I'm about halfway through reading Ludwig von Mises' Human Action. So far, I am highly impressed. He does an excellent job showing how physical reality combined with human desires is the only way to understand economics (Mises takes a very wide view of what constitutes economic action, which I believe is appropriate). His book has also done a magnificent job of destroying falsehoods concerning the nature of value (it is subjective and transient, not objective and measurable contra Marx) and the nature of the free market, in particular that state intervention on behalf of businesses is still a form of statism incompatible with the free market.
There is a problem, however, with the free market. Mises points this out but does not spend a great deal of time on it. Here's the situation:
The free market is predicated on the idea that the use of force, whether by individuals or the government, will not be used. People are free to buy from the best sellers to their individual needs and to sell likewise.
This means that some businesses will fail. Those that, for whatever reason, cannot compete to meet consumer demand best will not survive, which is a good thing seeing that resources are scarce and need to be employed to fit consumer's values. Those not doing so are wasting those goods. Even for those winning, they have to sell their goods at a lower price than they would if competition did not exist.
Here is the problem: those businessmen do not want to compete with others. It lowers their profits. If at all possible, they will wish to use force either to improve their own resources, increase their own clientele, or to damage competitors. The best means to achieve this power is via the government, which has a tendency to be seen as legitimate.
In democracies, the government is elected by the people. Like anyone else, they wish for more power, or at the very least to maintain their current level of power.
The anti competition businessman and the company see an opportunity for mutual cooperation. The government can claim powers to regulate businesses (introducing the use of force to compel people to act contrary to their own desires) in order to help either consumers or weaker businesses. These people, in turn, come out to support those politicians.
The more powerful the protected business, the more influence they can have in bribing politicians with votes and public support; the more power the politicians get, the more they can offer to protect those businesses, which in turn empowers those businesses further. It becomes a nasty cycle of increasing use of force and power for the government at the expense of competition and a free market.
Consumers are screwed in this deal, as more competitive businesses that could provide goods for lower prices are forced out via regulation (if not outlawed outright). However, most consumers do not understand what is going on in terms of economics and will not trace back the problem to government interference into the free market in the first place. Many will naively believe that more regulation will somehow be helpful, further limiting the ability of businesses to compete. If the best businesses at a particular time are protected, potentially better newcomers are kept out; if a bad business is protected, good businesses are damaged. In both situations, the consumer losses. Those who gain (the only ones who gain) are the protected business and the government which gains more power.
1. Competition is good for consumers, bad for businesses.
2. Businesses will seek protection from government officials in return for electoral support.
3. Competition is reduced; consumers pay more, protected businesses make more, government can grab more power to protect more privileged businesses or "protect the consumers."
4. Cycle continues.
This is not an optimal situation for anyone but the protected business and the government; the more it occurs, the more we get screwed. How do we stop it from occurring, though?
One proposed solution is to quit on the free market and establish a full blown socialist system. This idea is ridiculous on multiple fronts. For starters, resources are still limited and have to be distributed somehow. As von Mises points out, giving all power and resources to the government is to create the mother of all monopolies; the bureaucrats running the show will have no incentive to do anything efficiently save use those resources as a bribe for their own individual good. This isn't a solution to the above problem; it is that problem in its absolute worst form. The other problems need not even be stated, as this solution fails completely to mitigate to problem at hand.
The other proposed solution is...non existent.
I'm concerned that the drift towards more powerful governments and hence less efficient economies is a likely (if not inevitable) result of the very conditions that make the free market work. Politicians will always want more power; in a democracy, that usually means bribing people, in particular voters, to support those particular politicians. Those politicians, in order to pay off those bribes, have to take the resources from otherwise innocent people; productive taxpayers are screwed, productive businesses are "regulated" and made less productive.
But so long as voters think they gain, they will continue to allow such abuses of power. The situation will get worse (competition is ruined, goods are not sold at optimum prices for consumers), the government claims that yet more regulation will help, and the mess is repeated.
An educated, virtuous citizenry would be able to stop this madness by understanding how the free market works. But such a citizenry does not, and probably never will, exist. It is on par with hoping for socialist denizens that love shoveling horse manure for the collective good; such people do not exist.
It is like finding a solution to the prisoner's dilemma.
I do not believe in a sentient being willing us towards this conclusion (Marx, his historical materialism, and his entire critique of capitalism and crisis theory are hogwash). None the less, as technology makes more power available for people to use over one another, this centralization of power into the hands of a few and away from personal liberty seems likely. It is a horrifying thought for anyone dedicated towards human happiness.
Machiavelli may have been on to something with his idea of virtu. Rather than being a willingness to fight and increase the power of one's country, though, we should view it as the willingness to uphold the rights of others. How this particular trait is created is beyond my understanding. I do know that it is easier to destroy than to create; it is our nature to want more, even if at the expense of others, and reversing this trend is extremely difficult. Places like Russia did not make a nice transition to the protection of rights.
I wonder if stable democracies with free markets are like Plato's philosopher king, a fluke that just kind of happens by accident? If so, and if they are destroyed more easily than created, our future will not be nearly as bright as it could have been.