On free markets

Jawaharlal Nehru had once said “Why do we need 19 brands of toothpaste?

So, I thought about this for a while, since it is a fair question. Producing 19 brands of toothpaste is enormously inefficient. It requires many people doing accounting, marketing and other housekeeping activities which are resources you could divert into the production of other goods and services. Then I realized why : “It eliminates corruption” ( among other inefficiencies ).

I am yet to see a good systemic solution for government corruption. One common solution proposed is to put people to watch the government officials to check if they are corrupt. But of course the problem here is that it creates a new problem : who will watch the watchers ?

Free market is a solution to this problem. Imagine a toothpaste company ( say “Colgate” ) trying to make toothpaste. It requires the supply of 100 Kg of Calcium Carbonate from the rocks in a nearby quarry. The quarry owner agrees to sell this to Colgate for $100. Imagine the supplier in charge of securing the raw materials instead asks the quarry owner to charge the company $200 so that both of them can pocket $50 each. This cost would in turn be borne by the customer purchasing the toothpaste. However, in this case, another company ( say “Pepsodent” ) may be able to obtain the same quantity of Calcium Carbonate for $100 from another quarry and the sell their toothpaste for a lower price. Given two packets of toothpaste with exactly the same quality which one would you choose ? Surely the lower priced one. This should put Colgate out of business and thus end this instance of corruption. Therefore, this provides a systemic incentive to end corruption.

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4 thoughts on “On free markets

  1. Now imagine a world where the government has monopolised toothpaste by force and it provides ‘free’ toothpaste paid for by taxation. This has been going on for several generations and is considered ‘just the way things are done’.

    Because there is no competition they have spent all our toothpaste taxes on bigger government and lots of wars and now they are so in debt they are cutting back on our toothpaste allowances while raising taxes.

    All we can to is write “This is sooo unfair” on cardboard signs and take to the streets. But if too many people do this they will just hire thugs to pepper spray everyone (all paid for by our toothpaste taxes).

    Then someone suggests “Why don’t we just buy our own toothpaste voluntarily and let the free market provide it for us peacefully?”

    At this point a thousand billion people say in unison “But we couldn’t do thaaaaat! That would be anarchy!”

    1. Are you saying :
      (a) It only appears that free market is the best way to deal with this problem because that is how it has been for many many years ?

      or

      (b) People are hesitant to believe that giving them freedoms like ‘choose your own fate’ is a good idea that can lead to good outcomes ?

      By the way, I come from a part of the world where a communist party routinely wins elections and has a fair amount of public support.

      1. B 🙂

        People have been brainwashed into believing the way to keep the world safe and fair is to give a small group of people a monopoly on the legal right right to initiate force and steal property.

        In our daily lives (business and personal) we all understand why this is a very, very bad idea. We’d never employ somebody or do business with somebody without proper a two way contract. We’d never agree to let them point guns at us and demand money (or sex or our obedience) whenever they feel like it.

        But when it comes to anything connected to ‘governments’ all of that logic goes out of the window.

        Government is just another religion of control. They start telling is ‘government’ exists and is good at age four in schools. But, like god, government does not exist only people exist.

        Government is just a bunch of people pointing guns at everyone, stealing their stuff and saying “If you behave this way it’s bad, but when we do it it’s good”.

  2. @Spinning For Difficulty:
    Thanks for commenting. I think you may have meant (b).

    I do not want to get rid of the government, it does serve many useful purposes. Your own reasoning points out the necessity of contracts which can only be enforced by a government.

    However, since there is no way to check government power abuse, I do agree that the government should try to limit itself as much as possible. This principle is called Small Government ( http://en.wikipedia.org/wiki/Small_government ).

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