Wednesday, November 7, 2007

If You Only Knew the Power of the Free Market

I received this response from Joe M. of League City, Texas regarding last week’s post.

If the mega company (who is still making record profits) wants to, they can take the cheap way out. Does it really help the economy or do they keep the cash? Do they re-invest those savings in improving the current bad situation, increase benefits to employees, or anything that makes sense other than to pad the pockets of the wealthy .01% on the planet?

Ever since we were kids, we saw that some people had special privileges that we did not. There was the pretty cheerleader who never seemed to get in trouble for going off campus for lunch. There was the fast-talking jock that charmed homework answers from the bashful nerd. As adults, we see movie stars and athletes not going to jail or serving little time. We know that rich people have more clout and it bothers us. Sometimes the advantages are more than just a few perks, and we worry that a rich person or a big company with lots of connections will be able to destroy us financially because we do not have the money to fight back. It does happen in real life, not just in the movies.

Some see the government as the solution to this power, but government power is the vehicle the wealthy often use to expand their power. If the government passes a law that only affects a small group it’s very difficult to convince thousands of people to care enough to undo the law. You might wonder what power we have to protect ourselves if we don’t use the government. The answer is to use the power of the free market. The market grinds away at special privilege like a jackhammer.

I talk about it all the time, but what exactly is the Market? We are the Market. When I say I am looking for free-market solutions, it is the same as saying free-people solutions.

We usually think of voting as a card we fill out or an electronic pad we touch, but in the free market we are voting every second of the day. When we walk down the isles of a grocery store, we are voting on every product. You might see the price on black olives as being good, where I require payment to haul them to the dump. You vote to purchase them and I vote not to purchase them. If too many people vote not to purchase the olives, they will have to lower the price. We control the price not the grocery store. With a mere “Pshh, I’ll wait until the price comes down” we vote by the thousands. We are in charge, not them. If the government doesn’t interfere, the market has all the power, meaning that we have all the power.

The example of Cap-and-Trade from last week will help illustrate this power in the situation that Joe mentions. Let’s say that in 2009, Texas passes Cap-and-Trade for industries in Texas. Bob is majority owner of Texas Box, Incorporated. Bob’s engineer figures out the company can save millions by cutting pollution under the new cap-and-trade system and selling the credits. Texas Box Inc. makes record profits. Bob decides to keep all the new profit for himself and his shareholders, giving nothing to his employees. Many people think that Bob is selfish and nothing can be done without passing laws to make him give some away. Bob is friends with many Texas politicians so this is unlikely to happen.

Unfortunately for Bob, the ability to own a big office is insignificant next to the power of the free market. Stan is the majority owner of Louisiana Box, Inc. and has never tried to make boxes in Texas because the profit margins didn’t justify opening a new plant. However, his planning people show him news reports that Texas Box is making record profits. They do a little digging and figure out that Texas Box is selling pollution credits along with the boxes. Stan goes to his rich friends, borrows money to buy an old box plant in Texas, and fixes it up to sell boxes and pollution credits. To get new customers Stan undercuts Bob’s price. To keep his customers Bob cuts his prices too. Now Jim from New Mexico Box, Inc. joins the fun and undercuts them all. Stan and Bob lower their prices again to keep their customers. The prices fall until the profit margins are just about what they were before the cap-and-trade. The power of the market decides the price not Bob, not Stan, and not Jim.

While Bob, Stan, and Jim all made some sweet profits for a little while, eventually the market drives down the price because of competition. So in the end, who wins? We do. Our boxes are cheaper, and Stan and Jim hired more people to build boxes. While Bob might not want to be so generous, the free market takes his big profits away and gives it to us.

So the next time you walk through the store and choose not to buy something because the price is too high, remember that in a small way you are Stickin’ it to the Man.

As always, tell me what you think.

Letters to the Editor

Over the next few weeks, I want to challenge you to write a letter to the editor that I will include in this newsletter. It can be a few sentences or a couple paragraphs, but no more than 300 words. I want you to convince the readers of this newsletter about a topic that you feel passionately about. I also pledge to edit only misspellings, not whole sentences like the Chronicle. If I think something is inappropriate I will explain via e-mail. For those of you with co-workers who receive this newsletter you can request to be anonymous.

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