The free market often sounds quite simple and straight forward. Consumers simply decide whether product A or B benefits them more and then choose accordingly. If the same or similar product is sold by shop A or B consumers simply choose whichever is cheaper, better quality or otherwise benefits them. It is easy and doesn’t require any complicated plan or someone telling consumers what is best for them, people simply decide themselves. This is the market as described by economists, politicians and writers, especially when they are trying to make a political point. After all, if the market is so simple and straight forward, why do we need the government interfering? All these rules and regulations only get in the way, surely it is better for everyone if we just leave the consumers to decide for themselves.
The road to Hell is paved with good intentions and although this sounds like a completely reasonable idea, it is completely unworkable in reality. As tempting as it is to simply remove regulations and let people figure it out for themselves, the free market is not simple and straight forward. It is an extremely complex mechanism that none of us fully understand. The biggest reason we shouldn’t remove regulations is because simply do not have the time.
Let me use an example. I once went to the shops to buy some bacon. In my economics classes this was always presented as a simple affair. I would just compare two types of bacon see which was better (in terms of price or quality) and choose whichever gave me the most utility. However, when I came to the aisle, to my surprise, I saw that there were 40 different types of bacon. There were different sizes, different brands, different parts of the pig etc. How was I supposed to know which was best? Perhaps I could give each one a taste test and rate them accordingly and devise a system that combines taste and price to calculate the most efficient option. But I would have to cook each piece identically with similar food in order to give a fair test and perform it more than once, to avoid the risk of getting an unusually good or bad piece. Needless to say this would be an enormously time consuming task that would take weeks (by which time need bacon products would probably be released) and no one has the time for.
Yet this is only one product. Supermarkets contain thousands of products that all must be considered, compared and a decision made on them. I am a skinny lad with incredibly unimaginative tastes in food (I’ve never cooked myself a meal with more than three ingredients) who only shops for myself, yet a full shopping involves buying 30-40 goods. More imaginative people and those with families have even more decisions to make. Plus there is also all the other goods you decided not to buy, meaning that doing the shopping involves over a hundred decisions and hundreds of comparisons. All of this occurs in one supermarket but there are also a dozen others that you could go to instead (also containing hundreds or thousands of products) further multiplying the calculations that could be made. No human has the time or willingness to do a full and comprehensive comparison of all the economic costs and benefits.
So what do people do instead? Sometimes they just choose randomly. As an economics student it always struck me as odd that I was spend all day learning complex equations that supposedly related as to how consumers made their decisions and then randomly choose what to eat for dinner. Most times, people just buy the same product they did before. Or they’ll choose one with nice packaging or that they recently saw an ad for. I usually buy the cheapest.
Although, this might seem a bit obvious or even trivial, it has serious consequences. The core principle of the free market is that the invisible hand guides it to the most efficient outcome. It is assumed that consumers know what is best for themselves and act accordingly. Consumers buy the goods that benefit themselves the most, thereby rewarding the businesses that are most efficient and innovative. Consumers are supposed to avoid the inferior products, thereby punishing less efficient businesses, forcing them to improve or go bankrupt. Prices adjust in response to consumer actions and thereby guide the economy to the most efficient use of resources. However, if it is impossible for consumers to choose which is the best, then the system doesn’t work. Businesses that make shoddy goods can continue in business while innovative and efficient businesses can fail to succeed.
But if the goods are shoddy, why would people buy them a second time? Again this comes down to time and our brain. Honestly, a lot of the time I don’t remember what I bought last time or its quality. People don’t have the time or the patience to stand in the aisle, conjure up a list of all previous times they bought each brand and compare which satisfied them the most. The fact is that I’ve repeatedly made mistakes and not learned from them. Even if a product wasn’t good, that doesn’t mean the others are.
The worst part is that all these problems exist under the current system of regulation. Imagine if instead, we removed regulations and added even more calculations that must be made. So instead of the current system, where there is some of assurance that the workers who made your product had somewhat decent wages and working conditions (although globalisation is undermining this) minimum wages and labour laws were abolished. Now instead of just comparing the price and quality of the products, you also now have to compare whether or not they exploit their workers, to what extent and how much you care about this. Even getting this information would require every consumer to be something of an investigative journalist or at least very well informed on the labour conditions of every company they buy from.
Or consider environmental laws. It seems reasonable to leave this up to consumers and let them decide if they want to stop buying polluting products and such to organic and environmentally friendly. But every product has something of an environment footprint, which is very difficult for consumers to calculate and even harder to compute. Or imagine if consumers had to determine whether animals are treated sufficiently well without needless suffering before killed for food. Or if health laws were repealed and consumers themselves would decide whether their food was made in sufficiently sanitary conditions and free of disease. Or if the advertising rules were removed and consumers had to wade through company propaganda to figure out the truth about their products.
Some people say we should remove anti-discrimination laws and simply let consumers decide if they want to buy from racists. After all, who would buy from an openly racist shop? However, it can be very difficult to get information about the inner workings of a business, such as how they pay their workers and the ethnic, gender, religion breakdown etc. How is a consumer supposed to know whether the white male manager got his position due to his skills or identity? If a business has only a handful of black employees how is a consumer standing in a supermarket aisle supposed to know whether this is due to racism or a lack of qualified applicants? Nor is discrimination a clear cut issue. What if a business is positive towards ethnic minorities but not women? Or gives opportunities to people from disadvantaged backgrounds but won’t hire Muslims? What if they are discriminatory in favour of my people? (I once worked in an American company that only hired Irish people which certainly had advantages for me.)
So without regulations the already complicated decision of picking which bacon to buy, becomes exponentially more difficult. Now I have to compare the 40 or so brands based on their relative price, taste, quality, risk of disease, treatment of animals, environmental impact, working conditions, sanitary conditions, attitudes towards minorities and women, both in terms of willingness to hire, pay an equal wage and promote, nutrition, origin (people like to support local businesses), honesty (is this actually bacon?) and a dozen other factors I have probably forgotten. Needless to say your brain would melt if you tried to calculate all these factors (assuming you had all the information you needed), so instead people pick one or two that matter and ignore the others. This means that I’ll buy the cheapest, even if the workers aren’t treated well or the quality is shoddy. So contrary to what some would have you believe, consumers don’t have the power to compel businesses to act as they wish and the threat of switching brands merely means switching some disfavourable factors for others.
This is why regulation is actually helpful to consumers and simplifies life. This might sound odd and contrary to what you’ve always heard about regulations, so I’ll repeat it. Regulations simplify decisions. When I go to the supermarket, I know that the products have to meet some basic standards such as health & safety, environmental impact and working conditions. This means I don’t have to worry as much about it and reduces the number of factors by which I judge products. By standardising other factors, I am freed to focus mainly on price and quality, which makes comparison and competition much easier to determine. It also means this is where businesses have to compete instead of undercutting each other where consumers don’t see.
So contrary to what most people think, removing regulations would actually complicate, not simplify our life. No one has the time to make the endless calculations that are necessary for a completely free market to function.