The Free Market in Action

Recently, an attempt by the Chinese to corner the world market in rare earth mineral production demonstrated the power of capitalism in responding to market inequities. 

Rare earth minerals are a necessary component in modern electronics, and the Chinese have been maneuvering for years to consolidate their hold on the production of these vital elements. China currently controls the production of more than 90% of the world’s rare earths, and the U.S. has had to rely on Chinese supplies since the closure of Molycorp’s Mountain Pass, California mining operation. Although announced as a way to deal with what was characterized as a rare earth supply shortage, China sought to use its control over the rare earth market to announce supply restrictions last year that gave preference to Chinese companies in order to boost their competitiveness at the expense of firms in other countries. Rare earths are also a critical component in the production of weapons systems, and China’s action uncovered serious geopolitical ramifications for American defense. China’s attempt to control the supply of rare earths was immediately seen as flexing of its muscle and its actions did not go unnoticed.

Responding to the issue of Chinese control of the rare earth market and the subsequent sharp price increase resulting from their monopoly on production, Molycorp modernized and reopened its Mountain Pass mining facility and recently purchased Canadian rare earth processor Neo Material Technologies Inc. Molycorp’s reentry into the rare earth production market was responsible for the recent decline in prices for rare earths as concern over Chinese control of the market evaporated.

This episode is a perfect example of the free market in action to correct an imbalance in the production of a vital product. When Molycorp closed its Mountain Pass facility due to low prices for rare earths, the Chinese sought to use their monopoly power to restrict access and raise prices hoping to put its competitors at a disadvantage and pressure the American defense establishment. Prices of rare earths rose dramatically when the market realized the implications of Chinese control, and the increased prices caused Molycorp to reexamine its earlier decision to leave the market, thus alleviating a market imbalance. Congress was not required to pass a law; in fact, the only law applicable to this situation was the plain old economic law of supply and demand. This law is much misunderstood by progressive liberals who have no understanding of economics or the incentive of the profit motive.

Capitalism thrives on its ability to correct market distortions when given the opportunity. Busybody progressive liberals often refuse to give the free market a chance to correct inefficiencies in their zeal to be seen as doing something about a problem. Their inept actions create still more market inefficiencies through the law of unintended consequences than then must be taken into consideration and absorbed by the market. Markets have been overregulated to the point that American business is being strangled and economic recovery thwarted.

Regulations such as the Dodd-Frank financial reform act and the Sarbanes-Oxley corporate accountability act penalize honest companies already protective of their reputations while doing little to nothing to prevent fraudulent market participants from dreaming up ever more complex schemes to defraud the public. Their effect has been to increase the amount of paperwork required of public companies by the government in an effort to force accountability through voluminous documentation meant to increase the difficulty of papering over fraudulent acts. The problem with increased paperwork is the tendency to rely on the documentation being examined without actually auditing the underlying assumptions or fiscal components. In other words, it might actually be easier to commit acts of fraud if it is believed that regulators only examine the documentation without actually reviewing the firm’s books. Then, as long as the paperwork looked plausible, fraud could go on unabated for years if no attention was paid to the actual fundamentals of the business.

Meanwhile, firms that value their reputations and not likely to engage in fraudulent activity in the first place are saddled with the additional expense of compliance which then must be passed along to their customers. Some large companies actually welcome more regulation as a barrier to market entry for smaller firms that places them in an uncompetitive position relative to these larger firms which can better absorb the compliance costs.

Capitalism is the antithesis of the government command and control economic system and is vastly more efficient at allocating scarce capital to its most productive use. Progressive liberals will continue to decry the unfairness of capitalism with examples such as the fact that some sports star is paid more than a teacher in their bid to promote social justice, but it must be remembered that the market values the sports star more because they are a unique commodity compared to teachers and there are buyers for the services of that sports star. Capitalism is not about fairness, but about efficiency and this efficiency has resulted in the greatest standard of living in history. Life is not fair, but we all live much better due to the efficiency of capitalism and free markets.

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