What are the basic ingredients of a free market? There are four: competition, technology, transparency, and regulation. The most fundamental is competition. If sufficient competition is assured, everything else will fall into place. Competition is seen by stable or falling prices, improved quality, more choices for consumers, and low profit margin for suppliers. The following are some examples: the highly competitive restaurant business, supermarkets, online retail, and most high-tech products. All of the above have to compete for volumes to stay in business because the profit margin is low, driven down by competition.
Competition hinges on substitution at two levels: product and supplier. When I go out for dinner, I have plenty of choices regarding what food to eat, and which restaurant to patronize. The consumer is king, so to speak. Now, think about driving from my home to the restaurant. My car runs on gasoline that cannot be substituted. The price of gasoline is set by OPEC and I must accept it, or not to drive at all. As a consumer, I am stuck as far as gasoline is concerned. In life, we face many situations similar to the one I’ve just described.
Technology is a driver of the free market. It alleviates the problem of scarcity by providing substitutes, for instance, composite materials to make aircraft instead of aluminum, carbon fibers to substitute for various metals, email and digital record to save paper, and genetic engineering to increase food production, etc. The most obvious case is electronic products where constant innovation leads to lower prices, higher quality, and the empowerment of the consumer. Technology enhances the free market by improving productivity and driving down cost, besides providing substitution.
Transparency is harder to understand. It is most relevant in the financial sector where they deal with less tangible products such as stocks and shares, commodities, currencies, mortgages, and insurance. In ordinary products, the consumer can easily judge the quality by applying one simple criterion: It’s good if it works well. For a financial product, when the consumer finds out it does not work, it’s already too late. This kind of situation is conducive to deception. The best way to combat this is to insist on transparency where the company and its sales force are required to explain the products and the risks in plain written language, not hidden in the fine prints too small to read and too complicated to understand. This enables the consumers to evaluate and compare. You will understand what I mean if you try to read an insurance or a credit card policy. Without transparency, the consumer is swindled without even knowing it.
So far, I’ve covered three of the four fundamental ingredients of the free market: competition, technology, and transparency. Can we take them for granted that nothing will stand in their way? Absolutely not! The reason is that all companies oppose to them for one simple reason: protecting their profit margin. Companies will resist anything that seems harmful to their current profits. Even when the right technology is available, they tend to adopt the one that will increase their profits in the short run. This explains why green or renewable energy is facing so much resistance from the oil industry even though huge long-term benefits exist.
The last ingredient, regulation, is required to safeguard the free market from being corrupted by unrestrained profit motive. Note that heavy regulation may stifle the market to a great extent. A balance must be achieved where a reasonable degree of regulation ensures sufficient competition and transparency, while providing incentives for the development of new technology.
Who has the authority to safeguard the free market? The government should act as guardian and protector for the consumers simply because there is nobody else who can do the job. If the people elect the right government officials, better laws and regulations will provide good incentives and restraints for maintaining the free market. Failing that, the corrupt government officials will partner with big business for consumer exploitation, as seen in many places around the world. When this situation occurs, consumer laws and regulations, even if present, will not be enforced. Worse still, new laws will be written to favor big exploiting companies that will result in further weakening of the free market.