The Limits of Free Markets

Let me say to start this off, I am in no way “anti capitalist” or anything of the like. I am, in fact, a pretty avid supporter of the free market approach to economics. However, I recently remembered a remarkable Idea, which made me contemplate the limits of free markets, the Pareto Principle.

The Pareto distribution or more popularly known as the 80/20 rule states that in any given system 80 percent of the outcome is generated by 20 percent of the causes. That is common knowledge in the business world, suggesting that the rule is especially true in corporate settings. There it is just another fact of life that 20 percent of workers will produce most of the outcome. Accordingly, resources are managed to support those 20 percent of workers.

This reality gives rise to the question: “Can this pattern be observed in other aspects of life?”

It can.

This rule is so fascinating not because of its usefulness in business settings, even though the circumstance contributes to the allure of the idea, but because of its universal range of application.

It can be spotted in the distribution of stars, land ownership in Italy and, as the Headline suggests,the distribution of wealth.

Indeed, the distribution of wealth to the most capable individuals and effective causes does not seem too complex a concept to grasp. One should after all put their bet on the fastest horse, or in this case the upper crust of the distribution in terms of productivity. It would offer the most returns for not only you, but the entire community.

In that vein hierarchies have been natural among humans and animals alike. Here is where the ancient problem arises. When there is a top there also must be a bottom. When someone gets lots of money someone gets little.

What this means for modern society is that a free market will always cause a hierarchy on the basis of whatever the system values and the more liberal the market the steeper the hierarchy, those hierarchies in turn will inherently bring with them inequality.

Though the hierarchy existing and inequality for that matter, is not problematic, two factors can make it so.

1. Existence at the bottom of the hierarchy being unbearable

2. the Hierarchy eventually turning stiff

In theory, when the right values are adopted and the bottom of the hierarchy still makes for a good life everything is fine, maximum growth and good living conditions for everyone are united. This would also represent the perfect balance between social regulations and harnessing the power of the pareto distribution, or political left and right.

An argument one could make against an unregulated market is that the massive growth will carry the bottom class with it. In my estimation, however, that would not be true. For such an outcome might be true for the middle class, analogous growth would cause the standards for providing value, previously unattainable, for the bottom of the distribution to just keep on rising, creating an even bigger gap. The disparity would keep on growing given that providing value for someone who cannot compensate you is a bad deal, leading to a seperation of lower classes people from the economy. Such an effect can be most closely observed in the feudal age, only that in the feudal age growth was stagnant since in the feudal age, the aristocracy deliberately stopped growth to keep their place in the distribution. In our scenario the bottom class would completely be cut off from the economy since the mentioned lowest standard for creating value would exclude them, making them unable of even the cheapest labour.

Conclusion

The Free Market is a powerful force and I remain an advocate of a partial free market, but with great potential for good also comes great potential for the bad.

Similarly the power of the free market, which ultimately is natural selection, may provide us remarkable growth but the cost of that growth is, like in nature, the sacrifice of the weak. A totality we as social creatures have hopefully outgrown.

note: I mentioned a “perfect balance” previously, this is to be understood as a idealistic example. I want to emphasize that I do not believe in such a utopian system and that I consider such aspirations highly dangerous. The answer, for me, is to be found in a constant, honest and free political discourse.