Why don't free markets self-correct like my economics book told me?

Someone at Reddit posed this question.  It's based on a false assumption, and I'd like to explain what that assumption is, and why it's false.

Contemporary markets don't self-correct because the assumption underlying that statement is a free market, something you do not have now. You are living in the age of the most blatant interventionism mankind has ever seen, where governments distort price signals that would normally inform the market participants what to do next:

• patents
• copyrights
• money supply monopoly and inflationary "policy"
• other state-sanctioned monopolies
• wage floors and ceilings
• workplace regulations
• labor regulations
• unionization
• trade caps / tariffs
• taxes
• subsidies
• bailouts
• corporate personhood / limited liability

None of those things exist under a really free market -- they are all artifacts of the government, enforced through very clear and very present threats of violence (jail) and destitution (fines). You just don't notice all of this because you're used to it; does a fish notice the water? Of course not, he is in it.

There is, however, ample evidence of this distortion if you look closely at the market:

• How did Microsoft get a monopoly? Copyrights.
• Why are cutting-edge drugs and medical imaging so expensive? Patents.
• Why is there nonvoluntary unemployment? Wage floors.
• Why do corporations engage in evil things like pollution or bribery? Because the CEOs and shareholders know that, should the corporation get sued, they can either settle or won't be held personally responsible.
• Why is nigh everything sweetened with high-fructose corn sugar? Corn subsidies.
• Why did companies irresponsibly lend money to NINJAs? Artificially low interest rates.

The truth is there and is available for your perusal -- it's just severely clouded by orthodox myth.

So, you see, your economics book is correct -- it's just not referring to the world you live in. Now, you tell me, how do you expect markets to react appropriately under the price-distorting influence of the scenario you're living in?

The road to hell is paved with good intentions, and we're pretty much nearing the cliff at full throttle.