A Fairy tale of free competitive market

This article is written by Martin Manurung, a President Director of GARDAGraha, A Chevening Scholar and studying his Development Studies in University of East Anglia.


They say a free competitive market is the answer to Indonesia's economic crisis. The economy is in problem because the market is not free from distortions which lead to market failures. That's why we need to get rid of all distortions, including the subsidies.

The jargon of "free competitive market" is now arising, especially after the current administration established which its economic team consists of business men and neo-classical (neo-liberal) theorists. People forget to discuss the theoretical background of "free competitive market". Let us revisit the assumptions that fundamentally back up the "free competitive market":

First, there are a very large number of small consumers and producers. The number is (must be) very large so that none of the consumers or producers can influence the market price (the equilibrium). This is, without doubt, impossible. Even in the market of basic needs’ products, where consumers are abundant, this assumption does not apply.

Second, every consumers and producers have a symmetric information and perfect knowledge of the market. Therefore, none of them will have hidden information which can be used to influence the market price. Well, this is also impossible, even now in the midst of the internet era which information flows free and almost without borders.

Third, the cost of production is ‘constant returns to scale’ due to the small scale of producers. This assumption means none of the producers have the advantage of ‘economies of scale’ which gives them the opportunity to maximise profit. This is, of course, can hardly be come true, because it’s certainly impossible that every producer in the market is in the phase of ‘constant returns to scale’.

Four, no market barriers. The market must have free entry and exit for every consumers and producers. Price is the only information for both the consumers and producers whether they want to enter to or exit from the market. Furthermore, the market price (the equilibrium) must be stable, so if the price goes up or down there will be consumers or producers who enter to or exit from the market that makes the price back to the equilibrium. This is, once again, too good to be true.

So, if the fundamentals of the “free competitive market” happen to be just a fantasy, then the “free competitive market” becomes a fairy tale. It’s just created to make us sleep and will swallow us while our eyes close. Therefore, stay awake!