Thoughts, essays, and writings on Liberty. Written by the heirs of Patrick Henry.

July 20, 2009

“The Free Market In Action”

by Brad Warbiany

Kevin Drum observes the lobbying fight between merchants and credit card companies. Card companies charge fees to merchants for the ability to accept cards, but if competition makes them unable to fully pass those fees along, they end up eating out of profit margins. So merchants want to get Congress to slap restrictions an the card companies to reduce fees.

So what does Kevin Drum do? He champions the “free” market! (Bold added, italics original.)

In fact, I’d go further: let’s kill two birds with one stone and just abolish interchange fees altogether. Card companies would then be forced to charge higher annual fees to credit card users — fees that (a) would fall solely on the people actually using credit cards and (b) would make it obvious just how much credit cards actually cost. That strikes me as an excellent idea. Credit cards aren’t a free lunch, and there’s no reason that consumers should be fooled into thinking they are.

And if that means consumers end up using credit cards less — well, what’s wrong with that? It’s the free market in action.

So right now we have a position of freedom: credit card companies compete with each other on low annual fees and other benefits. They can afford to do this by charging merchants interchange fees, who must weigh the costs of the fees with the potential lost business by not accepting cards. It’s not a nice system for the merchants, but they can walk away from the cards if they want (and some do so, annoyingly IMHO).

So merchants want to run to Congress to slap regulations on the companies. And Kevin Drum wants to go one step farther and — with the force of government — remove the fees entirely.

He then suggests that when the government has FORCED the new business model upon merchants and card companies, changes in behavior of card users are “the free market in action.”

It is a market in action, Mr. Drum, but it’s certainly not a free one.

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  • SWilliams

    The fees are simply one more toll that drives up prices for you and everyone else, lord knows 20% interest isn’t enough for exponential growth, it is not something the merchant is paying it if they wish to stay in business, but rather the customer. You simply aren’t told that their prices are based on everyone using Am Ex, or Discover I can’t remember which my wife said costs the most. So in the end it isn’t the merchant getting screwed it’s you when you pay with cash or Visa.

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