Wal-Mart and the “Free” Market

Think Wal-Mart’s the epitome of a functioning free market? This article from Forbes argues otherwise.

The big buyers and sellers tend to throw their weight around. Some have deeper pockets. Some devote more time and resources to getting better information, or lobbying to keep protective barriers in place. Otherwise, there would be no need for laws proscribing trading on insider information, monopolies and bribing rule makers and lawmakers.

Yes, The Market’s Unfair [Forbes]

Everything you’ve heard about the virtues of competition in markets--and about how supply and demand work in concert to set the proper prices for goods, services and securities--is irrelevant. There are no perfectly functioning markets outside of the imaginations of economists.

In a perfect market, no buyer or seller should be able to set prices. In practice, this happens all the time. OPEC has near unilateral power to set oil prices because its members control so much of the world’s oil reserves. Wal-Mart, as a large buyer of manufactured goods, has vast power over its suppliers and can force them to lower prices. Proposals that the U.S. government should buy medicine in bulk from the drug companies, leveraging the purchasing power of everyone on Medicare and Medicaid, frighten the entire pharmaceutical industry. Buyers can exert monopoly power too, when they’re large enough.

In theory, markets participants are all equal. They all know everything about what’s being bought and sold, and they all have the equal ability to buy and sell. In reality, markets are power struggles between buyers and sellers of varying size and influence. Some know a lot, some know little. Markets are also populated by cheats with insider information (and that’s perfectly legal in most markets, just not in the stock market) and people who can make demand seem greater than it is by controlling supply.

The big buyers and sellers tend to throw their weight around. Some have deeper pockets. Some devote more time and resources to getting better information, or lobbying to keep protective barriers in place. Otherwise, there would be no need for laws proscribing trading on insider information, monopolies and bribing rule makers and lawmakers.

There are a few situations where our commercial transactions at least approximate the ideals of the economics textbook. A large farmers’ market is one. All the goods are on display, people are perfectly capable of deciding whether or not an heirloom tomato is worth an extra dollar, and haggling is acceptable behavior. EBay is a higher-tech version, though given the number of fraud claims the online auctioneer generates, it’s hard to argue that information is “perfectly shared” on the site.

The stock market is such a good approximation that most economists believe that it efficiently prices all of the stocks traded on it in the long term. But we know this isn’t true in the short term. Large institutions like pension funds, mutual funds and hedge funds can force stock prices up or down based on their trades, so they sometimes set the prices and everyone else just has to live with them.

Economists know markets work best when all participants are of a roughly equal size. If we could eliminate retail investors from the stock market, for instance, we’d have a purer market, since all the buyers and sellers would be on a more equal footing. A stock falling because Fidelity sells it would be buttressed by Vanguard buying.

Wall Street firms have their own, walled-off perfect markets, called electronic communications networks, or ECNs. There they can trade stocks and currencies among themselves, often anonymously, without their trades moving the prices the way they would on the open market.

In the end, all of the inequality in all markets, whether for stocks or used cars, has one good effect--it means that getting a good deal, an undervalued stock or a used car that’s really a classic can happen. In the perfect markets of the economics texts, it’d be impossible to make a fast fortune.

Posted by Research Team on Friday, May 09, 2008

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COMMENTS

"The stock market is such a good approximation that most economists believe that it efficiently prices all of the stocks traded on it in the long term. But we know this isn’t true in the short term. Large institutions like pension funds, mutual funds and hedge funds can force stock prices up or down based on their trades, so they sometimes set the prices and everyone else just has to live with them.”

Type in Plunge Protection Team into your Google search engine and begin to know what is really going on to manipulate stocks and prevent deep market corrections. The PPT was formerly known as the Whitehouse Working Group on Financial Markets set up by the Reagan crowd in 1987.

Beyond insider trading and backdating stock options, and after Citi and Sandy Wiel were leading the way blowing through Glass/Stegal like it was rice paper, the SEC is at best the Bush team taking another dive for corporate America.

When capitalism does not behave itself and they start to rip each other off, wars are usually the result. War reparations payments from the 91 Gulf War and the $300 billion plus interest owed by Saddam to the Saudi and Kuwaiti wealthy families are why you are really looking at more than $4/gal for fuel. The American taxpayer getting shafted for the ‘club’ wealthy interests of Bush family friends around the globe. Chumps at the pumps to pay for another managed financial inflation to benefit a select few.

WalMart through the Waltons are another example of Bush connections to allow Bentonville to ride roughshod over the American worker. This is also why you don’t want Hillary Clinton operating the levers of the Federal Government. Anybody remember her cattle futures trading scam or her ripping off Madison Guarantee S & L for around $60 million?
Yes OK, Neil Bush did Silverado S & L for $200 million but pops was in office so he could steal without worry. This is the type of ‘financial and market capitalism’ that is and has been really going on in the United States.

WalMart- Go ahead and call the police.

SanDiegoView in fiat money and the printing press
Friday, May 09 at 02:56 PM

cutting off community in the and one day, him.

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Friday, May 09 at 07:05 PM

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Friday, May 09 at 07:06 PM

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Friday, May 09 at 07:07 PM

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woodelephant in London
Friday, May 09 at 07:08 PM

The entire concept of a “free market” is just that, a concept and as Paul Maidment points out, exists only in “the imaginations of economists”. I suppose you could call the “free market” a perception and not a reality.

In an appearance on MSNBC (4/08/08) CNBC’s business bunny Erin Burnett referred to Wal-Mart and Costco as “bottom feeders” and the beneficiaries of consumer’s trading down due to the failing economy.

Ken V in Texas
Saturday, May 10 at 11:10 AM

There seems to be a confusion of concepts.

Free markets are defined differently by different people. Some say freedom from government intrusion. Some say freedom from competition. It depends. But these markets do exist in varying degrees.

The concept economists use (at least all of my professors the whole time I was getting my economics degree) is that of a perfectly competitive market.

Different things. There are entire schools of thought that deal with entrepreneurialism and the like, and they’ve covered everything, and much more, than was covered in this article.

Scott in
Saturday, May 10 at 03:36 PM

Some say freedom from competition.

Could you be a little more specific as to who “some” are? A economy of monopolies? A money-grubbers wet dream!

...my economics degree...

You sound like another graduate of the Ayn Rand/Adam Smith-On-Crack School of Economics.

As long as the US has the Federal Reserve making good on high roller’s losing investments, this is not a free market by any rational definition.

Ken V in Texas
Sunday, May 11 at 03:26 AM

How is Wal-mart going to steal Target’s customers? Im sure isaac mizrah would love to sell his clothing for $.30 If becoming green is Lee Scotts solution then there is no way that they will ever attract loyal target customers.

I love Walmart.....syke in Columbus, Ohio (Walmart territory)
Sunday, May 11 at 08:03 PM