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What is referred to in business and government as “capitalism” and “free markets” typically has nothing to do with actual market theory.

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(EUGENE, Ore.) - In this article I will address the topic of Free Markets and Capitalism from an economic perspective. I will address some common myths about Free Markets.

My analysis will be based on the history of economic theory. I will provide insight into the real economic consensus on market theory, and show where claims about Free Markets and Capitalism are often very different than what actual economists theorize.

Myth: Free Markets are Synonymous with Democracy

In Europe, the theory of a self-regulating free market was originally put forward by François Quesnay. François Quesnay was an adviser to Louis XV. The reign of Louis XV was shortly followed by the French Revolution.

Adam Smith learned market theory from Quesnay while studying in France. Adam Smith lived and published in the British Empire under the reign of King George III. King George III was the monarch under which the United States seceded from the British Empire.

Both Smith and Quesnay theorized free markets as a means for monarchs to efficiently administer their empires. Some researchers assert that Quesnay was originally influenced by the Wu Wei economic philosophy originally formulated by economic theorists in Imperial China.

Market theory has nothing to do with individual freedom or democracy. It is only a theory of how economies work. The theory was created by people who worked for and advised monarchs in countries that were far from democratic.

Myth: Free Markets are Self-Regulating The assertion that free markets are self-regulating is limited to a very specific context.

Quesnay and Smith originally observed that food production is the basis of all economic activity. They theorized that because food production is physically quantifiable, economic activity based on food production must follow physical laws.

In a market based on various forms of fictional property, such as patents, copyrights, stocks, bonds, and a monetary system based on a limitless supply of paper money, none of the physical laws of market theory hold true.

It should also be noted that the original physical laws of economics only hold true because it is assumed that without food people will die off. The economy regulates itself in classical market theory because people die of starvation and malnutrition related illnesses.

Myth: Free Markets are a Level Playing Field for All

This myth is an extension of the myth that democracy is synonymous with free markets.

Free markets have never been conceived of as a level playing field. Originally, they were theorized to be a way for second-class citizens to engage in economic activity without the direct oversight and interference of the ruling class.

Under original market theory, monarchs maintained absolute control over the economy through control of taxation and currency.

The lower-class of citizens were allowed to have economic freedom within this system because according to market theory, they would optimize their own economic behavior, which would result in optimal outcomes for the ruler who established the overall economic policy.

Myth/Reality: The United States has a Free Market Economy

The U.S. has a free market economy in the classical sense. Taxation and control of the currency establish the general guidelines for the economy. Individuals are allowed freedom within this system to engage in the activities that optimize outcomes for the individuals that set tax and currency policies.

In the U.S., government allocates approximate 30% of the GDP directly. Government activity influences private economic activity to a great extent, so an even larger part of the total economy is directly controlled by government policy.

The U.S. also has an extensive system of private centralized administration. This is administered by private banks and the major corporations that they control.

Myth: The Free Market Provides Freedom

If you review the Federal Reserve’s reports on private stock ownership, you will see that according to their statistics, ownership of capital is highly centralized.

According to the Federal Reserve’s statistics, it can be estimated that controlling ownership (50%+ of shares issued) of ALL publicly listed stocks is held by a group of a few hundred thousand people at most.

Myth: Market Freedom is Equal to Democratic Freedom

In democracy, the governing principle is one person, one vote. In the market, the governing principle is one dollar, one vote.

Even if you think that, in principle, it is reasonable for the wealthiest individuals to have the greatest say in society, the U.S. economic structure raises some interesting questions.

If one dollar equals one vote, then by definition, the individuals who have a monopoly on creating money will always be in control.

Freedom of choice for consumers is to purchase whatever they want with the dollars they are given. This is a slightly different type of freedom than the freedom to define the laws of your society within a democratic system.

Myth: Money has Value

Money does not have value. It does not matter whether it is paper or gold.

Gold is one of the most useless metals around. If you could ask the former natives of South America, they would probably tell you that Iron is much more valuable than Gold.

Money only has value if it can be traded for things with real value.

Money, like government, is a sort of social contract. The value of money depends on social agreement to accept it for trade. Fraudulent exploitation of this social contract for individual gain has been continually present in the history of money.

Myth: Money Can Only Be Earned

Money is not only earned. Money is created.

In the United States, money is created by private banks. In theory these banks participate in a competitive open market, but in practice the banking industry is highly monopolized.

The way that banking works in the United States is that banks are allowed to make loans on the basis of their assets. In the banking industry, debt owed is an asset.

Banks are required to maintain a reserve ratio of 10%. In other words, a bank can loan out 9 times the actual amount of assets that it has on hand.

Individual loans to businesses and consumers can’t be counted as assets for purposes of meeting reserve ratio requirements. U.S. Treasury bonds can be. Whenever the U.S. government goes farther into debt, and issues new bonds, this increases the ability of private banks to lend amounts 9 times the amount of the increased government debt.

For every dollar the U.S. government borrows in the name of the taxpayers, private banks can create 9 dollars without owing a cent to anyone.

Banks also count what are called “Mortgage Backed Securities” and “Collateralized Debt Obligations” as reserves. These are bonds that are created out of consumer mortgage and credit card debts. Typically, these debts are too high risk to be counted as assets for the purpose of reserve requirements.

The current “Banking Crisis” was created because banks developed these new types of securities as a way to count consumer debts as reserves, thus dramatically increasing their ability to create money.

Using Mortgage Backed Securities and Collateralized Debt Obligations, for every dollar a bank loans a consumer, it can create 9 more dollars. Through this mechanism, banks were able to create an inflationary boom, which has now resulted in a bust.

Myth: Market Cycles are a Natural Part of Market Economies

Market cycles can occur due to natural reasons, such as changes in climate and agricultural productivity, changes in technology and labor productivity, or other external factors. However, most market cycles result from manipulation of the money supply.

Because money only has value relative to things of real value, increasing the amount of money will lead to an increase in prices. Increasing the amount of money will also increase output in the short term, because people will initially respond to the increase in money, and consequent demand, by increasing production.

However, once people realize that the increased demand is only resulting from an increase in money, prices will adjust accordingly, and because actual demand has not increased, production will fall back to its original level.

These monetary cycles are highly profitable for individuals who are able to create money.

In our recent history, banks created mortgage backed securities as a new mechanism for money creation. The money supply expanded, and home prices increased dramatically. Most of these home purchases were funded by mortgages owed to banks.

The banks created the money that they loaned to people they gave mortgages to. Home prices rose for the entire society, and a massive transfer of wealth occurred between debtors and creditors.

When a mortgage payer defaults, that is not a loss for a bank. The bank created the money they loaned to that mortgage payer out of thin air. The bank cannot lose, only gain. Even if millions default on their mortgages, hundreds of millions more are locked into owing more to mortgage issuers that ever before.

Myth: Private Property Ownership is a Permanent and Natural Right

The myth of private property is essential to modern capitalism. Those who espouse this myth assert that because they claim to own something, it belongs to them. Private property rights are supposedly etched in stone. Even if this were true, it would not make them any more valid.

The government, and by extension society, create property rights. Property rights are a social construct.

The world was not created with any borders drawn on it. God did not issue anyone a deed to land. Monarchs used to openly claim this, but such claims should be shown the contempt they deserve.

We live in a democratic society, and the only property rights that exist are subject to the will of the people.

Property rights are redefined by our government on a regular basis. New types of property, such as the mortgage backed securities mentioned earlier, are created all the time. Patents have been extended to cover gene sequences. The duration of copyrights has been extended. These are all forms of redefining property rights.

Myth: The Redistribution of Wealth is Contrary to Free Markets

The distribution of wealth is determined by the property rights established by the government. Anyone who argues that re-distribution of property is contrary to their rights, is also arguing in the same breath that their rights are invalid.

If you argue that government does not have the power to assign property rights at will, then your property rights cannot be valid, because they were assigned to you by the government.

The government redistributes property rights and wealth all the time. Every time an individual wants to hold onto a temporary advantage they have gained, they claim that the government does not have the right to re-distribute property.

These people are all frauds and liars.

Conclusion

This is but a brief overview of these topics. I have attempted to address some of the more common and ridiculous myths spread by supposed free market advocates. If you are interested in real market theory, read Quesnay, Smith, David Ricardo, and Karl Marx, and consider the context in which they were writing.

What is referred to in business and government as “capitalism” and “free markets” typically has nothing to do with actual market theory. It is mostly just self serving propaganda with no consistent theoretical foundation at all.

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Salem-News.com Business/Economy Reporter Ersun Warncke is a native Oregonian. He has a degree in Economics from Portland State University and studied Law at University of Oregon. At a young age, his career spans a wide variety of fields, from fast food, to union labor, to computer programming. He has published works concerning economics, business, government, and media on blogs for several years. He currently works as an independent software designer specializing in web based applications, open source software, and peer-to-peer (P2P) applications. Ersun describes his writing as being "in the language of the boardroom from the perspective of the shop floor." He adds that "he has no education in journalism other than reading Hunter S. Thompson." But along with life comes the real experience that indeed creates quality writers. Right now, every detail that can help the general public get ahead in life financially, is of paramount importance. You can write to Ersun at: warncke@comcast.net