Econ 101: What is a free market? (it’s obvious, isn’t it?) – a short quiz

We all know free markets when we see them, don’t we?  Lets’ see how reliable our vision is.  Here is a short, fun quiz on the definition and properties of free markets:

  1. What is a “free” market (select all that apply – “all” and “none” are time savers)?
    1. A place where I can get all the free stuff I want.
    2. A place where I can buy stuff without having to pay for admission to it
    3. A place where I can buy any anything I want without government interference
    4. A place where I can sell any anything I want without government interference
    5. All of the above
    6. None of the above
    7. What is a perfectly competitive market (select all that apply)?
      1. A free market
      2. A place where the winner takes all or almost all, like a golf or tennis tournament or the Super Bowl
      3. A place where no buyer or seller can set prices as they see fit, but, must take the price they find there.
      4. A place where there are very many sellers and just as many sellers
      5. A place where the price of everything equals its economic cost (which includes a competitively determined level of profit)
      6. A place where everybody knows everything that everybody else knows and knows that everybody knows it.
      7. None of the above
      8. All of the above
      9. Which of the markets listed below are perfectly competitive (select all that apply – “all” and “none” are time savers)?
        1. Health care products
        2. Health care services
        3. Personal computers
        4. Software operating systems
        5. Transportation
        6. Petroleum products (oil, gasoline, plastics)
        7. Firearms
        8. Labor (including professional services)
        9. Chinese food
        10. Prescription drugs
        11. Over-the-counter drugs
        12. Insurance (any kind, such as flood or medical insurance)
        13. Toys
        14. Database software
        15. Accounting software
        16. Internet search engines
        17. Broccoli
        18. Beef
        19. Beans
        20. Barley
        21. Beer
        22. None of the above
        23. All of the above
        24. Free response:  If you can name a perfectly competitive or free market,
          1. Name it here:__________________________
          2. Is it free or perfectly competitive (select one or both choices)?

i.     Free

ii.     Perfectly competitive

iii.     Both free and perfectly competitive.

  1. I can’t think of one right now
  2. There are none

Answers:

  1. d
  2. c, d, e, f
  3. v
  4. d

The notion of a “free” market is nonsensical; “free” is a misnomer designed to persuade us that there is such a thing.  It isn’t even a useful fiction.  It’s used, like “unicorn”, as a rhetorical or storytelling device.  Like “the second king Charles of France”, the phrase, “perfectly competitive market” denotes nothing.  The notion of a “perfectly competitive market” is, while not nonsensical, a fiction that is used to tell a story of human behavior.  It appears to be useful because it involves mathematics and has a mathematical apparatus.  This apparatus is supposed to express our intuitions about perfectly competitive markets precisely.  It reminds me of the (apocryphal) story of a doctoral student in Mathematics who proved a theorem using functions the domains of which were empty.  The theorem had, therefore, no range of application; it was related to nothing.  The idea of “perfectly competitive markets” has no range of application because its domain of human behaviors is empty.  People and markets just aren’t as the theory presupposes; it fails to explain any human behavior, either individually or aggregated.  This inference is evident from the fact that the predictive record of economic theory and economists is terrible.

 

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3 Comments

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3 responses to “Econ 101: What is a free market? (it’s obvious, isn’t it?) – a short quiz

  1. Pingback: Econ 101: What is a free market? (it’s obvious, isn’t it?) – a short quiz | A Keen Grasp of the Obvious

  2. Mark

    Just another exercise in useless blathering. We can all agree that the term “free market” in practice is not absolute. It IS, however, a useful concept as we debate the DEGREE of freedom in the market.

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  3. Mark: You missed the point, completely. The underlying point of this exercise is that there are no free markets and none of the markets on this list are close to being “free” (if we mean perfectly competitive), hence, the simple supply/demand model that we all learned in chapter 2 of econ 101 have no application. Using the logic of supply and demand in perfectly competitive markets is an obstacle to understanding how markets work and what economic outcomes of government policy are likely to occur. There are other useful models and much is known about how they work.

    Argument about “free” markets is useless blather about an abstraction only . It’s a smoke screen used by some political operatives, elected officials and businessmen. For example, most econ 101 professors and textbooks teach that setting a minimum wage reduces employment and the net economic value to society is negative – everyone is, as a whole, worse off, if there is a minimum wage. Politicians, lobbyists, and voters will behave one way if they accept this argument and a different way if they don’t. That having a minimum wage is detrimental to total economic well-being may be true, but, this conclusion is not supported by arguments based on the theory of perfectly competitive markets alone. You need empirical evidence as well as theoretical support. In fact, there is no evidence that the existence of minimum wages affects GNP either way.

    Knowing the DEGREE of freedom in a given market, in particular, is useless information. What would you do with that “knowledge”? Is a market’s relative “freedom” an important decision variable in deciding how to regulate or deregulate it or whether to grant special tax status to its participants? No. What ARE the important variables in such decisions?

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