- Open markets are the aggregate of exchanges that occur in places with no, or minimal, regulatory environments which would create barriers to entry excluding potential firms from competing. This is distinct from competitive markets in which uncompetitive firms are pushed out of the market because of high prices or inferior goods.Closed markets most often occur under states that seek the protection of domestic firms against foreign competitors or domestic competitors that would supplant traditional companies or careers. Tariffs, subsidies, taxes, zoning, and legal monopoly statuses can serve as tools to create closed markets.
- Democratic movements support open markets when competitive pricing and powerful monopolies threaten the welfare of popular majorities. They can also promote closed markets when they wish to protect labor, eliminate large anti-competitive firms, or promote national industries for ideological reasons.
Open Markets and Capitalism
The concept of an open market describes an economic system with no regulatory barriers to free market activities. No protective taxes, licensing requirements, tariffs, subsidies, or other regulations restrict activity in an open market system. In these markets, there exists an equal opportunity for any seller to enter the market and negotiate with buyers to determine a price for their goods and services regardless of any legal or political status.Many governmentsenact protective policies meant to improve the competitiveness of national firms. Such policies are the most common reason for the creation of closed markets. Politicians, especially in regions noted for corruption, may also create closed markets by restricting access to markets to only private supporters. However, a degree of restricted market access exists in all sectors that rely on public contracting, which produce markets with very few firms vying for opportunities to meet market demand. Examples of such markets include defense spending and airlines.1 Economic thought promoting international competition through open markets was a key concept underlying the emergence of economic liberalismin the eighteenth century. Before this, the dominant strains of thought, now often categorized as mercantilism, saw a direct connection between national wealth and either (1) the direct protection of national firms by restricting access to domestic markets, or (2) incentivizing specific sectors like manufacturing through protective tariffs or inflationary monetary policy that promoted borrowing among domestic industries. No full transition away from such protective measures toward economic liberalism, especially between nations, has occurred in modern history.2 However, some nations, like the United States, currently have very little prohibitive barriers to international competition. Key to understanding the difference between open and closed markets is the concept of barriers to entry, which is a catch-all term for prohibitive legal barriers that prevent a new firm from entering a market. Such barriers to entry are theoretically distinct from firms’ inability to enter, or remain in, a market due to competitive efficiencies in pricing or superior products.3
In large part, open markets and modern capitalism have coevolved. However, the exact extent to which protectionism, and state intervention into markets, is inherently antithetical to capitalism remains a matter of debate. One of the most common arguments in support of the restriction of access to markets is that it allows for the growth of infant industries, or national sectors, usually manufacturing, that would not be able to develop given the low prices and products of dominant global competitors. Many industries in the United States, for example, developed under periods of protective tariffs in the nineteenth and early-twentieth centuries such as the Dallas Tariff (1816), Tariff of 1824, Walker Tariff of 1846, Tariff of 1857, and the Smoot-Hawley Tariff (1930).4 Most counterarguments to the compatibility of such protectionist measures that close markets to international competition depend on two principles. First, proponents of uninhibited open markets note that protectionism favors the protected firms over individual consumers, including other firms, who must pay more for products because of limitations to competitive pricing. Second, thy argue that protectionist closed markets ignore comparative advantage, or the economic principle that two parties to an exchange benefit most when each specializes in an activity for which they can produce a good or service at a lower relative cost.5 By limiting the ability for international firms to specialize and exchange without state-imposed costs, proponents of unfettered open markets argue, anticompetitive restrictions hurt both consumers and most suppliers to the benefit of interest groups.
Open Markets and Democracy
Policiesarising from democratic participation have, at various times,both supported and opposed open markets based on economic conditions and popular perceptions. Opposition to open markets generally emerges frompopular support for national industries. This type of movement finds support in democratic governments for one, or multiple, of the following reasons: (1) labor movements fear unemployment or some other form of economic loss as the result of the increasing market share of international competitors;6 (2) the economic interests of specific firms act as interest groups that influence the policy decisions of elected representatives;7 or (3) patriotic or nationalist sympathies support domestic firms to the exclusion of foreign competitors as a perceived social good in and of itself. Democratic opposition can also oppose these same rationales for protectionism. For example, when protectionism drives up prices or creates protected monopolies that exclude domestic competitors, mass movements can occur which promote freedom of competition. This also occurs in domestic markets within given nations where popular sentiment turns against legal monopolies who hold exclusive rights to the detriment of smaller suppliers who are pushed out of markets. This, for example, was one of the core complaints against the monopolistic joint-stock companies that held exclusive trading rights in early modern Britain. Many of the first policies promoting economic liberalism in England, Scotland, and North America emerged among Whig politicians and thinkers in the eighteenth century who wanted the opportunity to vie for market shares in international markets against these chartered monopoly companies.8 Many people in modern nations make similar claims of disproportionate rights of large corporations that they argue can exercise disproportionate legal and political influence to exclude competitors, often harming small businesses with fewer resources and connections.Democracy can serve as a tool to support these competing political positions in a public forum.
Why It Matters
The economic environment of many nations today, like the United States, support open markets generally. However, sizeable movements have emerged which oppose this to varying degrees, especially when it concerns the perceived threats to national industries by the rise of international competitors, or when competition threatens to displace traditional careers within given industries. For example, American manufacturers have sought state protection in recent decades as the national economy shifts more towards a service economy that relies on the comparative advantage of industrializing foreign exporters like China, India, and Mexico. Also, within the United States, many small businesses, especially in historic areas, use protective subsidies and zoning laws to exclude corporate competitors that would be able to undercut their prices or otherwise outcompete them for local market shares.9Both maintaining and eroding these protections depends on democratic participation on the national, state, and local levels.
1 Christopher J. Coyne, Courtney Michaluk and Rachel Reese, “Unproductive Entrepreneurship in U.S. Military Contracting, Journal of Entrepreneurship and Public Policy. Vol. 5, No.2.(2016),221-39.
2 Jonathan Hughes andLouis P. Cain, American Economic History. 7thed. (Boston, MA: Pearson, 2007), 6-7,70-6, 82.
3 Corporate Finance Institute, “Open Market: An Economic System with no trade barriers to free market activities.” Corporate Finance Institute. May 21, 2020; Sarwat Jahan and Ahmed Saber Mahmud, “What is Capitalism?”Finance & Development. International Monetary Fund; Walter J. Wessels, Economics. 5thed. (U.S.: Barron’s, 2012), 421-2.
4 Hughes and Cain, American Economic History, 225-8,254-5,412-9.
5 Wessels, Economics, 590, 593-7.
6 Hans F. Sennholz, “Protectionism and Unemployment,” Foundation for Economic Education. March 1, 1985; Danny Schechter, “Will Protectionism Protect Our Workers?” HuffPost. May 25, 2011.
7 Jay Garg, “The Politics of Protectionism,” Harvard Political Review. April 24, 2020.
8 William R. Scott, The Constitution and Finance of English, Scottish and Irish Joint-Stock Companies to 1720 (Cambridge, UK: Cambridge University Press, 1910-12);Lawrence A. Harper, The English Navigation Laws: A Seventeenth Century Experiment in Social Engineering (New York, NY: Columbia University Press, 1939); Nuala Zahedieh, The Capital and the Colonies: London and the Atlantic Economy, 1660-1700 (Cambridge, UK: Cambridge University Press, 2010),114-26, 133-4.
9 Arista Strungys, “Zoning for Small Business,” Zoning Practice. July 2016.