A number of issues come with a system based solely on free market economics—that’s why we don’t have one. Ours is a mixed economy where government through regulation, production, and social welfare co-exists with the private sector. Yes, the majority of outputs still come from business but we have public involvement to address issues like security and stability (the tricky stuff).
Regulations
The theory of capitalism rests heavily on the notion of competition. That if company A makes a better widget than company B, they’ll attract more customers and then company B must either adapt to this new condition or perish. The net result is better value for the consumer and better efficiency for our system. The competition model works well because business, in its quest for survival and profits, will always try to outmaneuver the other guy. Without competition where is the motive to get better or cheaper? That’s why governments don’t allow monopolies. And if circumstances dictate one is required, they run it themselves.
In theory land, free market thinking supposes that once prices soar under a monopoly, companies in other industries will be attracted to enter the market, thereby reinstating competition. Sure, this might work in the long run but how long can we wait? And depending on the complexity of the industry, competition may never come. Businesses too, wish for competition because companies are also consumers, so monopolies hurt them equally as well. As you’ll soon see, total price is a determining factor in overall sales. So even if it is a level playing field with all companies paying monopolistic input prices (say, for plastic), my business still gets hurt because the whole market diminishes. For example, if every company’s I-pod is priced at $1,000 instead of $100, people buy less I-pods.
Same goes for regulating safety standards and minimum wage. Today’s common wisdom dictates that an external body is required to insist upon rules being followed because business, through a total free market system, cannot always regulate itself. Total free market theory says if company A provides window washers with safety equipment, they’ll attract the best workers. But rather than wait for a bunch of guys to fall off a platform, we chose instead to force companies into buying workers a harness. And if this increases the cost of having windows washed—so be it. We don’t need efficiency to be perfect. Likewise with employee wages, ethical companies are handcuffed by their directive to maximize profits. So if they can get away with paying less—they must.
Production
It’s always an argument whether government should be involved in producing goods or services. Proponents think it’s a great idea because, in theory, this keeps taxes down. Opponents (i.e., free marketers) say the business world is not the government’s space. But there is one instance in which everyone agrees where governments must get involved and that’s when circumstances carry with them extremely high investment and risk. Take for example, the Canadian National Railway. How could any company get financing for such a massive project that carried such huge risk? Did anyone really know how much it would cost and whether people would use it? So projects of this nature are always started by the government—essentially as monopolies. Examples include not only CNR, but Air Canada, utility companies, and many instances involving natural resources.
Now once an industry can stand on its own—with viable competition—free marketers say it should. And we’ve seen this through the privatization of most telephone companies and utilities (e.g., AGT and BC Tel becoming Telus). Many have gone well but some have become disasters (those privatized before their time or not conducive to competition). CNR is now successfully private since the huge risk is gone and competition is provided by trucking companies and airlines. So we can argue over whether provinces should own their own liquor stores and operate insurance companies, but everyone agrees that it’s the government’s role to get certain industries off the ground.
Social welfare
Every economist knows that capitalism brings with it inherent brutalities. That as competition rewards Company A with greater market share, Company B falls. You might think employees of Company B just go work for Company A, but what if they’re in different cities?
Economies have natural ebbs and flows. Sometimes we’re at full bore and sometimes you really can’t find a job. That’s why we invented employment insurance. It’s not welfare for people who don’t want to work, it’s a social program to bridge the gap between previous and future employment. And it’s essential when the market naturally crashes. Do people sometimes take advantage? Sure, but people also cheat the private insurance industry. So what’s the difference? EI was introduced to curb part of capitalism’s inherent brutality and the overwhelming majority of free marketers support it.
Likewise with social security (public pensions). Early capitalists insisted that people take financial responsibility for themselves and provide for their own future. But it quickly became apparent that most people don’t have the necessary skills. Too many of us were entering our senior years without anything for savings, and how was anyone to correct poor past behavior when they were at their financial weakest? Society, through government, chose to force people into retirement savings. And the forcing part, along with pre-determined outcomes, meant they had to be administered by the feds. Free marketer rumblings soon silenced once everyone realized there had to be forced “pay ins” and dependable “pay outs.” (Most countries, like Canada, have a hybrid model where public pensions provide you with something and you’re on your own for the rest.)
Summary
We don’t have a totally free market system. No country does. We have a mixed economy, where government plays a significant role. Total free-market economics is a theory, and just a theory. It doesn’t work in common practice. Practical free marketers believe in some government regulation, some government production, and some social services (like, employment insurance and public pensions). The difference is they don’t believe in excessive regulation, unnecessary government production, or questionable social services. And this position is perfectly justifiable.
Note: CNR wasn’t actually started by the government but I’m sure you get the point. CNR was the result of government buying up private railways that went bankrupt, and was later privatized.