On Markets...(or why lawyers should stick to the law)

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The problem with lawyers is that they don’t understand economics. OK that’s not the only problem with lawyers and it is a problem they share with most politicians and nearly all of the political punditry. And the matter of markets is the most obvious example where this ignorant misunderstanding crops up. Our lawyers seem to think economics is somehow a matter either of policy or of choice. It is neither.

Here’s one lawyer, our dear friend and sceptic, Jack of Kent:

“The ongoing economic crisis is a good moment to test this faith in the Market deity.”

Now describing the market as a God (an approach we might expect from a sceptical atheist, I fear) is something of a convenient metaphor. The suggestion is that we operate with a faith in Adam Smith’s laissez faire dictum of “the invisible hand”. Indeed our economically semi-literate lawyer bases his whole argument on a rejection of faith – in this case a faith in the ‘benevolence’ of markets.

OK, I hear you all cry, that’s fine but isn’t this faith in markets what caused the problem? On one level this might be an argument but it is better put this way:

The credit crisis and consequent recession were a result of our faith in Government’s ability to manage markets not faith in markets.

Indeed, if dear Jack no longer believes in “markets” he enters the same strange world as those who believe the earth is flat or that God created the world in 4004BC.

Markets are a matter of observable fact. Our understanding of markets relates to the ways in which exchange takes place. What Adam Smith observed and subsequent economic theory has supported is that the more free the market operates the better is it at allocating scarce resources. This position is not without challenge – indeed economists, as befits good scientists, continue to explore the ideas that underlie the discipline’s core assumptions.

The point about the current problem isn’t that markets have “failed” but that our management of markets has failed. The credit crunch illustrates the failures of interventions in the market and the culpable markets in this case (finance and property) are perhaps the two most extensively managed markets in our mixed economies. By way of example:

Interest rates are controlled by central banks not the market
Levels of risk taken by banks are subject of regulatory audit
Banks are licensed, inspected and registered
Deposits (up to a given level) are guaranteed
Property rights are only exercisable with regulatory permission
Ownership and disposal of property is subject to registration
Government reserves the right to acquire at a price its agents determine

I’m sure there is much else besides these but these examples illustrate the point. The market – to use Jack’s inappropriate metaphor – being worshipped wasn’t a free one but a managed one. OK, the bankers wanted you to believe it was a free market just as government agents want you to believe that planning law is not the de facto nationalisation of property rights. But these are managed markets.

Don’t take this as a defence of banks. With the consent of their regulators, bankers screwed us over big time. But it was not the free operation of markets that did the damage. It was allowing banks and related financial businesses to capture the regulation of their markets. And in doing so to fix them to the benefit of both the bankers and of the Governments they “advised”.

The lesson of the credit crunch and the banking crisis is that you don’t put the fox in charge of the chicken coop. Sadly, I fear a new sleeker fox is signing up to run the new chicken run.

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