The Free Market 17, no. 7 (July 1999)
The internet provides a remarkable test case of the free market. What have we learned?
Business doesn’t need government to succeed. Independence is the trait that sums up the attitude of all successful web entrepreneurs. But this model of market success is not to be found in most textbooks of American history, where government is seen as the engine of economic growth and where businessmen are portrayed as helpless in the absence of the government’s helping hand.
Nobody is left out. In the fantasies of the left, the free market is a conspiracy by which rich people serve rich people at the expense of the little guy. Yet internet commerce is only four years old, and there is nothing that is not available for purchase. The huge range of prices and qualities makes it possible for all income groups, interests, and tastes to be served. The impulse of regulators is to homogenize all business, forcing each to cater to every conceivable market. But authentic diversity in business is built from specializing in niches.
Commerce is peaceful. In Marx’s vision of the market, conflict was omnipresent. But the truth about markets is illustrated by the web, where buyers and sellers are brought together to their mutual benefit. There is not conflict but cooperation. Just like in the brick-and-mortar world, there are always goods and services that we don’t want any part of. But commercial software--spam-filters and family-friendly filters--have done far more than government regulations to keep unwanted material out of reach.
Contracts can be enforced privately. Sanctions for bad behavior are nothing worse than a loss of one’s reputation, and yet this alone is powerful enough to make the vast number of exchanges successful. Frauds and cheats are quickly unearthed and experience the web equivalent of shunning.
Consolidation is normal. Information is nearly costless, prices are almost instantaneously comparable, start-up costs are low, and there are no physical barriers to entry--the textbook ideal of “perfect competition.” And yet we don’t see hundreds and thousands of firms of equal size. More successful firms buy up less successful ones. Large firms are in no position to “exploit” their size. If they let up in their service or pricing policies, their stock price falls and consumers go elsewhere.
The consumer is everything. The driving force behind all activity is the hundreds of millions of individual computer users, who are in a position to render decisive judgments about what is sold and what is not sold, and thereby determine what is produced and how resources are used. Businessmen who believe they can make autonomous decisions are reminded in an instant of who is really in charge. So much for the hysterical socialist vision of robber barons and price-setting capitalist moguls.
Much of the economy is unseen. When people think of web commerce, they think of Amazon.com and other retail sites. In fact, the bulk of the volume of web sales comes from businesses doing business with other businesses. No more calling suppliers on the phone or sending in orders through the post office. Inventories can be maintained automatically with software that links wholesalers and retailers in an instant.
Innovation never stops. Socialist economies like Cuba’s look like movie stage sets from the 1940s. Capital deteriorates and is not replaced, which is why socialism sends society into technological time warps. But in the intense market atmosphere of the web, improvement is relentless. Businesses that stop improving quickly lose revenue to those who are focused on improvement. So much for the classical image of capitalist fatcats resting on their laurels.
Gobs of stuff is free. Markets are said to result in the “commodification” of everything, thus debasing the higher pursuits and excluding those without the means to pay. In reality, the overwhelming amount of information on the web is available with no user fees. One reason is that old bugbear advertising, which has made millions of sites viable. Another is that many individuals and organizations--prepare yourself--aren’t in it for the money. They just want to get the word out.
Forecasting never works. The shape and direction of change on the internet is determined by the all-powerful force of human choice. By its nature, human choice is unpredictable. It follows, then, that the future is never perfectly predictable either. And yet for decades, economists have aspired to create models that forecast what is inherently unknowable. It can’t be done. Ten years ago, no living human being predicted that the web would work the way it does today. An economic theory that doesn’t account for this intrinsically uncertain future is not a sound one.
The key feature of most internet commerce is that government is at arm’s length. If the rest of the economy were permitted to work in the same way, all of the blessings of innovation, service, self-regulation, and consumer sovereignty would be everywhere, and not just on computer screens.
