Understanding The Inherent Power of a Free Market

If you listen to many politicians and others who desire the power to take their "fair" share of another person's efforts or inheritance, you would get the idea that the "free market" is somehow responsible for economic inequality and makes profits by denying the common man or woman a just payment for their efforts. The free market can be cruel but it is inherently fair. It is far fairer than designed or prescribed systems which invite corruption, favoritism and legal bribes for votes.

I just read a headline, "Biggest Real Estate Flops of the Year"on Yahoo. It pointed out two very different examples of how the real estate and credit meltdown along with the continued recession has produced two bargains for buyers. The first bargain is Dunnellen Hall (The Helmsley Estate) in Greenwich, Connecticut which has dropped in selling price from $125 million to $60 million over the last year and is still wanting a buyer. The other bargain was the Pontiac Silverdome which was built for $55.7 million in 1975 and recently sold at auction for $583,000. (The article written by Jason Notte and provided to yahoo by TheStreet.com.)

What a buyer both can afford and is willing to pay determines the difference between 125 and 60 million dollars in either direction. Whether or not something has a profitable use determines whether a domed stadium (or any other asset) is worth hundreds of millions or hundreds of thousands. In fact the antiquated domed stadium is probably worth negative dollars and actually deflated the value of the land upon which it sits.

I point to this story for two reasons:
1) It emphasizes the multiplicative effect of the free market when you develop or invest in an asset that appreciates in value, due to the power of a market of buyers to create value through competition.
2) It hints at the ultimate futility of trying to support a valuation with bail-outs, subsidies or other non-market attempts to make-up for the lack of market demand and potential buyers.

Two buyers competing for either of these properties would create more wealth than any possible government subsidy or refinancing of any mortgage. When there are no buyers only drastic devaluation will create an opportunity to generate them.

When it comes to these two examples there are no villains and no victims in terms of the marketplace. These two properties are simply worth the price at which the seller and a buyer meet. A higher price and higher value received for that price go hand in hand. If the seller can not obtain their desired price they can meet the buyer by lowering price or hold onto the asset based upon its potential future value.

When you look at market-driven creation of value as a means of raising the standard of living of human beings in general a few things become apparent.

1) Long periods of modest economic growth create steady market demand for both consumed and durable products and result in investment and job creation which raises everyone's standard of living.

2) Rapid economic growth creates instability due to its inherent lack of sustainability and this itself leads eventually to collapse and misery.

3) Economic contraction leads simultaneously to a huge loss in the value of investments and also to job elimination to conserve cash resources.

4) Political (legal, tax-burden and regulatory) uncertainty itself moves investment from productive job creating endeavors to hard assets such as gold -or- moves the investment from an unpredictable nation to a more predictable nation.

5) Debt used for consumption rather than investment in durable goods and productive investments increases the likelihood of a boom-bust cycle and if debt repayment is defaulted above minimal levels it also leads to contraction.


The fairness of the free market comes from its ability to function as an arbitrator of merit. In the market place, merit trumps favoritism and corruption as long as buyers have the option to choose freely among choices and say no if the seller demands too high a price.

The potential for profit in the marketplace does tempt the greedy and the corrupt. Some sellers will attempt to extract more than they merit by stifling the choices which the buyers have or by forcing a sale against the free will of the buyer. This could be a large multi-national cutting prices below cost to drive a competitor out of business (an illegal practice) or a labor union attempting to represent the workforce (and compensation) of a certain employer at a certain location (a legal practice.) This could also be the government forcing everyone to pay more than the market price for milk, corn or health insurance by restricting competition.

The marketplace behaves differently when the government is involved but rarely creates more value as a result of government intervention and regulation. In some circumstances we have determined that regulation is needed for the public good. The basic issues which demand regulation which are:
1) Standards which ensure public health and safety.
2) Requirements that promises to pay or provide services in the future are backed with the retained financial ability to do so.
3) Oversight over the few products and services which due to extensive infrastructure or local delivery require regional/local monopolies to deliver a fair product for a fair price. (cable television for example).

Regulation beyond the basic three items above always limits competition and results in buyers paying more for less.

All this matters in the current economic climate as the perfect storm of
- debt fueled spending with no ability to repay
- corruption, incompetence and lack of governance in primarily government regulated industries and
- short-term transaction-based profit taking in the same government regulated industries
led to loss of a generation of asset based wealth and 10 million jobs.

The solution requires exercising both fiscal responsibility in governmental budgets and stability in governmental policy and demonstrated faith in the free-market, so that buyers determine value, investors can invest in the future and businesses can begin hiring once again.