The free market rewards success, regardless of how it was achieved. In this regard it is morally blind, encouraging ethical behavior only in so far as it proves effective, and equally encouraging unethical behavior wherever it produces results. This is why government agencies and regulations are an essential element of capitalism. I feel like this is such an obvious, fundamental element of capitalism that it shouldn’t need to be stated. But at the same time, I often get the impression that people urging free market solutions don’t understand this basic limitation of the free market.
I’m sure the most obvious objection to this idea is that the free market has a built in defense against unethical behavior: consumers. The idea is that when companies or businesses do unethical things consumers will punish them by doing less business with them. Like communism, this works better in theory than in practice. Probably the biggest barrier here is simple information: people need to know about unethical actions by a company in order to respond to them. Especially now, with as large and complex as companies have become, being an informed consumer is a difficult task even for the most aware and conscientious. Beyond that, though, people need to care more about the ethical behavior of the company they do business with than the benefits that company extends to them. Put another way, as long as people look at the price tag first consumers aren’t going to punish Walmart if they treat employees unfairly. Also, in order for consumers to adjust their behavior, they have to believe that an ethical alternative exists, and that their behavior has an impact on the company. Both are increasingly rare.
But even if individuals were vigilant in their efforts to punish companies for making money in unethical ways, there are still many ways for companies to avoid this check. For example, in the recent economic crisis we saw financial ratings companies acting in unethical ways that benefited their customers and harmed the economy at large. On a slightly larger scale we have the example of the health insurance industry, where the balance of power greatly favors the company over the consumer.
The point is: calls for deregulation may look appealing because it’s easy to see cases where companies are hampered by regulations. But the system depends on these regulations to function at all. Without them the free market not only fails to encourage good behavior, it demands bad behavior. The competition that drives the free market becomes a liability by forcing businesses to adopt any new practice that proves effective. Without an outside factor discouraging bad behavior business becomes a race to the moral bottom.