“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.” - John Maynard Keynes

Keynes was half right. It's not so much that practical men are the slaves of some defunct economist or philosopher's ideas - it's that they are the slaves to the only-half understood idea of some dead economist. Adam Smith, who also wrote about how tradesmen constantly conspired against the public good and who wrote an entire book on morals, would have been horrified by the way his passage on the invisible hand has been used to justify never interfering in markets, for example. And Marx, perhaps most succinctly, once said "I am not a Marxist".

Every era is subject to a number of bad ideas, born of badly understood philosophy (in the larger sense, where all the sciences are but offspring of the first discipline, that of the philosopher). In our era one of the worst is what has come to be known as "free market fundamentalism".

Free market fundamental is the idea that:

A free market is any market which the government does not interfere in in any fashion, except to enforce freely written contracts or actual criminal behaviour. Free markets are the best way for a society to function, both because they are the best way to create prosperous societies and because they are innately moral, being based on the negotiation of un-coerced free actors in their own interest, which they know better than any government ever could. Any outcome achieved by markets operating in this fashion is by definition a good outcome because it was achieved by free actors and because free markets always optimize prosperity.

There's a lot there that deserves to be taken apart, and I'll come back to pieces of it in other essays, but for today let's deal with the idea that government intervention is always bad for a market's optimization of prosperity. What's implicit in this is tolerance of oligopolies and monopolies.

More After the Jump

Now there are times when monopolies make sense – so called natural monopolies. Power distribution is a natural monopoly – you don't want every power company having to string power lines to each house. Sewage removal is a natural monopoly – you really don't want each company having its own set of pipes under the city. Any type of insurance which will be universal in a population is a natural monopoly because without the monopoly you don't get the advantage of actuarial benefits of scale and without the government bearing risks, government doesn't have the incentive to manage negative externalities which impact that risk (which is one reason why the government doesn't deal with many types of pollution as aggressively in the US as governments in countries with universal health care do – it's not on the full hook for their results.)

However, in general when you have a monopoly or an oligopoly what happens is rent-seeking behaviour. There is no incentive for any monopoly or oligopoly to allow any encroachment on its monopoly which it does not take a cut from. In terms of cell phone cameras, for example, most of the big 4 Telecom companies have done their best to ensure you can't just e-mail the picture to yourself without them charging you, even though technically that's a simple solution Instead they charge your for the right to send pictures to yourself. Easy access to the Internet complete with downloads is likewise forbidden, because if you could do that you could download ring tones – which they make a great deal of money selling.

The Telecom companies have likewise been quite hostile to net neutrality, overall, arguing that requiring content producers to pay for good service is only fair. Those who did not pay would get lousy service (or if the model of the wireless companies, no delivery at all).

One model to use when thinking of Telecom companies in general with, is to compare them to 19th century railroad companies. In the 19th century railroad companies controlled whether or not producers, primarily farmers, could get their produce to market. Rates for shipping that produce were generally set in such a fashion that most of the margin went to the railroads, leaving farmers only barely enough to survive (and not enough, in the case of the many marginal farmers.) There was no other game in town – there were no highways. You took the prices the railroads offered, or you went out of business.

Telecom companies provide the pipes between consumers and producers. If they don't carry your material to those consumers, you get nothing. The fact that they are not allowed to charge whatever the market would bear for that delivery – whether of web pages, e-mails, or downloads, is an immense frustration to them. What is the Internet really worth to many businesses? How much would a large bank pay to have its e-mails delivered in a timely fashion, or have customers be able to get to their Internet banking site?

Quite a bit – but the telecoms can't charge that much.

How much would you pay to have access to parts of the Internet created by people who can't pay for preferential delivery? For many readers – quite a bit. The Telecom companies would like you to pay extra for that, and not just a blanket fee.

There's a lot of profit being made by various people who use the Internet, over the Telecom companies pipes. And they want to increase the proportion of that profit that comes to them. If they were allowed to do so, of course, they would squeeze out all marginal producers and many people who do much for free. They would squeeze out the poor and the unprofitable, and create a gated web where those who have get (but pay through the nose for it) and those who don't have, get only what major producers pay to have pushed out to them.

It would be immensely profitable for them, but it would be a much less interesting Internet for everyone else – there would have been no U-Tube, no blog revolution, no Amazon and no Yahoo under this model, for example. I can't predict what sites, what services, what cool stuff would be destroyed to changing to this model, but rest assured that much of the future would never come to be.

This model, to a large extent, already exists in the wireless world, where 4 large companies control the US market. US consumers have about ¼ the choices in phones that those overseas do, since the large companies control most of the phone distribution. Web services over phones are largely crippled, not because of innate technical limitations, but because of limitations that the Big 4 have put on developers. And not just anyone can create a service that uses cell phones, because all development must be approved by any given network, and they almost nothing that doesn't give them a cut. The wireless future – a future which should have happened this decade, has been in slow motion rather than bursting out in a revolution like the 90's Internet revolution, because the Big 4 gatekeep and make all the decisions.

Let's bring this back to free market fundamentalism. Free markets are good when a problem is very complicated and too big for centralized planning and solutions. How to distribute wide varieties of goods, what to manufacture, what product will be popular, what websites to create and so on are all activities that free markets perform far better than managed ones or monopolies.

When the future isn't clear and when it doesn't involve a natural monopoly, the best way to to find is to allow everyone to try and create it. Anyone could put up a web page. Anyone could send e-mail. Anyone could and can create file sharing sites. The future of the Internet was open to everyone who wanted to try something. Many ideas failed – but many succeeded. A lot of the ideas that failed were created by large organizations, while the things that worked, like Amazon or Dell, came from people who, in a situation where there were barriers to entry, would never have made a go of it.

That phrase, barriers to entry is a key one. No market is particularly free, in the economic sense as opposed to the ideological one, if it doesn't have low barriers to entry. For competition to work its benefits, like the best product winning, or prices being kept low, and so on, people mus be able to start a business in the field and compete. The more business in any given industry, the closer to a free market the business generally is. Low barriers prevent rent seeking. Let's say that Telecom Company X is charging $20/month for service and you figure that you could do it for $14/month. If you can start up a company relatively easily, then there's a low barrier to entry. If it takes billions of dollars and/or very difficult regulatory approval, then it isn't. And if the companies know that others can't get in, then it's safe for them to keep prices higher than in a free market and safe for them to not bother with swift technological competition, because they know that no one can jump in and take their customers away.

This is especially true in technological terms. Say you thought (as many developers do) that you could create a full we enabled phone with full capabilities of using local hospots to make VoiP calls, with GPS tracking so you could always find your friends, restaurants and so on, which had a reader that allowed you to read information from local businesses. Killer app. But the Big 4 would never let you create such a thing – the VoiP calls would cut into their profits, the web would allow you to bypass many of their services, costing them money. They keep phones largely stupid and don't allow engineers access to most of the hardware, so the GPS stuff is off limits. Etc... It's not in their interest for such a killer phone to exist.

Free market fundamentalists don't get that one reason a free market is free not because it's free from regulation (though that does help) but because it is easy to enter.

Markets in many industries naturally tend towards oligopolies or monopolies. Once one is created, it's very hard to break it through competition, because of very high barriers to entry. Real free markets often require government intervention, either to prevent monopolies and oligopolies from coming into existence, or to break them up when they do. Microsoft, for example, has monopoly power in many parts of the computer industry. In 2000 the Justice Department was close to breaking it up. When Bush came in, he had Justice drop the suit.

In the 19th century Standard Oil was a monopoly, and had to be broken up. In the 20th century Ma Bell was a monopoly, and was broken up. There were some negative consequences to that, but on the other hand, it doesn't cost me hundreds of dollars to make an hour long long distance call to Europe any more.

Free market fundamentalism, by concentrating only on government regulation as something which makes markets unfree, misses the way that oligopolies and monopolies act to limit entry to their businesses; to shut down technological innovation and to increase rent seeking (ie. To keep prices high).

A free market can be destroyed by many things. One of those is government. But free markets are odd and rather fragile things. The natural tendency in many markets, as already noted, is towards market control by large businesses. Government intervention is absolutely needed in such cases, and quite to the contrary of it making a market less free; or of it reducing the benefits of a market, it is only such intervention which can assure the benefits of the market continue to flow.

Free markets are wonderful things. But left to themselves they often wind up being unfree. Those who aren't ideologues recognize that in such times and places (and the US has many oligopolies and monopolies) only the government is in a position to make markets work as they should. Free Market fundamentalism, in insisting that governments not do this, destroys the very thing it claims to protect – the beauty of a properly functioning free market. In this it is much like all types of fundamentalism, which mistake rigid rules for the actual deity they worship.