Sunday, 11 February 2018

Free markets work really well - for everyone. We should stop trying to fix them.

When we were children, my Mum used to put up students from a nearby English school. These students came from all over - we had a Saudi colonel, a French jazz pianist, an Italian woman with the highest heels I'd ever seen. One such guest was from Ecuador - he was an agronomist.

I say this because, during one conversation with this Ecuadorian chap, he remarked about the supermarket as he'd had occasion to go into one. This was the 1970s when our supermarkets were less grand affairs than today's hyper-stores but our guest was still blown away with the experience. In this discussion the Ecuadorian asked "who sets the prices". To which we replied "the supermarket" or something similar. This wasn't good enough for our friend who insisted that there had to be an agency somewhere that decided on the price of, say, oranges or tea. This was what happened in Ecuador, we were told,

I recalled this story following another frustrating exchange with an intelligent person who simply could not see that free markets - indeed even slightly unfree markets - are a good thing. I'm told variously that there aren't any free markets, that it's all about the source of the capital, that free markets are exploitative and that direction is essential for reasons of fairness, equity or goodness. The problem is that, while these intelligent people are happy to pile into free markets (mostly for the simple reason that free markets are things right wing people like and are therefore bad) they are very reluctant to offer an alternative - other than, in effect, an unfree market liable to corruption.

The problem - you'll have spotted it - lies in the opinion of our Ecuadorian guest. The alternative is for some agency - typically, but not always, government - to decide on price, supply and who can take part in the process of buying and selling. This is, in the manner of things, the logical extension of Douglas Jay's case for socialism - the gentleman in Whitehall really does know best. And, as is shown time and time again, this really isn't the case at all. More importantly, why institute some planned system when markets do it so much better? And it's complicated - as Adam Smith explained:
Observe the accommodation of the most common artificer or day-labourer in a civilized and thriving country, and you will perceive that the number of people of whose industry a part, though but a small part, has been employed in procuring him this accommodation, exceeds all computation. The woollen coat, for example, which covers the day-labourer, as coarse and rough as it may appear, is the produce of the joint labour of a great multitude of workmen. The shepherd, the sorter of the wool, the wool-comber or carder, the dyer, the scribbler, the spinner, the weaver, the fuller, the dresser, with many others, must all join their different arts in order to complete even this homely production. How many merchants and carriers, besides, must have been employed in transporting the materials from some of those workmen to others who often live in a very distant part of the country! How much commerce and navigation in particular, how many ship-builders, sailors, sail-makers, rope-makers, must have been employed in order to bring together the different drugs made use of by the dyer, which often come from the remotest corners of the world! What a variety of labour too is necessary in order to produce the tools of the meanest of those workmen! To say nothing of such complicated machines as the ship of the sailor, the mill of the fuller, or even the loom of the weaver, let us consider only what a variety of labour is requisite in order to form that very simple machine, the shears with which the shepherd clips the wool. The miner, the builder of the furnace for smelting the ore, the feller of the timber, the burner of the charcoal to be made use of in the smelting-house, the brick-maker, the brick-layer, the workmen who attend the furnace, the mill-wright, the forger, the smith, must all of them join their different arts in order to produce them. Were we to examine, in the same manner, all the different parts of his dress and household furniture, the coarse linen shirt which he wears next his skin, the shoes which cover his feet, the bed which he lies on, and all the different parts which compose it, the kitchen-grate at which he prepares his victuals, the coals which he makes use of for that purpose, dug from the bowels of the earth, and brought to him perhaps by a long sea and a long land carriage, all the other utensils of his kitchen, all the furniture of his table, the knives and forks, the earthen or pewter plates upon which he serves up and divides his victuals, the different hands employed in preparing his bread and his beer, the glass window which lets in the heat and the light, and keeps out the wind and the rain, with all the knowledge and art requisite for preparing that beautiful and happy invention, without which these northern parts of the world could scarce have afforded a very comfortable habitation, together with the tools of all the different workmen employed in producing those different conveniencies; if we examine, I say, all these things, and consider what a variety of labour is employed about each of them, we shall be sensible that without the assistance and co-operation of many thousands, the very meanest person in a civilized country could not be provided, even according to what we very falsely imagine, the easy and simple manner in which he is commonly accommodated.
Repeat that across everything in our complicated lives today and imagine - or try to imagine - the planning system that can organise all this better than a market? And then consider that the more that market is free, the more people can take part in trade without constraint, the better it is for everyone. To illustrate, I'll give you just one example - the 18 year old woman who rents a chair so she can cut hair, who after a year or two at that chair takes on a proper shop to serve the loyal customers she has secured in that two years. In that shop she can take on some trainees, maybe rent out chairs herself.

Imagine - and in some places this is the case - that a group of existing hairdresser, using the excuse of safety or quality, get together to persuade government that cutting hair should be licenced and that the number of licenses is limited. Who gains here? The market is limited - fettered as its opponents desire - ostensibly for good reason (safety, quality) but in reality we get more expensive haircuts, less innovation and less creativity.

If this fettering of markets extends everywhere, the result will always less innovation and less betterment for society. In some cases - we see this with energy - the result of government fettering of markets is high prices shortly followed by demands from the same government responsible for the problem that the firms cut their prices. Similarly, London has a housing problem because we've stopped people from building homes in the places where people want to live. The crisis is the direct result of government interference in the market, yet one proposed solution is to fix the rents - the state creates a problem then compounds it through price controls.

We haven't found a better way of organising the distribution of goods and services than a market (and it's not for want of trying) but then the same people who haven't found a better way screech about "market failure" as if this is a fault of the market rather than a fault of state intervention - most so-called market failures would be better entitled, "regulatory failure". Whether it's fuel poverty, housing shortages, too few doctors or a lack of school places, the cause of the problem is almost always governments - often along with producer interests like trade unions, business lobbies and professional associations - limiting or preventing the free operation of the market.

It is pretty much impossible to replicate a free market system through planning, however clever the people in Whitehall might be and however mighty their computers are. It really beats me why we try.


1 comment:

Soarer said...

It is pretty much impossible to replicate a free market system through planning, however clever the people in Whitehall might be and however mighty their computers are. It really beats me why we try.

The only reason to try is because the proposer of a planned economy expects to be the one doing the planning, in his/her own interest. This may be monetary (they want to accumulate wealth without providing value) or, more likely, they just like telling other people what to do.

I have never understood this latter urge myself, but I am aware of it in many people I meet, especially those of the Left.