The Illusion of Free Markets

 

True market freedom cannot coexist with vast disparities in wealth and power

Wealth creation is an incredibly loaded term. Extraction is one of its hidden truths. A rich man negotiating with a poor man always gets the better part of the deal—he is not creating that value; the power disparity is what creates the value. Power disparity is further increased by increases in wealth. What is the value of power to me or you? In itself absolutely nothing but the ability to extract wealth from those who have no power. Producing goods and services and thereby value for society is only part of the economic equation. The other part is the psychology of power, and it is the most wealthy who play those games of power above all else. They impoverish everyone by extracting power and wealth that is ours. True free markets are structured so that power cannot be leveraged and they benefit everyone taking part in them.

The classical economic assumption of voluntary exchange presumes equality between contracting parties. Yet this presumption crumbles under scrutiny. John Kenneth Galbraith identified what he termed "countervailing power" in American Capitalism (1952), arguing that market power naturally concentrates and that supposedly free exchanges mask fundamental imbalances. When a wealthy employer negotiates with a worker who needs immediate income to survive, the transaction occurs under what Galbraith recognized as radically unequal bargaining positions.

Karl Polanyi, in The Great Transformation (1944), argued that truly self-regulating markets are a dangerous fiction. He observed that labour, land, and money are treated as commodities in market economies despite being fundamentally different from genuine commodities. labour represents human beings whose survival depends on selling their capacity to work. This creates what Polanyi called "fictitious commodities"—the treatment of essential human needs as market goods generates inherent power asymmetries that no amount of theoretical market freedom can resolve.

The concentration of wealth operates as a self-perpetuating mechanism. Thomas Piketty's Capital in the Twenty-First Century (2014) demonstrated empirically that returns on capital consistently outpace economic growth (r > g), meaning that existing wealth accumulates faster than new wealth can be created through labour. This mathematical reality ensures that power disparities widen over time rather than equilibrate through market mechanisms.

Joseph Stiglitz has extensively documented how information asymmetries and market power allow those with wealth to extract rents rather than create value. In The Price of Inequality (2012), Stiglitz argues that much of today's inequality stems not from productive contribution but from rent-seeking behaviour—the use of political and economic power to claim a larger share of the pie rather than making the pie larger. The wealthy can afford superior legal counsel, wait out negotiations, access better information, and structure transactions to their advantage in ways that have nothing to do with productive efficiency.

Pierre Bourdieu's concept of "cultural capital" and "symbolic capital" extends beyond purely economic analysis to examine how power operates through social and psychological mechanisms. In Distinction (1979) and subsequent works, Bourdieu showed how the wealthy deploy non-economic forms of capital—education, social networks, cultural knowledge—to maintain and reproduce their privileged positions. These forms of capital are convertible into economic advantage while appearing meritocratic.

Max Weber's analysis of power in Economy and Society (1922) distinguished between power derived from market position and power derived from social structure and legitimacy. Weber recognized that economic transactions never occur in a vacuum but are embedded in social relations that profoundly shape outcomes. The "formal rationality" of markets, Weber argued, can coexist with substantive irrationality in terms of human welfare.

The distinction between wealth extraction and wealth creation echoes through classical political economy. David Ricardo's analysis of land rent in Principles of Political Economy and Taxation (1817) identified how landowners capture value they did not create simply through ownership. Henry George extended this analysis in Progress and Poverty (1879), arguing that much of what appears as return to capital is actually economic rent—payment for the control of resources rather than productive contribution.

Contemporary theorists like Mariana Mazzucato, in The Value of Everything (2018), have revived these questions about what constitutes genuine value creation. Mazzucato argues that much activity in financial sectors and corporate management extracts value that was collectively created rather than generating new value. The ability to claim ownership of collective innovation and public investment represents a form of extraction enabled by power rather than compensation for genuine creation.

Friedrich Hayek, despite being associated with free-market economics, acknowledged in The Constitution of Liberty (1960) that the legal framework establishing property rights and contracts is itself a form of power structure that determines market outcomes. The question is never whether markets will be structured by power, but whose power will structure them and to what ends.

Amartya Sen's capability approach, developed in works like Inequality Reexamined (1992), argues that formal market freedoms are meaningless without the substantive capability to exercise them. A person without resources cannot effectively participate in markets regardless of how theoretically "free" those markets are. Sen's framework reveals that true opportunity requires not just absence of interference but presence of genuine capability—access to resources, education, health, and social support.

John Rawls, in A Theory of Justice (1971), proposed that economic arrangements should be evaluated by their impact on the least advantaged. His "difference principle" suggests that inequalities are only justifiable when they benefit those at the bottom. This framework implies that power imbalances violating this principle represent not efficient markets but illegitimate extraction.

More radical democratic theorists like G.D.H. Cole and contemporary advocates of economic democracy argue that genuine market freedom requires distributing economic power itself. In this view, worker cooperatives, stakeholder governance, and democratic control over investment represent not constraints on markets but preconditions for markets to serve human flourishing rather than power accumulation.

Ruth Towse and other economists studying labour markets have documented how monopsony power—when few buyers face many sellers—allows employers to suppress wages below productive contribution. This is particularly evident in creative industries, care work, and other sectors where workers face concentrated buyers. The solution requires not deregulation but restructuring power relations through collective bargaining, universal basic services, or alternative ownership models.

True market freedom cannot coexist with vast disparities in wealth and power. Every transaction occurs within a structure of power relations, and pretending otherwise serves those who benefit from existing asymmetries. The wealthy negotiate from positions of strength not because of superior productivity but because they can afford to wait, can access better alternatives, and can shape the rules governing exchange.

If markets are to serve human development rather than power concentration, they must be embedded in institutions that prevent the conversion of wealth into domination. This might include progressive taxation and redistribution, strong labour protections and collective bargaining rights, limits on inheritance and intergenerational wealth transfer, public provision of basic needs removing them from market logic, democratic governance of firms and investment, and robust antitrust enforcement preventing market concentration.

The question is not whether to interfere with markets but whether markets will serve democratic equality or plutocratic extraction. Recognition that power, not productivity, increasingly determines distribution is the first step toward building economic institutions worthy of free people. My next article will specifically dig into the main dynamics of the psychology of power.

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References

Bourdieu, P. (1986). The Forms of Capital. In J. Richardson (Ed.), Handbook of Theory and Research for the Sociology of Education. Greenwood Press.

Galbraith, J.K. (1952). American Capitalism: The Concept of Countervailing Power. Houghton Mifflin.

George, H. (1879). Progress and Poverty. D. Appleton and Company.

Hayek, F.A. (1960). The Constitution of Liberty. University of Chicago Press.

Mazzucato, M. (2018). The Value of Everything: Making and Taking in the Global Economy. Allen Lane.

Piketty, T. (2014). Capital in the Twenty-First Century. Harvard University Press.

Polanyi, K. (1944). The Great Transformation. Farrar & Rinehart.

Rawls, J. (1971). A Theory of Justice. Harvard University Press.

Ricardo, D. (1817). On the Principles of Political Economy and Taxation. John Murray.

Sen, A. (1992). Inequality Reexamined. Clarendon Press.

Stiglitz, J.E. (2012). The Price of Inequality: How Today's Divided Society Endangers Our Future. W.W. Norton & Company.

Weber, M. (1922/1978). Economy and Society. University of California Press.