We  hear a lot today about “the free market economy”, so much in fact that it may be worth reminding ourselves that a free market has defining characteristics without which while still a way of distributing assets it cannot be called free or possibly not even a market. First, the goods for sale must be sufficiently similar to be substitutes for each other; apples might be bought in place of pears bur not a chair in place of a pair of trousers. Secondly there must be complete knowledge by all buyers and all sellers of all prices obtained for all goods.

A street produce market is a near approximation, where if Jacques reduces the price of apples as one end of the street, Pierre a hundred metres away will know and be able to respond within minutes, the information being carried by sellers directly or by their actions in favouring Jacques’ apples over those of Pierre, assuming equal quality, hence substitutability. Pierre may respond by reducing his prices whereupon it will be Jacque’s turn to react. Thus buyers’ apple requirements will be satisfied at the lowest “possible” price, constrained by the need for both sellers to make a profit over a reasonable length of time. One of our two producers may be persuaded to find a better, hence cheaper, way of bringing his produce to market enabling him to undercut his competitor for a significant period. Money will flow to him enabling even more improvement or an increase in production with possible further reductions in price to the benefit of all. Assets will be distributed to the producer best able to use them and prices will be kept low by competition.

In the larger world the equity market is close to being a free market. Share prices are published daily and known to participants by the second. In theory assets flow to the efficient by an increase in company value; the inefficient lose value and the ability to raise capital for expansion and in the extreme may not be able to purchase their needs and therefore have to cease trading.

Imperfections reduce the ability of the market to provide low prices and advantageous distribution of assets. The UK market in domestic gas for example does not function well, as consumers do not know what price their neighbour is paying, indeed, deliberate obfuscation in the tariff structure may mean that they do not even know the price they themselves are being charged. Sellers do their best to keep buyers in ignorance of prices, so that they cannot move to the cheapest. In a market such as this where the companies supply the same product through the same pipes to the same customers it is doubtful whether any real competition can exist. Efficiency it would appear is outside the control of the suppliers.

No system involving secret tenders can be a fee market for the obvious reason that prices are deliberately concealed so that sellers cannot compete with each other, the intention being that they are prevented from colluding  to fix the price at a high level though in reality the lack of transparency makes price fixing more likely. Auctioning a contract to the lowest bidder might be a better method so that the prospective contractors compete. Fixed price secret tendering is greatly favoured in the UK public sector and almost certainly raises costs in services such as health, infrastructure projects, and provision of rail services, recently in the news.

In the British National Health Service the confusion goes even further! Politicians to distance themselves from difficult decisions as to what services should be provided and which not, have introduced a “market system” which they tell us will enable “money to follow the patient”. It should be remembered that by its very nature the NHS is not a market. It is a service provided from general taxation. In its present form the NHS is unaffordable but certainly will not be made so by the introduction of “business systems” of baroque complexity.