Sunday, August 30, 2009

Observations and Distortions

A recent post of mine over on the Blog at

Observations and Distortions

Jim Fedako

A free market provides for the wants of the consumer by utilizing scarce resources in a manner that becomes more efficient over time. This is always true -- in a free market, that is. But when we observe the market and assume it is free, we tend toward conclusions that are not true. Consider this situation:

Each Friday I observe the garbage trucks working their routes through my neighborhood.[1] Each truck is manned by one employee. These men serve as both driver and loader. A laborious and slow task to be sure. Now, if I assume a free market, I will believe that I am witnessing an efficient utilization of capital (truck) and labor (driver/loader). But is that true?

First off, the refuse company has an exclusive contract to serve residents throughout my township.[2] The company's competition is political based, not market based. So the company is likely not as lean and mean as a free market would demand.

And then there is minimum wage. It could be that the company would hire a separate loader at some salary less than the current and future minimum wages.

Finally, there are the host of laws and regulations that dictate how capital and labor are employed.
So, I observe something every Friday. Is it an efficient utilization of scarce resources? Not a chance.

I try to keep this in mind every time someone talks about failures of the free market. My first question is always: Which market is free?

1. Due to township mandated recycling, the refuse company must run three trucks through my neighborhood: one for yard waste; another for recycling; and the final for everything else. We, the residents pay for this "service."
2. Absent the exclusive contract, the refuse company would utilize resources as efficient as possible given the remaining governmental interventions in the market -- minimum wage included. But that employment of capital and labor would still not be efficient when viewed from a free market perspective.

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