There is a huge problem in this notion of the free market giving accurate price information. The problem is the (often massive) distortion produced by sales and control efforts. It is facile nonsense to talk about a free market when it is the job of business to do its best to screw up the system to benefit the business. This manifests in advertising and information availability, (from athletic shoe advertising and breakfast cereal to pharmaceuticals).
Distortion also appears in the lack of money available to produce what people would want. And without capital to do make a product, you will never see it. Distortion also appears in the system by regulating what people want away so they can’t get it. Sure, with rare products like cannabis, cocaine or heroin, there is enough demand to overcome regulation, but those are rare. When I say something is regulated away, or eliminated by sales efforts that bamboozle buyers, I mean that the regulation or sales efforts accomplish active harm.
The pharmaceutical industry is an excellent example of this. A treatment that is effective, that must be given once, perhaps twice, is not fundable by investors because the pharma system wants treatments that people (victims) must consume daily. Violation of the drug pusher model is not allowed. (There are rare exceptions. Certain injected biologics – Enbrel, Humira, etc. last a few days. Note that Enbrel came from Amgen, an upstart that pharma initially ignored – and this drug too gets its users on a string – just like heroin.) This applies as well to the length of time that a treatment works within a day. A noted anti-inflammatory compound researcher no longer even bothers to look at compounds that last longer than 6-8 hours because pharma won’t license it. And yet, there are anti-inflammatory alternatives to aspirin, and NSAIDs, that last for 30 hours or more. There is no question that consumers would prefer one pill that lasts for 24 hours.
Another pharma example is GHB, the so-called “date rape drug”. This used to be available in stores over the counter, since it’s technically a “neutraceutical”. It produces high quality sleep. It is the only known compound like this that has zero interaction with alcohol. There have been no deaths from GHB. It has the highest margin between effectiveness and lethal dose of any known sleep inducing drug. And since the banning of GHB, its date rape competitors (produced by pharma at high prices) have flourished and continued to kill people. Rohypnol and other drug sales used for this purpose went up. Since GHB was so effective, had no negative side effects, and was cheap, the industry eliminated it using dirty tricks and PR when consumers turned to GHB over far more dangerous alternatives. Anything that cuts into the profits of big pharma’s dangerous hypnotics sales is eliminated. Note that L-tryptophan, an amino acid, which also induces sleep, though not as effectively as GHB was also banned. One bad batch containing a deadly chemical resulted in a ban that the FDA lifted only after decades and heavy pressure. And that ban was not lifted until a use patent on L-tryptophan (to treat the very condition that it was banned for) ran out. And yet, thousands of people die each year from prescription hypnotics, even from aspirin.
Another very simple example of gross distortion of the “free market” is sea salt. Because of sea salt being sold as a snob appeal product (at ridiculous price) the average iodine dose per day has dropped by half since the 1950’s. There is an iodine pump in breast tissue, and there is, worldwide, a near perfect inverse correlation between breast cancer incidence in women and daily iodine dose. Iodine has been shown to reverse benign breast tumors. In addition, sea salt has more radionuclides in it than refined salt does, although the levels are completely innocuous. The same people who go out to protest nuclear power insist on sea salt’s superiority, which is bizarre, because they are taking in more uranium and radium by eating sea salt than they are ever likely to get from the plant.
In the financial industry, an example of massive distortion is the sale of tranche mortgage backed securities in a system corrupted by lack of regulation and enforcement. Thus, huge amounts of such were sold, and the sellers knew they were selling garbage. Per case law, Chase, BofA, et al, purposely pushed loans to unqualified debtors, because they wanted those loans to fail. After making the loan, a CDS is bought, then the underlying loan is sold into a security. The loan amount is recouped in that sale, then, when the loan goes belly-up, the CDS pays off to the loan issuer, which books the insurance payment as profit. Consequently, the idea that the price of a security in the open market represents information about its value is just not credible.
Thus the notion that the “free market” is actually free, or that it gives accurate information about what people want and need is just not true. It has always been a fundamental of capitalism that as much distortion of the market as can possibly be managed is present. It has always been fundamental that those who are most successful at distorting the market make the most money. The perfect distortion is the pure con – Bernie Madoff. But there are many degrees of con, and we live in an ocean of con.
The con cannot be eliminated, but like liberty, constant vigilance and active regulation can make a big difference. With all respect due to Hayek, his ideas are founded on a false premise.