The 1980’s was an important era in the history of economics and the world. With the election of President Ronald Regan in the United States and Baroness Thatcher of Kesteven as Prime in the United Kingdom, economic policies in the West underwent a major overhaul. Subsequently, international institutions made these policies a prerequisite for granting loans to the countries that were on the brink of bankruptcy. The policies that I am talking about are the neo-liberal economic policies, and the framework they are built upon is the fundamental assumption of the efficiency of free markets. Every undergraduate economics student is taught that leaving markets to function without any intervention by the State will accrue benefits to the society as a whole. This article is an attempt to look at why free markets are not so free and why they do not always lead to the best of outcomes.

Every transaction takes place with an implicit assumption that the other party will uphold their end of the bargain. If that does not happen, they are likely to approach the police or courts for justice. This tells us that to function freely, markets depend on some rules and regulations. The rhetoric around the free markets often fails to appreciate these rules because they are taken for granted. In fact, for the markets to function, property rights need to be clearly defined and enforceable. Therefore, it is absolutely correct to say that government laws, rules and regulations create scope for the markets to function and form the basis that drives competition. Then there are patents. Though there are strong arguments as to the requirement of such laws in place, they themselves act as obstacles to market freedom. Patents can lead to situations where the goods are out of reach of those who value (value here is not in terms of the amount paid but in terms of necessity) them the most. Gleevac, a leukaemia drug, is a case in point. The cost of this drug in the US is $70,000 since Novartis, the company that manufactures the drug has a patent in the US. Thanks to the refusal of the Supreme Court of India to grant a patent, it is available for $2,500 in India.

Another problem with free markets is that of ‘asymmetric information’. Asymmetric information arises when one party (typically the seller) possesses more information or knowledge about goods or services being sold. One common example that you will come across is about how the buyers of health insurance have an incentive to conceal their health information to get a better insurance deal. This example portrays how the sellers are at a loss. But today, you see almost every insurance company has a physician only from whom you are allowed to take a medical checkup. For a more general example, consider a clothes shop or a tech gadget shop. Old stock is prominently displayed so as to dispose of the stock and in such situations, the seller has more information than the buyer. Of course, there are resources available today that help bridge the information gap, but still the problem is more commonplace than we all think. The economic theory treats this asymmetry of information as an anomaly — one of the three instances of market failure. What it fails to recognise is that this phenomenon is not an exception, but a ubiquitous conundrum.

The inherent characteristic of the free markets, that has hardly ever been a part of the public discourse, is that they are indifferent to human needs and provide only those goods and services that are profitable. Take, for example, the case of Google. Over the years the search engine giant has altered its webpage to show pre-packaged information when we search for something, rather than sending traffic to other websites. This may not affect you or me directly; but will result in the loss of customers to many businesses, whose business models rely on Google sending traffic to their websites. Another example is the pharmaceutical industry. During the initial stages in the coronavirus outbreak in February 2020, Rolf Hilgenfeld, a structural biologist, told the scientific journal Nature, “The total number of people infected, if you combine SARS, MERS [previous related coronavirus outbreaks] and this new virus, is under 12,500 people. That’s not a market. The number of cases is too small. Pharmaceutical companies are not interested”. Though the trails for a vaccine are underway, one cannot miss the larger point. One more example is the Indian realty market. Despite the requirement of an additional 20 million houses, there is no sign of falling housing prices. This is partly because the developers prevent a fall in price in anticipation of a boost in demand in the future. Sometimes, by delaying construction, they demand higher amounts from the buyers to complete the construction. The end result is, despite a huge population without their own houses and large inventories held by realtors, the market is unable to satisfy the needs of the end-users.

By this time, you might have come to the conclusion that I am a communist; I am not. What I am trying to get across is that while free markets benefit society in many ways, there are also many faults associated with free markets. Even as free markets provide what most people want, they will deceive, manipulate, and tempt us into buying things that might be harmful to us. Renowned economists George Akerlof and Robert Shiller said, “Markets are not benign forces working for the greater good but instead are filled with businesses that ‘phish’ by exploiting our weaknesses to get us to buy their products”. From the 1980’s, in many countries across the world, the role of the state was cut down, paving ways for the ‘free markets’ to operate. There has been little debate about the flaws in the free market system and economists fail to acknowledge the problem. The failure in understanding the markets will only result in the formulation of bad policies. The failure to rectify the existing problems will tilt the markets to work in favour of a few and will result in wide sections of society being worse off. The capitalist system works well not just because there are free markets but also because there are a wide range of institutional arrangements that act as checks and balances on these markets. It is important to recognise that the state plays as important a role as the markets to bring the economy to equilibrium. Finally, there is nothing wrong with wanting free markets; but to think that they can’t go wrong is a mistake.