Does free market lead to inequality?

There is an objection that free market leads to inequality. And a popular argument is child labor, meaning that free market leads to child labor. Nothing can be further from the truth. One of the things made child labor disappear since the 19th century was the invention of free market. We’ve seen children age 8-9 working in fields all throughout of the history. But thanks to the free market, basically, people in developed countries became richer and richer and don`t have their children work in the fields anymore. I don’t say that child labor is a good thing, I think that child labor should be out of this world as soon as possible, but I don’t think that boycotts are necessary a good idea.
But does free market lead to inequality? Societies that are extremely poor are also extremely equal. But once society started to grow, inequality grows, because some people will benefit more from education, access to finance, political connections than others. And then in one point of time people start asking for redistribution, like, say, in the Northern Europe. So the free market is not necessary leading to inequality, it’s a choice of society.
Also they say that economic growth leads to pollution, because there are too many people and we are destroying this planet. I don’t really agree with that. My arguments are the following. First is that the rise of population is not necessary a process that is keeping ongoing forever. Yes, we’re about 8 billion right now and soon will be around 11 billion at 2100, but it won’t be continuing at this rate. For example, 5-6 thousand years B.C. people weren’t really numerous; it is quite possible that there were mo elephants than humans. And all at sudden around the Industrial Revolution there was an explosion in population. Traditionally a woman used to have 5-6-7 children in the hope that 2 will survive until the age of 18 when they can have kids themselves. And after the Industrial Revolution the child mortality fell so fast that having 7 kids in the hope that 2 will survive meant having 7 kids survived. And that lead to the explosion in population. For example, in Belgium mortality rate is 4 kids per 1000, who don’t survive until the age of 5. In Congo it is about 200 per 1000 and in Medieval Europe it was 500 per 1000 births. When the mortality rates dropped, birth rates remain high for cultural reasons. After some time people dropped their birth rates, they are too low in some regions, including Ukraine, by the way. But it has nothing to do with free market or growth per se, it is biology and it was a temporary phenomenal.
The second argument is that what free market does is it makes things more and more efficiently. For example, a cow. Productivity, innovation also happen in agriculture; moreover, it’s where it usually starts. A Dutch cow in the year 1900 produced about 2000 liters of milk per year. Right now a Dutch cow produces 8000 liters of milk yearly, which means an ecological footprint of 1 liter of milk is 25% of what it was a 100 years ago. Second example: the yield of corn in the most productive country-the USA-is about 9 tons per hectare, while in the most productive African country-South Africa-it is about 4.4 tons per hectare, and neighboring Zimbabwe has 128 kilos per hectare. So the boosting productivity is the way of making sure more people can survive on our planet. And that’s what happening: we become more efficient because of innovation and competition.
And finally let’s talk about subsidies, which is, basically, a superstition. It is saying: «The government knows best, it knows what I want or should like». It doesn’t. Government plays a very important role in society, but it cannot tell you what exactly you should buy, which sector is you should be active in and which sector shouldn’t have competition. I called a chapter in my book «Subsidies create losers», because you become lazy and don’t try to innovate. Another way of becoming lazy is having a monopoly. The government is not superior to the market in selecting a technology of the future. Would governments recognize Facebook, or LinkedIn, or Twitter, or 4G if you would present it to them 20 years ago? Probably, not. That is why I think free market is the best way to guarantee you prosperity. And the best way to innovate is not give subsidies, but to allow competition.
And the main argument against free market and allowing competition and innovation to happen is that it will cost a lot of jobs. First of all, creative destruction doesn’t mean that people in destroyed industries should be left alone. I thing that governments should help them to move into another industries. That is where education is very important. So reforms are necessary. You want creative destruction, you need to allow creation and you have to allow destruction. If you have a good product and it is better than your competitor’s, he should either go out of business or innovate, but shouldn’t be protected.
So here are the ways to prosperity: basic incomes, free markets, trade, taking risks, education, research and development-all these make a society richer. If you don’t take risks, you lose everything. Everything we have right now was build on risk. If Henry Ford-after his fifth bankruptcy-didn’t say: «Now I going to do something with cars», we wouldn’t had a currant car we see today. Risk makes sure that we will have a progress. What we shouldn’t have are: minimum wages, maximum prices, subsidies, monopolies, and protectionism. That is the way of keeping inefficiency, stagnation and status quo alive.
And finally I want to end with trade. Trade, for me, is embodiment of free markets. Doing trade with neighbors, selling your best products to them and exchange their best products make you richer. And that is a good thing about free markets: it is not a zero-sum game. If I walk into a bakery and buy a bread, after this transaction both of us become happier. He has money, because he doesn’t want a loaf of bread, and I have this loaf. Trade is a positive-sum game.
And that is my message.

01.12.2014
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