of both a seller and a buyer?

A seller feels free if he is free to choose the items he sells and the prices he asks, to give the information of the items and prices to whom he wants and to pick the most profitable set of items, prices and buyers. A buyer feels free if he is free to know all the items and prices, to choose and buy the items he wants and to pay the lowest price asked, not more than anyone else does. The third, most hidden and most fundamental discovery in market economics is to realize that these freedoms are not the same. They cannot, not even in theory, be united into one that defines one free trade or one perfectly competitive private property system. If every seller is free to give different buyers different accesses to what he sells, every buyer is not free to choose between all the products. If every buyer has a free and equal access to all the items on the market, every seller is not free to choose between buyers. We have, again, two roads to follow, and as a matter of fact, two totally different market economies.

It is obvious that the first road to be taken in practice is that of the seller's freedom, because the seller has, as the holder of the property, a practical power to trade it as he wishes. That also gives him a natural advantage in bargaining power compared to the power of the buyer's money – imagine a man owning all the goods in the world and another owning all the money; certainly the first man can sell a simple meal for all the money in the world. When each seller is free to choose buyers and free to contract with other sellers about discriminating buyers, the sellers can, by threatening not to supply merchandise, regulate the trade so that they extend this prior bargaining advantage through the chain of trades from the top of production to the lowest consumer. So the poor actually have to use all their money to buy their everyday bread. In these free selling circumstances, when everyone intends only his own gain, the gap between the powerful and the powerless automatically deepens.

A special form of a trade bargain is a company or a union between partners who make a deal to work together under one management. It is evident that by using their bargaining advantage the most successful unions grow gradually so wealthy that they own the land under their clients and workers. Then a new form of deal proves efficient. Since there are always competitors which do not necessarily respect the same idea of freedom, some kind of defensive force against the competitors has to be organized – remember that there is no government to protect the firms, not to mention the workers. So the land rent changes into a tax that includes a payment for the defense. Most probably the owners of each company or union also find it profitable to negotiate statutes involving sanctions or duties if anyone living on their land and enjoying their protection harmfully trades with another company or union.

So, following the practices of free selling an elementary state is formed. People are divided to those who govern and to those whose economy is governed. Not the slightest physical pressure between men is needed, nothing religious, nothing political, only voluntary trades and contracts between free citizens. The real pressure consists of two evident facts. First, the poor governed have no money to move to another land and second, even if they had, the governors of the other land follow the same practice. (The reality is, of course, more complicated but that is another story).

 

Since the road of the seller's freedom, here called the free trade, leads back to the same realm of restrictions and duties that the market economy is supposed to free us from, this cannot be the right way. In our journey toward economic freedom the only logical option left is to aim at the market economy that derives from the freedom of a buyer, here called the free market. This road leads to several practices different from those of the free trade, the latter used here also as the synonym of capitalist economy. By theory, this road also leads to a more balanced economy and to a lessening gap between the rich and the poor.

The free market economy is characterized by the following four features which derive from the free will of each independent buyer. However, the free will is restricted so as not to violate the equal free will of other buyers.

  1. The freedom of a buyer implies the equality of buyers. Contrary to the free trade property right the free market property right does not include a right to choose a buyer nor to use price discrimination. The seller can choose what to sell, where to sell, when to sell and at what (minimum) price but that is all and all that must be laid open on the market. The free market is not a private but a public domain. Since every buyer must have the same access to the market information, in the free market there can be no secrets concerning sellers, quantities, qualities or prices. This being the case, in the free market there can be no secret trade transactions not to mention bank secrecy – also lending money is an open transaction in the public domain.
  2. The freedom of contract – which cannot be consistently defined in the free trade economy – has a clear definition in the free market economy. Everyone is free to make all trade contracts but the ones that include conditions which circumvent or block some buyer's freedom in the market. Such contracts are forbidden even if they were free for everyone to make or buy. For example, there can be no exclusive rights to be agreed on or traded in the free market.
  3. Unlike in the free trade, in the free market firms and other unions do not have any rights or obligations in trading or taxation that individuals do not have. There are no organizational possessions. A firm is a private property of its personal owners and treated as such in relation to the part each one owns. For example, in the free market there can be no corporations owned by stocks whose owners are not, each for his part, personally and fully responsible for the firms' harmful actions and losses as well as its gains and profits.
  4. In the free market economy the role of a state or government is essentially different from that in the free trade economy. As known, no theory explains logically the relation between government and the free trade: on one hand every regulation by government is considered to restrict the free trade, on the other hand government seems to be needed to prescribe property rights and to forbid theft, slavery, blackmailing, monopolistic cartels, insider trading etc. Thus, in the free trade economy government is expected and needed, not only to decide which part of economy is politically managed and which part allocated by the market, but also to make political compromises in the market realm. It has to decide, for example, when and on what basis a cartel or a merger is so powerful that it threatens others' freedom to trade. This indefiniteness submits government to political pressure and lobbying and the outcome is either increased regulation or increased power of the rich – the latter only increasing the need of balancing control. In the free market economy government's role is more definite. Regardless of the size of politically controlled economy, in the market realm government only prescribes that the market is a public domain and forbids to misuse it just as it forbids theft and blackmailing. In principle there is no room for interest-group politics or lobbying.

 

It is evident that the free market is possible only by restricting the regulative actions sellers use in the free trade. Control is needed to control a control, but how? This question has to be solved before we understand how to move toward the free market practice. Let's start from the fundaments of control.

At its gist, human existence is a survival game, a fight to control the limited resources of the earth. In order to win people organize themselves into groups and specialize in labor. Villages, churches, armies, guilds, parties, firms and nations are born. An organization is by definition a control system. Managers control subordinates in order to make the organization more effective in competing against other organizations and to conquer the resources of the world.

The competition itself is a logical extension to this control. Competing organizations try to extend their control, besides on the nature, on each other in every possible way. They urge to control the environment, regulate the trade and threaten with arms to get what they want. Naturally the competition is usually profitable for winners. However, evaluated from a wider point of view, it is not necessarily a benefit of the whole or a larger organization if its suborganizations waste their energy in controlling, fighting and destroying each other. So, the larger organization, if there is one, tries to control the suborganizations and to stop the harmful competition between them.

It is essential to realize that the latter control is totally different from the first one. Hence, they should also be called differently; in the absence of better words I shall call them the regulative control and the equalizing control.

The aim of the regulative control is to increase the power and the wealth of the controlling organization and especially that of its managers. The means of the regulative control is to order people to control the nature and another groups, tasks varying according to the division of labor. This control involves classifying people and their functions and giving different functions different values. The outcome of the regulative control is a still wider control when weaker groups are conquered and merged into stronger ones.

When regulative organizations grow also the competition gets tougher, because the value of the victory grows: the larger the organization the more power the controllers have in relation to the controlled ones. Hence also the competition costs grow: the higher the prize the higher investments are reasoned. Eventually the competition costs grow bigger than the original benefit of organized division of labor, and the ultimate widening of the power gap breaks the control system. The controlled lose but also the controllers lose when they lose the control over the controlled.

The aim of the equalizing control is to control the regulative control and to prevent the above explained lose-lose outcome. The means of the equalizing control is to restrict people from doing too regulative and oppressive actions: to prevent them from killing, stealing, cheating, oppressing and controlling each other in a paternalistic way. Contrary to the regulative control there is no division of labor nor differently evaluated people involved in the equalizing control. The equalizing control covers everyone, also the top controllers. Thus the outcome of the equalizing control is a lower controlling level, a lower competition pressure and lower competition costs.

It is to be noted that in the competition for control the same control makes both the rivalry and the prize. When a certain stage of control, say domination by force, sets the rules of competition, the prize is to control more: to organize domination and to control a larger group of dominators. If force is forbidden the whole control structure will be changed. Also the top controllers must be chosen by some other process than using force, for example, by free elections. In that case the means to win, which characterizes the whole society, is to submit oneself into a long queue of free elections leading to the top which is quite different from fighting with force to be the top organizer of force.

 

However, there is a serious problem to be solved before equalizing the regulative system and achieving a wider cooperation on a lower control level. There is a power hierarchy between different controls, which means that one cannot force higher means by lower means. On top of the hierarchy is physical force, oppressing people by arms. Then there is economic power, dominating people by controlling the distribution of property. Still weaker is intellectual power, manipulating people by ideological or scientific knowledge. The hierarchy is easy to recognize. When a man having a gun confronts a man having a wallet, it is the man with the gun who tells the other man what to do with his wallet. Likewise, if there is a disagreement between a rich man and a man knowing how to become rich, it is the rich man who has every reason to keep both his money and his knowledge while the latter man has to rethink the issue. This is the case also if the rich man is the man who got his money by threatening people with arms.

So, if the most powerful gunmen can dominate the whole economy as well as the general way of thinking, how is it ever possible to master them and to move onto a lower level of control and competition?

A part of the answer is to be found in the above explained lose-lose outcome. When the competition for dominance is conducted by arms and everyone wants to win, the rivalry gets tougher, more organized and more destructive within each competing organization and especially between fighting forces. Eventually the competition costs exceed the winning prize, the social uniformity crumbles and the control structure breaks down. Some space is opened up for new kinds of control. If artillery is used the space may be open in a very concrete manner.

Another part of the answer is in a cause-effect hierarchy which is quite opposite to the power hierarchy. Intellectual knowledge is on the top and physical force is at the bottom. Science is needed for the development of technology and economy, and they both are needed to produce the most powerful arms. So, it is possible that when a space opens up for new control systems a system emerges which, when not competing with physical force, is not so restrictive toward economic and intellectual freedom but which for that reason is able to develop better natural sciences, a more effective economy and consequently an armament powerful enough to resist the arms of more controlling societies.

The third and the most important part to master the use of force is in the general accumulation of knowledge. The evolution of natural sciences inevitably develops transportation and communication systems that make the world more united. It also widens the scale of division of labor because a smaller and smaller part of knowledge is managed by one man or one group. Thus, an increasing cooperation is both possible and needed to develop science, economic prosperity and military power. It means that there is a continuing need to form larger groups under same rules and control, and every now and then an emerging need to renew the rules so that they set the oppression within and the competition between the growing groups on an essentially lower level. The general evolution favors those societies that understand how to do it.

The objective of social sciences is to build that understanding. However, social sciences, especially political sciences and economics, mirror and study the society they represent. They focus on questions concerning the regulative control within the generally approved pattern of proper means. Thus, every step defining a large equalizing control presumes a parallel step in social sciences. Only an equalizing revolution in social sciences makes it possible to find new lower level rules and also to teach people to understand and use them. And every such step is a step toward a nonideological ideal of science. In here the science meets the needs of ordinary people and they have the motive to understand why the regulative control has to be equalizingly controlled. Without collective understanding the plain rules, say the rules of democracy compared to the rules of class society, do not work but lead back to the use of force and oppression. The same is valid for the free market rules compared to the free trade rules.

 

That was the theory of two different market economies and their relation to two different forms of control. How does the theory explain the reality? The question consists of two sections. First, how does the idea of the lowering control level fit in the history. Second, how does the idea of free buying answer to the unsolved questions of today's reality.

There are two major socioeconomic histories any major economic theory has to explain. The other is the European led development from agricultural class society to industrialized democratic nations. The other development is the rise and fall of socialist nations. In this theory the key concepts are property, competition and crisis. The explanation goes as follows.

From ancient times up to the end of the 18th century land and people were the most important property and the means of the competition was capturing land and dominating peasants. The level of competition being at the use of physical force to capture and dominate greatly influenced the social norms and the economic structure of the whole world. This economic system could be called the free capture system. When the competition between monarchs was conducted by force, the competition for monarchy was a question of organizing force. It took the form of a more or less armylike social structure where everyone had his class, work and place under the control of his superior. On this level the history was a long struggle from feudalism to kingdoms and class nations. However, the fundamental difference between aristocracy and people stayed long unchanged.

Along with this process the scientific and technological evolution took place. Handcrafts improved to simple industries, the innovation of gunpowder made the arms more effective and better ships and navigation methods extended the European attendance everywhere in the world. This development had two consequences.

The first evident result from better arms and improved shipping was imperialism, the globalization of the European exploitation system. When landowners and other aristocrats extended their political and economic power into faraway lands and on their people, the wealth of the rich increased while the poor stayed as poor as ever. The competition between nations toughened and the conflicts between aristocrats and people hardened.

The second inevitable and more lasting result from technological development was the change in the property balance. Starting from the late 18th century the industrial revolution made the possession of mills and machines more profitable than owning land and people. This change and the rise of new competing forces eventually drove the old socioeconomic order into a long and deep crisis, a period of nearly two hundred years of great wars: the American War for Independence, the French Revolution, the wars of Napoleon, the 19th century rebellions all over the world and finally the Socialist Revolution and the two World Wars, every war being a part of a very confusing mixture of people rebelling against ruling estates, nations fighting each other and the industrial economy competing against the imperial economy.

The outcome of this destructive era was – parallel to this theory – the victory of the industrial economy, which meant that the new rules for governing and trading were set in favor of industry. The old property system, including privileges of clergy, landowners and guilds, was abandoned as a burden to industrial production, and only the rules and privileges serving firms and industrial growth were kept. The exclusive rights system, the tax deduction system and the liability system of corporations were legalized – and today considered as self-evident.

However, there was an exception. In some very autocratic realms, first in Russia, the evolution took another road. The shift in the property balance was adopted straight into the ruling system. The centrally controlled land and peasants without any rights were changed into centrally controlled industry and workers without many rights. In the world-wide dimension this extension of autocracy was followed by a new balance of force. After World War II the democratic world, despite not needing strong military forces against each other, still needed them against socialist armies. The socialist countries for their part had to have strong military forces to control their inner relations and to compete against the capitalist forces.

The world divided into two blocks. At first the socialist block seemed to manage well. A large heavy industry was erected and a huge atomic weaponry was built. However, the socialist block could not win the competition for force. The democratic system, giving more freedom to uncontrolled scientific inventions and technical innovations, could also develop more powerful military equipment. Lacking the superior military force, the only chance for an autocratic system to dominate, the socialist system was doomed to lose. The increasingly unprofitable competition against the other world's weapons and the useless power competition within the socialist world made it impossible to build an industry that could meet the needs of consumers. The socialist economy was ruined.

So, according to this theory, the fall of socialism was only one prolonged act in the history of collapsing control systems, vanishing value of force and the shift of the dominant property.

 

Looking against this historic picture the present world is the field of economic competition on industrial basis yet shifting to the dominance of information trade.

Opposite to what is expected by many, the globalization and the freeing of trade has not made the world economy more balanced. New difficulties have risen along with a toughening economic competition. Again the world is dividing into two parts and today at the core of the global divide is the vast inequality in controlling information production, innovations and diffusion of technology. When the political competition between the socialist block and the capitalist block has ended and the value of political control has decreased everywhere, the economy is becoming an end in itself, the Economy which we worship, for whom we congregate and for whose favor we struggle whatever the losses.

Many people, probably the majority, are not pleased with this. Yet, they cannot do much about it, since they have no theory on which to build a working plan. The whole huge realm of free trade economics and regulation economics offer no help. The advice contemporary economics give are only separate responses to certain troubles already born. When the free trade doctrine allows firms to grow or merge so big that it hazards fair competition, government is advised to split some companies or prevent some mergers. When the free trade allows someone to profit immoderately using insider information, government is advised to ban some insider trading. And so on.

However, lacking the basic theoretical model of the market economy, present-day economics offer no reasoning when deciding what is immoderate or unfair; why to intervene or how to act. The issue remains a question of politics, submitted to political rivalry. This leads to increasing commercial complexity and larger bureaucracy, and, exceedingly, to the denial of moderation and fairness. The weak and the uninformed are sacrificed and it is declared to be the righteous will of the Economy.

What will follow is crisis, both in economy and in economics. There are good reasons to hope that the quarrels and combats which will change the industrial world into the information world will be less destructive than the ones needed to change the agricultural world into the industrial world.

 

This is the problem for which the free market theory, or the theory of free buying, offers a solution. It does so by introducing two possible ways to manage with the inevitable. What, then, is inevitable?

The first inevitability is the development of science. Knowledge accumulates and information technique develops whatever we do. If we do nothing but business as usual when following the free trade rules, the information owners and producers will control and regulate the trade so that the accumulation of knowledge and wealth increasingly centralizes. For example, the exclusive rights system, which once was reasoned to build costly production and transportation for material goods, is far too effective in centralizing information production and trade with minimum copying and delivering costs. The tax deduction system, which once was reasoned to foster production by not taxing the wear and tear of machines and mills, is far too "productive” when used to information not wearing or tearing. And the corporation system, once reasoned to accumulate capital to build industrial mass production, is far too centralizing in information production, where human brains are the main productive source.

Now the problem is how to balance the increasing flow of resources from bottom to top. In the globalizing trade it cannot be balanced by old methods of taxing the rich and transferring the wealth to everybody, because of the difficulties inhered in international bureaucracies. The equilibrium has to take another form. It means that the increasing wealth of the rich must somehow disappear without profiting the poor. Logically it goes to excessive competition costs between producers. That is why the technological development does not necessarily cause unemployment but increasingly wastes all kinds of recourses in sales work, advertising, stock promoting, buying competitors, building capital fortresses, struggling for exclusive rights, pirating, building consumer profiles, litigation, lobbying and so on; everything but producing something useful for consumers. Soon – if not already – not only the majority of our natural resources, manpower and brainpower but also of our willpower is wasted in a struggle against competitors.

 

When the economic competition turns harder, the search for the public good is replaced by an urge for one's own good. Therefore, in maturing capitalist economy all information concerning the trade loses its real value. In a trade war one can break his promises, if it profits one's own company or one's own country. Eventually it is all right also to steal from competitors, since they all do the same. Logically piracy becomes the most useful way to diffuse information. Sooner or later the confidence in organized capitalist economy fades and stock markets collapse, corporations bankrupt or split and production slows down.

This is the "business as usual” way how the free market economy solves the problems caused by the free trade economy. Smaller firms, downsizing of stock markets, devaluating market information, breaking exclusive rights system and lowering stress on environment, all of which are theoretical objectives of the free market economy. However, this is a very costly and unpleasant way. Collapsing stock markets and bankrupting firms mean unemployment and poverty. Not even the environment necessarily profits, since the decreasing stress by a slowing production is replaced by an increasing stress by destructive activities.

Another, a much more intelligent way to solve the problems the free trade creates is to consciously adapt central free market rules into the global trade. The sooner the need and the idea of such rules are understood, the less uncontrolled and destructive incidents are needed to make people understand why the reform is inevitable.

In the following chapters I shall take two examples of how the free market system works when used especially in the information trade.

 

The first case is about market information. There are two essentially different kinds of information to be owned, used and traded. The first kind of information is the very product a buyer wants to consume, a book, a song, an invention, a TV-program. This is also the product the producer is working for and from which he is expecting a payment. We could call it productive information. The other is information about the prices, qualities, sellers and buyers of productive information, or any other product. This we could call market information, since it is about the market but not for consumers to be consumed. It is not the information a producer is working for but an inevitable byproduct: when something is produced, the producer is supposed to know what has been produced and at what price he is ready to sell it, although his knowledge of prospective buyers or their needs is more or less imperfect.

In the capitalist, free trade economy, it is understood that everything that have value and can be controlled can also be owned. So the free trade property right covers not only the owned object but – with some exceptions – also the market information about it. That is why present-day economics does not distinguish between productive information and market information. The market information is considered a valuable merchandise and advised to be used in the most profitable way – an entire subfield of economics called "imperfect information” is born to study this kind of problems. However, since this information is owned by a seller, he gets the profit of it. The property right for market information is kind of privilege which siphons wealth and power from buyers to sellers for nothing.

It is to be noted that the parallel market information of a buyer – what he wants to buy and at what price – is of essentially different nature. Usually a buyer or a consumer wants to buy almost everything but he doesn't know at what price each and in what order. He has no such information to be sold. On the contrary, that information can be collected by sellers who keep book about consumers' purchases and so it becomes a property of sellers. So also this information benefits sellers or producers when used for discriminative pricing according to consumers' different willingness and ability to purchase certain products.

The free market practice ends the above explained siphoning of wealth simply by ordering that all market information must be free. Of course, the owners of production may not like this idea, but actually it will be a great relief for firms that they do not need to conceal their market data, since also competitors' market data is open to public. And certainly it will be a great advantage for consumers that they can easily find the best buy. The only losers are those who produce and sell information and goods to contesting parties to be used as economic weaponry: to attack or to protect oneself against attacks.

Although in the free market economy the information of products, prices and trades is public, in there the information of a certain person's consuming habits and preferences is less public than in the free trade economy. That is because the latter information loses its value in the free market system. Since sellers cannot use consumer profiles for price discrimination – everyone has to be treated alike – it is unprofitable to collect that information. The individual privacy is bought by abandoning the market privacy.

An interesting example of discriminative information is blackmailing. The blackmailer promises to keep the secret if the client pays him. In this case the whole business is dependable on the discriminative market information, since if the blackmailer offered the information to everyone, it would lose its value. I am not saying that the free market rule would stop blackmailing, that is a crime even today, but there are many discriminating free trade practices which are not so self-evidently wrong. As a matter of fact, it can be asked why anyone wants to discriminate prospective clients by controlling the information he gives to each. Certainly it is because of the fact that some information has a certain value when kept secret. This is not far from blackmailing and in any case it is not a practice that builds common understanding and cooperative economy.

 

The second case is about exclusive rights. It is clear that a very important factor of the deepening gap between the rich and the poor is the information trade based on exclusive rights – not necessarily on copyright which is another thing. This trade concerns artistic information such as writings, paintings, movies and music; "happening” information like sports events and celebrities' weddings; technological information such as technical inventions and computer software; scientific information like certain uses of genes; and already studied market information.

There are two mechanisms by which the exclusive rights system overaccumulates riches especially in the developed information trade.

Firstly, the exclusive right system biases the competitive balance of supply and demand in favor of a supplier. When selling a material good a seller cannot use it himself any more, whereas after selling information both can use it. This has an important effect on pricing since the market price of a commodity depends essentially on its scarceness. The scarcer the commodity the higher the price. When trading information every trade makes it less scarce and less valuable as a merchandise. All this is well in line with the low marginal cost of making extra copies of intellectual property. However, in order to keep the price high a seller limits the trade by the exclusive right. When controlling copyright by the exclusive right the seller can avoid the competition in copy-making and hence the prices of copies can be held much above costs. In a perfectly competitive market everyone should have information for almost free.

Secondly, the exclusive right system causes an uneven allocation of productive information. Naturally an inventor tries to make as good profit of his invention as he can. So he, if possible, patents the invention and sells the patent to a firm that offers him the best price. Since in the free trade system the price depends on the market power of the firm, big firms are preferred. So all inventions tend to accumulate in the hands of the biggest firms. They will control the knowledge of central inventions and even buy inventions out of usage, if they are too effective in the hands of competitors but do not fit into their own production line.

The free market theory solves the problem of overaccumulating knowledge by maintaining the producer's right to sell his intellectual work at the price he chooses, but abandoning the utilizer's right to have an exclusive possession for the work. In every stage and occasion everyone has to have equal access to the product.

There are at least two interesting and reasonable ways to implement this demand. In both cases the producer of the intellectual work is supposed to sell his work at one total price. He sets the price in relation to the investment he has made or the price he expects to get from the public. An auction can also be used. The decision is only his; he has no-one to blame whatever the market does.

In the first case any industrial or merchant utilizer who wants to use the intellectual work as a part of his merchandise can buy the right to use it at the asked price. The first buyer has the only right to use the work unless another utilizer wants to buy it. However, since the producer has already been paid, the second utilizer is free to buy the right from the first one but at half the price, so that the cost, i.e. the access to the product, is the same for both. The third utilizer who wants to use the work is free to buy the right from the first and the second one paying one sixth part of the original price each. And so on. In a computerized world this is a simple method to ensure a fair pay for the producer, to restrict the commercial free-riding on an intellectual work and also to restrict the monopoly the exclusive right offers. If the producer has underestimated the "real” value of the work, the benefit goes to consumers, not to a firm utilizing the work.

The second case is about a still more collectively rewarding way to rule the information trade. When an intellectual work and its price are set, any utilizer can buy it for his use, but when bought, the work is free for everyone. How then anyone would buy the product? There is a good reason for that. If the product is really valued by some consumers, they are willing to buy it whether there are free-riders or not. Imagine an invention that cures a bad disease. Evidently there are people who are willing to pay what ever needed to be cured. Most likely the cured are only happy to see others cured too, even for nothing. The problem of producing and buying an intellectual work becomes a task of gathering a group of people who really want the product and can collect the money requested. The more large and complete the group the better price it can offer and the less there are free-riders. This leads to very interesting changes in socioeconomic organizations. National governments and international unions get a new mission as purchasing networks. They evaluate intellectual products, choose the ones good for their citizens and buy them in spite of the fact that the products may also improve the life of the citizens of other nations.

Naturally governments do not have any exclusive right to produce or buy the information they want. Every firm, unofficial group or a single person can freely do the same. The point is that the production is evaluated and controlled from bottom by individual or organized consumers for their benefit, not from top by individual or organized producers for their benefit. The economic role of government changes totally from a socialist producer and controller into a market unit for organized purchasing.

Probably the most astonishing feature in this free market application is its ability to distinguish constructive information from destructive information. Above I explained how in the free trade economy when the competition is hard, the most "profitable” information is the one used to destroy competitors. Hence such information is also produced and used, and the competition gets even harder. However, if it is required that the buying organization, say a nation or a firm, has to give the information free for anyone interested, only the information that builds cooperation and the general good appears to be worth buying. No nation nor firm would buy information about how to beat their competitors because the competitors would get the same information for free, which in a competitive situation wouldn't be very clever.

The free market rule, especially in the form of "free when bought information” changes the whole pricing system. If only cooperative and generally productive information is bought, it is also the information produced. Intellectual workers focus their innovative minds on products that cannot harm themselves in the hands of competitors. The market begins to function as supposed: the invisible hand translates the decisions of self-interested individuals into outcomes that promote the public good.

 

All this rises the question of incentives. Certainly the economic incentives are higher in the free trade economy than in the free market economy. But why should they be so high? The common explanation is that it is for the public good that the science progresses, technology improves and production grows. However, as said before, this explanation is not neutral but ideological when setting a collective goal and justifying oppressive habits and economic rules in order to achieve the goal. For example, the corporation system is supported and justified by law because it offers an effective tool to accumulate capital and to foster innovations. Without that ideological justification there is no reason to treat corporations by different rules than personally owned firms or families. Similarly, if there is no ideological need to develop technology, there is no collective need for the patent system or exclusive rights.

This ideological basis imports biased economy and misleading incentives. The capitalist system induces everyone, by its rewarding system, to work for economic growth or to be left without work. Yet, as there are two kinds of information there are two kinds of growth: a productive growth wanted by consumers and a competition growth used by producers in their contest against each other. Since the free trade system cannot differentiate the productive growth from the competition growth, the free trade incentives work for both.

It is clear that the incentives for the competition growth are generally harmful – just like the growth of armies and weaponry – but even the incentives for the productive growth are questionable. The fear of increasing pollution and climate changes, the fear of social destruction because of the deepening knowledge gap, and the fear of the damage that developing technology could cause in the wrong hands; all this makes people ask why to foster the economic growth. Why shouldn't the pricing system be neutral, so that they who wish are free to work for growth but they who disagree are not punished for that?

This is exactly what the free market system does. It abandons every ideological goal and lets the general development take the course independent individuals prefer. However, if some individuals consider the economic growth achieved by free market rules too slow for the public good, they are free to subsidy the growth. For example, they can give their own money to best growing firms or they can offer prizes for innovators. But they cannot expect that everyone shares the same idea of the public good and acts like they do. This is what the free world is about.

 

Summary: First I claimed that there are two opposite ideas a market economy can be founded on. The freedom of choice is either on seller's side or on buyer's side. The market economy based on seller's freedom, the free trade or capitalism, is reasoned by an ideological goal of economic growth. In order to maximize production the free trade organizes itself as a controlling system regulated by firms. The market economy based on buyer's freedom, the free market, is a nonideological economy that maximizes the individual freedom of choice, including the choice of unfostered growth.

Then I explained what are the main practices that differentiate the free market economy from the free trade economy:

  1. The equality of buyers implying public market information and the ban on price discrimination.
  2. The ban on exclusive rights.
  3. The non-organizational possessions implying only personally owned firms.
  4. Government being the confirmer of the free market rules and a market channel for consumers.

I also reasoned how economic systems change in accordance with the evolution in science, technology and production, and how the free market fits in this picture. It is the competition for the most profitable property that sets the rules of an economic system.

Then I showed the difficulties concerning the transition between economic systems. A deep social crisis and a slow and painful change in economic thinking was needed to change imperialism and mercantilism into the lower controlling level of social democracy and free trade. Similar difficulties are expected also when the ideology of industrial growth and the free trade system are changed into the nonideological economy of knowledge and the non-controlling free market system.

I ended with two examples of how the free market rule in the information trade maximizes the public good that developing knowledge offers. The idea is that in a nonideological free market system there is no generally believed public good but the good achieved when everybody's opinion of the public good has the same freedom to exist.

Home