Free markets, perfect competition and monopolies


Simon Jenkins writing in Guardian yesterday, makes a claim that “Nobody but a fool believes that a free market in anything, left to its own devices, will tend to perfect competition. Economic history attests that it tends to monopoly." Scratch the surface and this argument adds up to very little and as a consequence, so does his demand that politicians need to regulate the banks better.

Mr Jenkins makes two crucial errors. The first is obviously his conflation of free markets with perfect competition. All markets are human and are by that attribute imperfect; this does not mean we need politicians and regulators to step in, history attests that they make matters worse. We could do with better education so that people can make better decisions more of the time, but seeing that the state has a near monopoly on teaching we can't expect that any time soon.

The second error Mr Jenkins makes is his statement that free markets tend to monopolies. This is wrong. Regulated and politicized markets tend to monopolies, while free markets tend towards competition, perhaps not perfect competition, but competition nonetheless. With regards to the specific case of banking that Mr Jenkins tries to tackle in his article, though not a monopoly, it is regulated to such a ludicrous extent that the barriers to entry are too high for newcomers to enter the market.

In general Mr Jenkins takes an illogical approach to the issue of government and regulation. If he is writing about small businesses he wants less regulation, if it's big businesses he wants more. However, he fails to acknowledge that the reason many businesses are so big is down to the regulation itself.