The Ouroboros: how the free-market eats itself

ouroboros

The putative takeover of 99p Stores by rival discount retailer Poundland exposes yet another intellectual paradox of free market economics. Left to their own devices, firms will always try to takeover other firms or force them out of business. But every takeover (or bankruptcy) by definition reduces competition and choice, which is supposed to be the whole point of the free market in the first place.

It’s obvious that Poundland’s takeover of the 99p Stores would reduce competition between high street “pound shops”. Poundland’s chief executive, Jim McCarthy, doesn’t even try to deny it, although he calls it “consolidation” because that sounds better than “taking out the competition”.

It’s always seemed to me that the three top dogmas of free market economics — rational behaviour, perfectly functioning markets and government non-intervention — contradict each other. If companies and firms always act rationally in their own self interest, they will always try to subvert the free market, unless the law stops them (and sometimes not even then). But in a free market, the government is supposed to stand aside. How can this work? Imagine a football match in which all 22 players are determined to commit as many fouls as they can get away with. Then send the referee to the stands.

Free market fundamentalists are always trying to kid us that firms are falling over themselves to “compete” for our custom. They aren’t. Occasionally some business people will claim that they “welcome” competition. They don’t, or if they do, their shareholders or owners certainly don’t. They don’t want competition. They want, if possible, a monopoly, or as close to one as they can get. Is there any example, anywhere in the world, of a joint stock private company willingly giving up its stranglehold over a market? I tried really hard, but I couldn’t think of one.

So how can “free” markets ever work perfectly, or even near perfectly, if every firm in the market has an existential urge to make sure they don’t? Like the Ouroboros, a mythical snake-like creature that ate its own tail, it’s an idea that is no sooner set in motion than it starts to devour itself.

As usual, free marketeers have little to say when the weird contradictions in their beliefs come to the surface. Some do admit that enforcing the rules of the free market might, in theory, be a legitimate role for strong government, but they always seem to cry foul whenever a real government body proposes to act — for example by blocking a takeover like Pfizer’s bid for British pharmaceutical giant Astra Zeneca last year which, whatever other damage it would’ve done, would definitely have reduced choice and competition.

In theory, a real free market government should not allow any takeovers at all, except where the target firm is seriously at risk of failure. But then it wouldn’t be a free market any more, would it?