Free Market Competition: With or Without Rules?

The free market exists in two places: one in your mind and the other in the real world. The mental model always works because that’s how you think it will work. The real world model depends on many factors beyond your control, even your awareness. Despite all the complexity, one fundamental ingredient is sure to make the free market work: free competition governed by the right kind of rules.

What do we mean by free competition? Does it mean no rules? The absence of rules can never make the market free. It only makes it wild and lawless. On the other hand, too many rules will suffocate the market to death. Suppose a football game has no rules, it won’t be a sport anymore. Spectators will not watch a game where no fair play exists. Hence the answer lies in the right prescription of rules, not the absence of rules.

In the business world, the situation is similar to sports but much more complicated. Big corporations always advocate minimum rules and regulations. How can they get away with this argument? Easy! Just use job creation as a smoke screen to attract public support because no one dislikes jobs. It’s not hard to see through their motives. They want a free hand to crush the competition, not a free market. Nobody likes competition because it cuts down profits despite benefiting the consumers and society as a whole.

Competition in the business world must be viewed objectively rather than emotionally. As in real life, a cruel condition of Darwinism exists in business. Simply put, business is about survival for the fittest, with the consequence that the strong eat the weak. Is that desirable? The first part always brings out the fittest. The second part will create problems because the smaller or weaker competitors will be eaten eventually if not protected. What will happen when small competitors are marginalized? If you are a consumer, you should worry because prices will rise without competition.

In the business world, everyone should be allowed to compete initially so that the fittest will rise to become stronger and bigger. The problem now emerges when a company becomes big enough. It will try to protect what it has gained by fending off the competitors. It will also try to crush them using its newfound wealth. After having traveled the tough road, the big company does not want to compete anymore. It tends to rest on its laurels and find an easy way to survive. How? It will try to increase its market share through all kinds of predatory practices with an eye on the ultimate goal: price manipulation or even monopoly to achieve maximum profit.

When you become big, you will find most things in the market suddenly working to your advantage due to better assets such as cash, hired talents, market share, brand name, and the ability to integrate both horizontally and vertically. In spite of those, the most tempting act is to bribe government officials to make laws and regulations in your favor against the competition. Why bother to compete if you can afford the easy way out?

Bribing government officials to protect self-interests is the common thing that a big corporation likes to do. There are many ways to do it, legally or otherwise. The only requirement is to do it quietly and discretely. The collusion between government and big business is the worst combination threatening the survival of the free market. That is why written rules and regulations are required for everybody to see. Besides, the media should also be encouraged to expose any corrupt or predatory practices. The purpose is to preserve free market competition, and prevent the small competitors from being eaten by the big ones. By safeguarding free competition for all, the right prescription of rules injects vitality into the business system to benefit both small and big companies.

Maintaining free market competition is much more complicated than we think. If left alone, the market can never develop to be totally free in the dog-eat-dog environment. On the contrary, the fittest company will survive from the start. They will grow bigger due to the advantages of size. Then they will become complacent after marginalizing other competitors. They will also corrupt the government in exchange for favors, an act that government officials quietly invite. It’s animal instinct playing out in the real world. After having reduced the competition, the big firms will turn to the consumers and raise prices. To prevent this eventuality, we want a free market governed by a framework of rules and regulations to level the playing field, to protect the small from being overwhelmed by the big, and to benefit the consumers and society as a whole.

Therefore, the relevant questions are: How much government control is needed to foster the free market? And what kind of rule is appropriate? This complex challenge should not be mindlessly reduced to whether or not we need rules or regulations. Of course we need rules! We only deceive ourselves by employing the crooked simple argument that less regulation will create more jobs. This is the argument long used by big business as a smoke screen to seduce popular support. They want a free hand to crush competition with their financial power. They don’t want a free market where everybody competes on level ground.

To safeguard free market competition, only a few fundamental ingredients are required. These are: no artificial barrier for small companies to enter into any business, no discrimination in financing based on size or brand, no barrier for seeking recourse against predatory practices, strict anti-trust review of big companies’ mergers and acquisitions, encouraging the media to report corruption, and finally, wholehearted embrace of new technologies.

Note that the last ingredient is the most powerful in fostering a free market. New technologies obsolete existing ones and weaken entrenched interests while they create new opportunities. In addition, new technologies force every company, big or small, to stay competitive. Even big established firms are brought to their knees if they fail to stay current with the times. This is exemplified by the information revolution we are seeing now. The creative destruction brought about by information technology has invigorated all companies to compete. It’s all about how fit a company is, rather than how big it has become.

(June 2012)

This entry was posted in Business/Investment, Economics/Politics, Inspiration. Bookmark the permalink.

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