On Free Trade 3: Exports Sucking Out American Money By Rick Kelo

On Free Trade 3: Exports Sucking Out American Money
By Rick Kelo

TRADE DEFICITS... UH OH

A nation pays for its imports with its exports.  So what happens when a country (like the US) imports more than it exports.  This is a trade deficit.  In the 1600s mankind adopted a school of thought called Mercantilism.  Mercantilism stated that trade surpluses were good and trade deficits were bad.  Even though mercantilism was refuted around the 1800s this myth has existed in the collective consciousness of many who are still led to believe a trade deficit is bad.  What a trade deficit really means is that our nation is exporting money in return for foreign imports instead of exporting only goods in return for foreign goods.

An example:

Picture a lawyer who lives in downtown New York City.  He eats out every day at the restaurants nearby.  Breakfast, lunch and dinner.  Last year no owner or worker from any of the restaurants hired him to represent them.  He is running a trade deficit with his favorite restaurants: he is spending more money on the things they produce than they are spending on the things he produces.  Is this a recipe for the lawyer's economic collapse?!  Of course it isn't.

Somehow this exact scenario above becomes hard to picture when we are asked to picture a nation instead of our individual lawyer.  By the way, why isn't this lawyer's trade deficit with his trade partners a problem?  The restaurant isn't the only group the lawyer trades with in a year.  He happens to run a pretty big trade surplus with the law firm who employs him.

What if the lawyer was in a total trade deficit though?  If the restaurants were willing to give the lawyer food every day and expect no payment then he has gotten a very good deal.  Likewise if other countries in the world were stupid enough to send us awesome goods that we desire in return for nothing but $100 bills that would be a great deal.  Here's an easy explanation in the video below:

HOW TRADE DEFICITS WORK
Like we mentioned the idea of the trade deficit goes back to the mercantalists who felt the need to stockpile as much money as possible.  In the 1600s they were trading the goods their country made (its economic output) for money.  Except "money" in those days wasn't green pieces of paper, it was pieces of gold.  So, in effect, the Mercantalists were trading goods from their country (say cars & Florida oranges) for gold (also a good produced through mining output in another country).

What happened?

Well as one country ran a trade surplus more gold ended up in that country.  As we now know gold is a commodity.  What happens to commodities when the supply goes up?  Bingo.... price falls.  So as one mercantalist nation would amass a greater amount of gold from a trade surplus the price of that gold fell.  Since money was linked to a gold standard that decline in the value of gold made prices in the nation with the trade surplus rise and prices in the nation with the trade deficit fall.  Eventually the citizens of the nation with the trade surplus (and the big gold stockpile) started buying the cheaper foreign goods and gold flowed out of their country.  

That, ladies & gentlemen, is how economic equilibrium works.  The only people willing to ignore this truth are usually special interest groups lobbying for a special government protection to their small group.  They would prefer the federal government interfere with the voluntary spending decisions of American consumers as a special favor to them, while disguising their concern as the lowering of a trade deficit.

AN EXAMPLE: ASIAN TRADEThe Japanese export a lot of cars to America.  Japan also imports things from America.  In fact 80% of its oil is imported from America.  Now suppose America reverts to Mercantalist thinking, gets concerned with our trade deficits, and decides to reduce them.  It is decided we will artificially lower the amount of Japanese cars we bring into the nation.  Government will either restrict them directly by force through an import quota or indirectly by forcing prices artificially higher through a tariff.  In doing this the first order effect is American car sales must necessarily increase to make up the shortage in demand.  The second order effect though is that we have reduced how much oil Japan can buy from workers in Texas & Alaska.

Lastly, let me close by point out that it is a total myth that trade deficits are caused by foreign competition.  They're not.  A trade deficit is only caused by American consumers.  American consumers preferred to buy more goods from overseas than the amount of goods those same Americans produced, then decided to sell overseas.

TRADE DEFICITS AND JOBS
I'm going to close on this idea to shift us to tomorrow's article on outsourcing of jobs.  One of the common, but incorrect, claims about trade deficits is that reducing them will create jobs in America.  That is untrue because the trade deficit is precisely offset by another item called the "capital account surplus."  Explained simply when US investors invest capital in a foreign country, then that dollar value of capital flows out of the US.

Now hold that thought in the back of your mind and think about the trade deficit.  A trade deficit means that the dollar value of imports has been more than the dollar value of America's exports.  Foreign capital has flowed into the US.  The trade deficit is offset by these capital inflows as foreign investors have, in effect, built factories & businesses in the US.  The only way to eliminate the $540B trade deficit America had last year is to also eliminate a $540B foreign investment surplus that creates American jobs.

People who discuss the impact of trade on outsourcing claim jobs are being exported, but they're not.  The jobs that get outsourced move because foreigners have a comparative advantage over Americans in that industry.  That kind of outsourcing is clearly good for America because it has the effect of the American consumer getting to hire cheap foreign labor and collect up the gains from trade.

On Free Trade 2: Sweatshops, Job Outsourcing & More By Rick Kelo

On Free Trade 2: Sweatshops, Job Outsourcing & More
By Rick  Kelo 

It is the maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy.
~ Adam Smith

The next articles the rest of the week will look at:

• Trade deficits (tomorrow)
• Outsourcing of jobs (Thursday)
• Tariffs (Friday)

First let's look at some popular myths about trade.  Nothing too technical, just a few of the common objections we hear when this subject comes up.  I'll offer you an original thought & expose you to a new perspective on each myth.

TRUTHS OF FREE TRADE
Before the myths I want to share the Law of Comparative Advantage.  It says that its most efficient for you to produce what you're best at.  It doesn't matter if someone else is better at it than you are, so long as its the thing you're best at that's what you should do, then trade for the other things you're not the best at producing.

THE DOCTOR AND THE SECRETARY
Here's an example: imagine a skilled doctor who happens to be an awesome typist as well as awesome at practicing medicine.  It turns out he types twice as fast as his secretary.  It is still to the doctor's advantage to trade with the secretary because while he is 2 times better at typing than she is he is also 100 times better at practicing medicine.  Now take it one step further and tell me how stupid it would be for our doctor to sew his own clothes from scratch just to "create employment opportunities" for himself in the field of clothes manufacturing.

Compare that to the barriers against free trade.  First and foremost, just as the doctor is guided through trade to the most efficient arrangement for everybody the opposite is also true if we set up trade barriers.  They create inefficient resource allocation while also benefiting only a few privileged businesses at the expense of every consumer in America who pays higher prices.

MYTH 1:

• MYTH:Trade is a zero sum game, if we give something up the other country gains and we lose.
• TRUTH: Poker is a zero sum game, trade is a positive sum game.  A review of all 50 nations who have adopted freer trade in the last 45 years revealed the gains were 30 times larger than the costs defined as the domestic losses due to freer trade.  (World Bank: Tarr, Matusz, 2005).
• CONSIDER THIS: Trade is based upon voluntary cooperation.  When we peaceably trade with one another then that is a positive sum game because you are better off AND I am better off.  If we are not both better off by making the trade then we would not have exchanged.

MYTH 2:

• MYTH: Free trade helps multi-national corporations become more powerful.
• TRUTH: Free trade exposes corporations to competition.
• CONSIDER THIS: If the myth were true then why is it always large, powerful corporations & lobbies that ask for trade protection?  Without trade the consumer is limited to domestic goods and large corporations can corrupt or manipulate American politicians.  Anyone who's seen a badly run, inefficient business in a Congressman's district get propped up by an earmark understands this.  Compare that to the treatment large corporations receive under free trade: now the consumer can savagely reject companies who don't measure up by reaching across international borders and choosing the very best option available anywhere.

MYTH 3: 

• MYTH: A nation's economy grows stronger by selling a lot and buying a little.
• TRUTH: "When one nation exchanges a part of its commodities for a part of the commodities of another nation, the nation can gain nothing by parting with its commodities; all the gain must consist in what it receives." ~ James Mill, Elements of Political Economy, 1844.
• CONSIDER THIS: As far as economists are concerned nothing has changed regarding trade for over 200 years.  The more goods a nation imports the better its standard of living will be because imports represent the benefits of trade.  Its exports that represent the cost.

MYTH 4:

• MYTH: Trade deficits are bad, trade surpluses are good.
• TRUTH: Both imports and exports are gains to the economy, the total quantity of trade matters way more than the balance of it.
• CONSIDER THIS: When America imports cheaper foreign goods (say a Korean TV) we free up resources at home that can now be invested in new products, fund R&D, fund expansion and foster new inventions.  If we were inefficiently producing that TV domestically when a cheaper foreign version was available, then we would still have a TV but would lose all the other extra things we could have also gotten by using those resources to fund domestic growth instead of using them to produce the TV.  With protectionism we get only a TV, with trade we get both a cheaper TV AND additional growth in other areas.
• PS: The more we trade with other countries the more rapidly America imports and gets access to the best techniques & ideas & discoveries.  Instead of only having access to things discovered in our 1 country we get rapid access to the latest discoveries in all 196 other countries on Earth too.

MYTH 5:

• MYTH: Free trade gives other countries the growth in those industries that we should have gotten instead.
• TRUTH: Growth is between 3x & 6x higher in free trade countries than ones that obstruct free trade. (Sachs & Warner, 1995).

MYTH 6:

• MYTH: Americans can't compete with low priced foreign labor.
• TRUTH: Americans are paid more because of an economic concept called the marginal product of labor.  Foreign workers are paid less because their marginal revenue product is less, or in very simple lay terms they are less "productive."  What makes them that much less productive?  America has a vastly superior capital structure.  This refers to the thousands of intermediate stages of production that all have to line up to create a finished product you buy (a "consumer good").  If you'd like to learn more about how the capital structure fuels the economy read On Economic Progress: Raising Standards of Living.

MYTH 7:

• MYTH: Free trade let's multinational corporations run sweatshops.
• TRUTH: When western MNC's come into a nation they set up factories with safer and cleaner conditions than presently exist in that nation.  This puts pressure on other companies to improve their working conditions in order to compete for labor.
• CONSIDER THIS: "American consumers are the main catalyst for better worker rights in China... if Nike and Reebok go - and they very well could if the trade status is rejected this pressure evaporates.  This is obvious."
  - Zhou Lital, China's most prominent labor attorney; Source: Congressional Record p. 7999, Testimony to the House of Representatives.

On Free Trade 1: The Opposable Thumb vs Trade By Rick Kelo

On Free Trade 1: The Opposable Thumb vs Trade
By Rick Kelo

If there were an Economist's Creed, it would surely contain the affirmations "I understand the Principle of Comparative Advantage" and "I advocate Free Trade." For one hundred seventy years, the appreciation that international trade benefits a country whether it is "fair" or not has been one of the touchstones of professionalism in economics. Comparative advantage is not just an idea both simple and profound; it is an idea that conflicts directly with both stubborn popular prejudices and powerful interests. This combination makes the defense of free trade as close to a sacred tenet as any idea in economics.

~ Paul Krugman

In the last 30 years the world abandoned centralized economic controls and has moved toward freer & freer trade year after year.  Still though there is no more divided subject than that of free trade.  As Paul Krugman notes almost every economist for 200 years has supported free trade unequivocally and without reservation.  However, to the common man viewing the world around him the case is far less clear.

So what do those guys know that makes them support free trade that they aren't telling the rest of us?

I assembled to share with you the best explanations of how trade functions.  Analogies in plain English that are interesting, thought provoking and help sum up what it is other humans know about free trade that we haven't yet considered.

I split these ideas into 4 topics around 4 major areas:

• Job losses due to trade: outsourcing
• Trade Deficits
• Tariffs
• Myths about Free Trade like sweatshops

WHAT IS FREE TRADEFree trade is allowing goods to be traded between nations without the use of force to restrain trade.  The opposite of free trade is called "Protectionism."  It refers to the use of government protections to prop up businesses that were otherwise going to die off or not be as profitable because they struggle to perform if they have to compete.  The power of capitalism over all of human history has been harnessing man's capacity for achieving great things through the discipline caused by exchange in the marketplace.

MENTAL SOMERSAULTS
There are a lot of mental gymnastics that takes place around the topic of free trade.  Here are a few examples:

• On one hand every one of the 197 countries on Earth engages in trade with other countries.  
• On the other hand 0 of the 197 countries on Earth engage in free trade.

• On one hand we are told foreign imports are bad because they increase unemployment among Americans.
• On the other hand we are told we institute trade sanctions against North Korea & Iran because it lowers their standard of living.

More than a few contradictions are afoot.... so which ones are right and which are not?  

TRADE VS. THE OPPOSABLE THUMB
Its not man's opposable thumbs or his invention of the wheel or fire that created the modern society we have today.  In fact human beings had all those things 6,000 years ago.  What brought you and I out of the Stone Age and into the incredible society we see around us every day was Trade.  Trading with each another gave rise to the Division of Labor.  It allowed a society to form that contained specialists.  Instead of spending all day hunting/gathering to manage to scrape together just enough calories to survive we can do other work.

And how do we get the food we need to survive that we used to have to work for?  We buy it of course, and not only that but the free market system & free trade creates incredible discipline.  This discipline in the market caused by competition makes all goods become gradually less expensive and higher quality over time.  As one example of these improvements to the left is a graph of the portion of family income used to purchasing food.

Source: Capitalism Makes You Fat

Without trade mankind would be back in the stone age.  Any one who doubts that should remember the predicament of Robinson Crusoe when he had to depend on himself for all of his needs instead of trading his skill as a lawyer with other people who were better fishermen, tailors, and carpenters.

FREE TRADE AND PEACE
If you are against foreign wars then you are in favor of free trade.  When goods don't cross borders soldiers will.  If the time ever comes that mankind needs reminded of this then it can look back to its recent past in the 1930s.  After America enacted the crushing Smoot-Hawley Tariff Act in 1930 other nations around the globe followed suit raising tariffs and forming import quotas to protect business at home.  The hopelessness wrought by crushing free trade not only deepened the global economic depression, but set the stage for World War 2.

SWEATSHOPS
As a segue into tomorrow's look at common myths about trade including a look at sweatshops let's hear what people in the third world actually think about multi-national corporations who come and open up shop in their nations:

DAILY LAUGH: Hitler vs. Confederate States of America

Not even from the south myself but this is hilarious.  It especially gets good at about the 2 minute mark when Hitler starts speaking.

Krugman Calls for Death Panels & Middle Class Tax Increases By Rick Kelo

Krugman Calls for Death Panels & Middle Class Tax Increases

By Rick Kelo

Paul Krugman has been the nation's single biggest advocate for Obamacare.  Even after we spent a half billion dollars of your money in order to create a website capable of enrolling 6 people he has still been adamant in his near daily defense of Obamacare.  

Now let's look at what does Paul Krugman knows about what it will take to make Obamacare financially solvent.  Also, FYI America presently has an unfunded liability of $42.8 trillion in Medicare funds shortage and an unfunded liability of $20.5 trillion in Social Security shortage.  The federal government brought in $2.5 trillion in tax receipts last year.  So if you think there is somehow money laying around to fund Obamacare without measures like the one's Krugman secretly suggests.... well.... its time for you to reconsider the logic of that position.

Before launching into a partial transcription below let me make one point of clarification.  One of the things you will hear Paul Krugman call for is a Value Added Tax to especially extract money from the Middle Class.  In the OECD nations who have a VAT the average is 18.97%.  So in Krugman's ideal world we slap you with a 20% additional tax on everything you buy.  His second point is the distinctly un-American idea of death panels.  The fact it smacks of Animal Farm where the pigs send the horse to the glue factory is why its not surprising to hear it roll of the lips of a guy like Paul Krugman.  To all the naive out there though let me make this general point: whenever government is given scarce resources then it must decide how to allocate them.

Eventually we do have a problem. That the population is getting older, health care costs are rising, and all of that.  So there is this question of how we're going to pay for the programs. The year 2025, the year 2030, something is going to have to give.

My vision of how I want it to be done is that we're going to need more revenue.  Surely it will require some middle class taxes.  We won't be able to pay for the kind of government the society will want without some increase in taxes, not a huge one, but some increase in taxes on the middle class, maybe a value added tax.

And we're also going to have to make decisions about health care, doc pay for health care that has no demonstrated medical benefits. So the snarky version, which I shouldn't even say because it will get me in trouble, is death panels and sales taxes is how we do this.

On Mainstream Media, Monsanto & the Tea Party By Rick Kelo

On Mainstream Media, Monsanto & the Tea Party
By Rick Kelo

In the morning I was listen to the Michael Smerconish program on POTUS on Sirius XM while driving.  I like hearing Michael's point of view because he is very centrist and takes a very practical non-dogma based approach to issues.  A couple months ago he took a call from a caller who made a point I felt was very interesting.  I mulled on it, I think the caller's point was excellent and worth sharing and elaborating on.

The program was discussing a speech former Governor & Secretary Tom Ridge gave last night to Log Cabin Republicans.  In it Ridge, a moderate Republican, had some very direct comments about Republican ideologues and their insensitive attitude on gays and various other topics.

HOW AMERICA CHANGED

So after discussing Ridge's speech the caller told her story.  She is a Democrat, her parents are/were Republicans.  As a teenager they would have delightful political discussions.  Despite their big differences on issues the conversations were never unpleasant.  Then the program discussed why it is conversations like that can't, or don't, seem to take place in America any longer.

WHY IT CHANGED?This is an open-ended question I leave to all of you.  On the show the caller & Michael discussed the sound bite world we live in.  If you can't make your point in 8 seconds or less people lose their attention.  Smerconish discussed how when he does programs on Hardball for Chris Matthews that a very very long program is 8 minutes, but most segments are 2-3 minutes.  His point was that there are a lot of issues that are complex enough they don't lend themselves to such a short treatment.

THE ROLE OF MAINSTREAM NEWSOne of the points that came up in this radio conversation caused me to stop and pause.  They discussed the fact that almost all news that is forwarded around on the internet between both mainstream websites along with Twitter and other non-mainstream sites is not written by reporters who have investigated the issue.  In the very large majority of stories that hit the AP wire they are written with the sound bite mentality in mind.  In order to get picked up off the AP wire they have to be sensationalist and make strong polarizing points.  

TESTING THIS THEORY WITH TODAY'S PAPER 
As I considered it more and more and reflected back on the last 20 or so stories I've read over this week I see that trend at work in every one of them.  To put it to the test I have a copy of USA Today sitting in front of me as I write this.  The cover story is:

Tea Party Backers Set New Target: Farm bill subsidies.

The article proceeds to explain that the only people who oppose the huge agri-business subsidies are far fringe Tea Party radicals!  I think if we polled registered Democrats and asked them if they support an $18 billion dollar check from the federal government being given to Montsanto, a profitable Fortune 500 company.... most would vote no.  So how is it the cover story on a major newspaper reflects no diversity of opinion on a very obvious issue most Americans oppose?  Very few people, regardless of political persuasion, would say they support corporate welfare like the farm subsidy program.

This example really made the discussion stick with me.  Once I saw today's farm subsidy article on USA Today it just absolutely drove the point home.  Now not only am I not a Republican but I oppose almost every item line by line on the far right ideology.  I am pro-gay rights, pro drug legalization, pro abortion, against the growth of military spending, against foreign wars and a number of other traditionally quite liberal ideological areas.  I'm also against farm subsidies and even published a detailed look at how the Farm Bill causes sugar prices in America to be double the price the rest of the world pays.  If you'd like the names of the 4 largest sugar companies in America (they also take home 71% of the sugar subsidies).... corporate welfarism at its worst.... I describe it in detail here: 

Sugar = Big Business Wins, You Lose, Government Laughs (Part 2)  

However, in keeping with the question about why there is so little middle ground in political discussion.... why issues have become so polarized.... I realize that in mainstream media, like the cover of USA Today, there is no place for a voice like mine.  Or yours.

Voting Patterns & Gun Violence

The Black Market: Organized Crime, Indians & NY Cigarettes By Rick Kelo

The Black Market: Organized Crime, Indians & NY Cigarettes
By Rick Kelo

There are some irrefutable laws you just can't escape, especially gravity, death and taxes.  Just like the law of gravity the law of taxes is that whatever you tax you get less of.  Just as New York recently found out.

The underground tobacco market in New York has been exploding since the state levied a $4.35/pack tax on cigarettes.  For New Yorkers unfortunate enough to buy their smokes in New York City the city tacks an additional $1.50/pack on top of that.  Always interested in championing the benefits of higher taxes President Obama's first action upon taking office was to add a $1.01/pack tax which really starts to pile up on poor New Yorkers.

So what's a New Yorker to do?  Well there's always Option A: pay $12/pack for some smokes.  Then there's Option B: buy on the black market.

RISE OF THE BLACK MARKET

After just 5 months under the increased tax, which went into effect the summer of 2010, the New York Post reported:

Sales of taxed cigarettes have plummeted 27 percent since July, when state lawmakers raised the excise tax to $4.35 a pack on top of the city’s tax of $1.50, making the average price of Marlboros here $11.60, with some shops charging as much as $14.

Sounds optomistic, we've encouraged people to quit smoking!  Chalk up a win for government forcing its morality onto an unwilling citizenry, right?  Well the story's not quite finished, let's pick up a couple other points from the New York Post article:

The underground tobacco market is spreading like a fast-growing cancer in the wake of tax hikes that make New York cigarettes the most expensive in the nation — and it’s costing the state tens of millions a month in lost tax revenue, a Post analysis has found.

Government data show that New York state is being smoked out of as much as $20 million a month from all these illegal cigarette purchases — an estimated 7.3 million packs a month sold off the state tax radar.

"Goodfellas" A young Henry Hill sells blackmarket
cigarettes in NYC.

As it turns out New York (and numerous other states around the country) happen to have Indian reservations.  Those Indian reservations happen to transact more commerce than just running roulette tables; they also grow tobacco.  Seems some of that tobacco might be leaving the reservations and entering the black market.  Now if back alley abortion doctors taught us anything as a nation it was, hopefully, that trying to legislate your morality onto others by making a thing illegal or highly taxed only pushes it into the shadow economy: the black market.

Also, a great many smokers have also taken to rolling their own cigarettes from pipe tobacco as a means to bypass the per carton cigarette taxes.  In my own none-too-scientific look around I noted that a 1-pound bag of rolling tobacco was $16 (Source).  In comparison a package of cigarettes has about 0.7 ounces so that $16 bag should produce about 20 packs of cigarettes.  Quite a fair improvement from the $14.50 per pack of cigarettes that is now the average in New York (Source).

THE TAX LESSON

Politicians are always eager to have more of our money to spend.  What they forget in their eagerness is that people change behaviors to avoid paying taxes.  The technical term is.... not too surprisingly... "tax avoidance behavior."  So increasing the tax rate on something does not necessarily mean that tax will now bring in more money.  As New York found out with its excise tax on cigarettes, many times it means you're going to bring in less money under the new, higher tax.  This is a concept we understand thanks to the work of Dr. Art Laffer and his Laffer Curve; a technical concept he perfected based on ideas he drew from the writing of John Maynard Keynes.

The other lesson comes in the form of what's known as "Public Choice" economics.  Politicians love programs that produce visible short-term effects, but are always oblivious to the long-term distortions they cause.  That idea brings us to the next area:

ENTER ORGANIZED CRIME

As anyone who's ever watched Goodfellas was already aware tobacco is nothing new to organized crime.  At the moment the FDA is mulling over a ban on methanol that it would very much like to enact.  However, just like America's War on Drugs has shown, making a product people demand illegal does not make it go away.  What it does do, however, is give a monopoly to existing criminal cartels.  Prohibition in the 1920s is a classic example of this effect.  In fact drugs are present in every town in the entire country, and given how well the "War on Drugs" has increased drug availability I recommend the government launch a "War on Fitness" next.

Thankfully, at least a few respondents to the FDA's announcement seem to present a voice of reason against more harmful & needless government intervention.  In a letter to the FDA dated August 28th, 2013 the Chief of Enforcement for Virginia's Cigarette Tax Board said this:

The contraband market would thrive under a ban and would increase criminal activity, including activities by organized crime and terrorist groups.  Federal and state law enforcement efforts already are under tremendous pressure.  They will not be able to handle the resulting increase in criminal activities.

Paul J. Carey III; Chief of Enforcement/Enforcement Coordinator; Northern Virginia Cigarette Tax Board  

I agree with Paul Carey.  Prohibitions have never worked, and hopefully America ceases its trend toward a prohibition on tobacco or methanol.  Legislating our morality as non-smokers onto other people is immoral.  People have a basic human right to their bodies and to their private property.  I am in the 81% of American adults who don't smoke, however, having a majority does not make it moral to aggress against the minority 19% who are smokers - even if they are engaged in a practice that hurts themselves.

The video below is one investigative journalists look at the black market that has sprung up in New York in response to high taxes:

Rick Kelo Addresses Free Market Concerns part2

Yesterday Newsvine member rational thought-3748544 made a post that contained a list of areas he is concerned about in the economy around us.  Some are mostly abstract, others are things we see every day.  I am going to address his questions as to how each area functions in a proper market economy.  Here is his list:

In reply to:  rational thought-3748544 #1.4

tainted food, bad pharmaceuticals, unsafe products, polluted air and water, underhanded banking practices, etc, etc, etc because you or you survivors can sue for compensation, if you have enough money from the $5/hour job you can only get.

And a bonus question on how economic power concentrates:

In reply to:  rational thought-3748544 #1.15

If the US suddenly became totally Libertarian overnight, you would see the biggest wealth, power a resource grab in the history of the world by a few with no legal way to stop them.

===========================================================

1. Tainted Food.

This question is based upon a lack of weighing our options from a statistical standpoint.  America in 2013 has a literal army of government food safety inspectors, and yet every month on the news there's some salmonella outbreak or another and a food recall.  Food contamination occurs at the same rate that it did prior to this army of bureaucrats being given their clipboards, but why?  Why is it that government regulators have failed to keep America safe from tainted food?  The answer is really a simple one if you pause to consider it:

Where do these regulators come from?  The general American population.  Unless we hire some breed of super-humans they will make errors at the exact same rate working for the government as their rate of error as a food inspector working for the corporation being regulated.  That is why the government bureaucrat and his paperwork have failed so badly & cannot keep you safe.

Now what is the free market solution to tainted food?  Quite simple, its all around you every day.  Where do you buy your food?  If you're like nearly everyone you buy it at a grocery store or some large retailer like a Super Wal-Mart.  The profit those businesses earn is in part conferred on them by the consumer because the consumer is not capable of effectively judging the quality of 20 different Florida orange growers.  So instead he pays a margin to a middle man like Wal-Mart who hires a team of highly trained specialists in the fine arts of procurement to vet out the best food producers.  There is a considerable economic stake for those food companies to produce the highest quality food possible or they will immediately lose their biggest client: the large national grocery store chain.

2. Bad Pharmaceuticals

What an odd combination of beliefs Americans have on this one.  One of the great problems of government economic interventions is they never work, then are never removed.  Instead a second, third, fourth, etc additional intervention is tacked on.  Pharmaceuticals is no different.  On the one hand every campaign cycle we hear stories about how people can't afford their prescription drugs.  On the other hand the federal government makes the cost of producing new drugs sky high through its mountain of regulation & the army of bureaucrats an entrepreneur must navigate to put a drug into circulation.  Instead of asking about bad pharmaceuticals you ought to be asking about all the good pharmaceuticals unavailable to you because the government inspectors held them from the shelves.  

The free market take on pharmaceuticals: As I write this, in October of 2013, the bottle of Aspirin in my medicine cabinet says nothing on the label about the fact it will save your life if you're having a heart attack.  Why?  The FDA forcibly forbids the maker of that product from sharing that vital information with consumers.  How about beta blockers? Eli Lilly developed them down home in good ol' Indianapolis, Indiana... in 1958!  As of 1980 the FDA still refused to grant their approval for use in America even though they'd now been used in Europe for decades when Milton Friedman called the FDA out on national television in the clip below.  The FDA was still blocking the use of beta blocker based drugs in the US when their discover, James Black, won the Nobel Prize in Medicine for his work with Beta Blockers in 1988!  According to the CDC (Source) heart attacks were the #1 leading cause of death in America every year in that 34 year period between the discovery of Beta Blockers and the FDA approving the 1st beta blocker containing drug for sale in the US.  In 2013 there are only 3 beta blockers approved by the FDA, the first didn't get approval for use in America until 1992... a full 34 years after its discovery in 1958.

3. Unsafe products 

One of the many misconceptions among people is that capitalism means no government.  Nothing could be further from the truth.  Free markets require government to perform certain legitimate functions like sanction & protect private property rights, provide courts where people who engage in dishonest commerce can be punished and made to pay huge sums of money, provide police forces to protect private property rights and other functions.

The Free Market Take on Unsafe Products: This one is pretty obvious.  What methods are available to protect consumers?  Well first there's the court system which punishes anyone who engages in dishonest commerce.  Then there are the solutions the free market itself has come up with separate from government.  We've already discussed in #1 Tainted Food the role that intermediaries play in providing expert assurance of product quality.  Others include Underwriter Laboratories (the UL stamp on your electronics), which tells you the product has been certified to meet electrical safety standards; Consumer Reports; Angie's List, Moody's credit rating agency, Transunion, Equifax, product reviews on Amazon.com, etc all free market solutions.

4. Polluted Air and Water 

Private property rights are the cornerstone of both the political philosophy of Liberalism and its economic off-spring Capitalism; that is why if you are a Liberal you can never be a Socialist.  Why do we see pollution in the air & water where instead of on land?  I can't come dump garbage on your land.  If I do you will sue me and win not only some money (exemplary damages) but I'll be forced to clean it up.

The Free Market Take on Air & Water Pollution: The only reason people are able to pollute into the air & ocean is we have no property rights.  The community owns them, which means no one owns them.  We have air socialism & ocean socialism, which is why those areas are polluted.  If, instead, America implemented a more Ad Coelum property rights system there would be no pollution. The free market solution to polluted air & water is simple = let the free market system work.  Let people own air & water instead of having the government own them & people will take care of them.  If I live next door to a large factory that is polluting my air and I have the legal right to that private property I can sue and force them to stop polluting.  Under such a regime of secure private property rights that capitalism calls for then business would very quickly adapt to the point the specific types of pollution we are worried about today would disappear.

5. Underhanded Banking Practices

I'll do my best on this one.  Frankly I've never heard of banks being underhanded; I think rational-thought is attempting to refer to the distress in the broader financial services sector during the Great Recession, but the question is banks specifically so I'll keep it to that.

Free Market Take on Banking: This is another easy one.  America in 2013 does not have a free market banking system, very far from it.  It has a system that NEVER could exist in the free market, and one that never did exist until the government created it.  In the free market banks can only issue notes for the amount of reserves they have on hand.  Banks perform the vital role of acting as credit intermediaries for society as a whole, but under a totally unmolested free market system a bank with a million dollars in the vault can issue a million dollar home mortgage.  The Federal Reserve allows banks to engage in fractional reserve lending, which is to say the government tells them: "You only have to keep 5 cents in the vault for every dollar you lend out."  When its that easy to print money it encourages irresponsible behavior.

6. Low Wages: if you have enough money from the $5/hour job you can only get 

This one is easy because its fallacy from beginning to end.  The free market system creates not only higher and higher wage rates but faster and faster wage growth.  Only when this process is derailed by government intervention against the free market does wage growth falter.  If you really have any question at all on the wealth created by the free market system ask yourself if you'd rather live in capitalist South Korea with the 9th highest income in the world or socialist North Korea where the average family income is $900/year?  I've compared Zimbabwe & Botswana previously (article viewable here), but Botswana with nearly total free market capitalism was the same size as socialist/Marxist Zimbabwe in 1980.  Under the free market system Botswana now has an average income of $22,000/year; Zimbabwe?  Reports vary between $800/year and $2,400/year.

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BONUS QUESTION

In reply to:  rational thought-3748544 #1.15

If the US suddenly became totally Libertarian overnight, you would see the biggest wealth, power a resource grab in the history of the world by a few with no legal way to stop them.

Statements like this one are not basing that statement on an understanding of how economies work they're based on superstition & prejudice.

In fact, wealth concentration takes place due to the collusion of government & big business.  President Obama's policy of economic fascism is a great example.  Consider the following facts.

Wages as a share of national income were:

1. 64.8% in 1985 once Regan's economic policies were in place
2. 64.99% when Obama came into office
3. 61.6% of national income in 2012 after a half decade of big government Obama economic policy

How about Corporate Profits as a share of national income?  The collusion of government & business yet again:

1. 6.82% in 1985 once Regan's economic policies were in place
2. 7.85% when Obama came into office
3. 11.27% of national income in 2012 after a half decade of big government Obama economic policy
4. 7.78% in 1963 under Kennedy's economic policy.... (just for one more further back comparison.)

There was no real change in the portion of the national income flowing into corporate profits from Kennedy, to Reagan, to the start of the Obama presidency.  Then under Obama's big government regime we see an explosion in the proportion of national income flowing into corporate profits and matched decline in the proportion of national income flowing to wages.  How about that?  Its high time you reevaluate your "libertarian wealth grab" nonsense; the concentration of wealth occurs when free markets are not allowed to function.  The more hampered they are, as Obama shows us, the worse things become.

Rick Kelo Addresses Free Market Concerns part1

This article is in response to Newsvine member tony-4245231, who made a post that contained a list of areas he is concerned about in the economy around us.  Some are mostly abstract, others are things we see every day.  I am going to address his concerns so he can appropriately direct his misgivings about this area toward the true cause of each item.  Here is his list:

In reply to:  tony-4245231 #4

Free enterprise gives us: black markets, war, drug cartels, gun smuggling, yellow cake smuggling, Somali pirates, Enron, Bernie Madoff, toxic air in LA, BP oil spill, Chinese knockoff counterfit designer handbags and movies and music CDs, medicare scams, tax cheats, Love Canal, Three Mile Island, Super Fund Sites, ..................... I'm getting finger cramps.

In reply to:  tony-4245231 #4

black markets

In the unhampered free market people are free to purchase anything they desire so there is no black market.  Government bans on the type of commerce people can transact push things into the shadow economy.  Marijuana is a classic example.

In reply to:  tony-4245231 #4

war

Caused by government, the free market creates peace.  Political theorists call it the McDonald's Principle: no 2 nations who each have a McDonald's will ever attack one another.  Government blocks free trade between nations with tariffs and other protectionist measures, and as famous economist Ludwig von Mises once said: "When goods don't cross borders soldiers will."   Under the free market system people would be free to trade and cross borders without restriction.

In reply to:  tony-4245231 #4

drug cartels

In the unhampered free market people would be free to injest whatever they wish.  Drugs would be legal.  Government making drugs illegal gave a government protected monopoly to drug cartel.  Under capitalism anyone with a patch of ground could grow marijuana, prices would be far lower, and people would be able to buy drugs for which they were sure of the quality.  Instead, the monopoly government has given to drug cartels creates an artificial barrier to entry.  Now in order to sell drugs you need a fleet of speed boats, airplanes, and submarines to get them across the border and an international distribution network.  Because you cannot legitimately retail drugs in the manner businesses sell everything else it requires street level black market peddlers which is how government's prohibition on drugs has further empowered not just the cartels but violent street gangs who serve as their distribution network. 

In reply to:  tony-4245231 #4

gun smuggling

Again in the unhampered free market there would be no smuggling because people who ranked their preference to purchase a gun higher than their preference to purchase some other good with the quantity of money at their disposal would be free to do so.  No different than above.

In reply to:  tony-4245231 #4

yellow cake smuggling

Again this is an action of government not private industry.  The only uranium smuggled between borders is done so by governments for the purpose of making devices of war.  Its not smuggled by entrepreneurs who own a business in the electric utility sector; to state capitalism has anything to do with this is nonsensical.

In reply to:  tony-4245231 #4

Somali pirates

The foundation of the free market system is private property rights and their protection.  The basic belief of capitalism is that you should be free from aggression & coercion to do anything you wish with your own body & private property (of which money is one type).  Theft & piracy are not acts caused by the free market system and they go against the very principles of the free market.

In reply to:  tony-4245231 #4

Enron

Enron epitomized everything that the free market is not.  Enron existed because it tapped into the government; it is a classic story of how big government & big business get in bed together and screw the little guy.  Are you aware that in 1997 President Clinton directly interceded on Enron's behalf to help Enron land a $3 billion deal in India?  Enron got into the super-regulated California energy market and was given a government utility monopoly by the California government.  Enron was able to buy (lobby) for government regulations that harmed its competition while excluding Enron from any impact.  The free enterprise system is built on earning money honestly through voluntary cooperation.  Notice something about Enron in 2013 though?  Its stock is worth about a penny a share, or in other words the free market system punished Enron for its dishonesty.  Enron was forced out of business; compare that to the US federal government's $122 trillion in unfunded liabilities.  Lastly, unlike if the government suddenly went out of business when Enron went out of business what happened to their nuclear power plants?  Did they suddenly turn into dust?  No, they were purchased at a fair market price.  Honest people sprung up to offer legitimate growth to the market place and the dishonest company was punished by the free market with extinction.

In reply to:  tony-4245231 #4

Bernie Madoff

Do you think Madoff could have ever amassed the amount of investment dollars he did without the government through the SEC constantly giving him their stamp of approval?  He never would have lured in as many people as he did and caused the harm he did without government legitimizing his actions.  It was the seal of government approval that caused people to be less careful in making investment decisions.  There would have been a lot more due diligence performed if people didn't think Big Brother was doing it for them.  Want proof?  When you opened a checking account did you ask for the bank's financial statements to make sure they were a financially safe bank?  Of course you didn't, because they're all backed by the government.  The more people presume Big Brother is protecting them the less they protect themselves, then a Ponzi scheme like Madoff's can grow to the size it became when under a free market he never would have been able to pay back his early investors and would have been found out.

In reply to:  tony-4245231 #4

toxic air in LA

Let's talk property rights.  The free enterprise system is founded upon property rights.  If you dump trash on my front yard, because it is my private property, the police will arrest you, you will be forced to clean up my property, and I will sue you and win a big sum of money in exemplary damages the court awards to discourage others from engaging in that behavior.  Except in the air we don't have the free market & we don't have its private property rights: we have air socialism.  We have socialized that resource.  Society in general owns the air, which means no one owns it.  Suppose instead we had the free market solution and you owned the air above your property.  This legal concept is called ad coleum.  If the people living next to a polluting factory could sue the business doing the polluting for harming their private property then business would have rapidly adopted its practices.  Except for one thing: the free market can't function to prevent air pollution as it otherwise would because government prevents private property rights to function in this area.

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Now after applying correct free market theory to this long list of fallacies frankly I'm getting finger cramps so I'm going to stop here.  The theme is very clear: once we analyze these items the blame for each is a failure of government not a failure of the entrepreneur.