A Free-Flowing Market

PETER: This is BackStory. I’m Peter Onuf.

BRIAN: I’m Brian Balogh.

ED: And I’m Ed Ayers. Today in the show, we’re taking the long view on the way that Americans have struggled to feed their appetite for oil. We just heard a story about their dramatic steps that one big oil state took to limit the amount of oil being produced there, Texas. And we want to take a few minutes now to reflect on that story.

BRIAN: So Ed, Peter, in that Texas story, we heard about martial law. And we heard about this state commission that for decades had been controlling the output of oil wells. We heard about OPEC. None of which we associate with the workings of a truly free market. And yet all of those were set up in order to keep the market functioning smoothly, so I have to ask you, was there ever such a thing as a naturally functioning free market in American history?

PETER: No. The answer is no. Just think of the word nature. There’s no market in nature. It’s nature that has to be transformed in order to create commodities for which there is demand, and none of this happens without sophisticated means of transportation, exchange, cultivation, manufacture. All of it requires the development of human capacity. Civilization. So the idea of a natural market, I’d say, is an oxymoron.

ED: Ah, Peter. Now things were so crude and simple back in your period.

BRIAN: I get it. Crude.

PETER: Yeah, crude. Definitely.

ED: They were so crude, they didn’t even have crude oil.

PETER: But they did have tobacco, Ed, as you well know. And tobacco, you say well, here’s something that grows in the Chesapeake area, and it’s a great boom in early Jamestown. Everybody’s growing tobacco. They can’t even feed themselves because they’re growing so much tobacco, because there is this market that they’re tapping in Europe. Who knew that a weed growing in America could come in such a high price in Europe. Well, it doesn’t for that long, does it?

Because the market is flooded. What do they do? They have various schemes for limiting growth. That is burning down tobacco. Grading some as trash and eliminating it. Establishing, well, government regulation and control. And without that government regulation and control, there’s going to be no market for American tobacco. Tobacco producers can go home, and they grow food, and they can, well, return to nature.

BRIAN: I do think we have one way in which we have quote, “natural markets,” without the state, and that’s what’s supposed to be so unnatural in the market. That’s monopoly. I think one way that producers can really control the supply of their goods and create stability is through either monopoly or oligopoly. And you can have that without the state interfering at all. And they simply work out among themselves. Can you spell De Beers? Can you spell diamond production, for instance?

ED: Can you spell Standard Oil?

BRIAN: Can you spell Standard Oil? That’s your century, Ed.

PETER: Well, I think you put your finger on it, Brian. Because until you have a value to a scarce good, you don’t have any kind of market. When you have a value put on a scarce good, then you have a natural monopoly of those who possess the good.

A free market, that’s the great invention. There’s nothing, absolutely nothing, natural about a free market. It is a way of countering the tendency of advantage seeking of one group or one individual over others.

ED: So was the free market an invention of the 18th century, Peter? Was that–

PETER: Yeah, its Adam Smith who articulates the notion of a truly free market. And it’s against monopolies that have grown up over the centuries that have distorted exchange. And so a free market comes at a moment in history in which you get rid of regulations and limitations on trade and exchange that seem to be undermining or subverting the wealth of the nation, as Smith put it.

BRIAN: Well let’s return to oil. Now, imposing martial law was literally sending guys with the guns into the oil fields to make sure that nobody produced any oil. That’s a pretty messy way to regulate a market. One of the reasons we think we have a free market is we’ve come up with much more subtle ways. What they did, for instance, in the case of oil, was they said, oh we need to conserve the long term supplies of oil. So we need to tell people how much they can produce, not because we’re fixing prices, no, no, no, no. That wouldn’t be us. But because we don’t want to deplete these oil reserves. So we want to conserve them. We want to use them in a steady and rational way.

And what I’m getting at is we come up with broader agendas that we wrap the market within. In the case of oil, it was, well we want a long term supply of oil, so even in Texas, that individualistic kind of state, we’re going to give the Texas Railroad Commission the power to allocate how much oil should be produced, because of the larger goal of conservation and long term supply of oil. After all, we don’t want to literally burn through all of this oil in 10 years. We want it to be around for a long time.

PETER: So Brian, you’re suggesting that what we take to be our environmental sensitivity and consciousness about looming scarcities, well, the real source of that in our culture comes from within industries that want to persuade us that the thing they’re selling us is in short supply and we need to be good stewards.

BRIAN: Absolutely. And whether it comes out of the ground, or whether the producer has to invest a lot to invent it, the way pharmaceutical companies argue, the argument is always the same. If you want us to spend our capital and invest in finding this stuff, developing, coming up with supply chains, we have to be pretty sure that we can have an adequate price and a stable price down the road.

ED: The most valuable commodity on BackStory, of course, is time. And we may be–

PETER: We’ve wasted it.

[LAUGHTER]

ED: No, no, no. There’s been a gusher of insight here, but I think we’re going to have to turn off the valve.

BRIAN: Oh, shut up so we can push the price up, Ed.