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.

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Are free markets unjust?

A few days ago I posted a piece asking why The Left has such an issue with free markets. One commenter took me to task (ever so slightly patronisingly):

I care about the well-being of humans, and I care about reducing inequality (and lots of other things). I support, for instance, rights to gay marriage because these rights can massively improve quality of life for lots of individuals, without really harming anybody. I also oppose unrestricted free markets when they lead to relatively poor quality of life for lots of individuals.

The difference is that I do no believe that the outcome of a free market is just, per se. In other words, my morals and opinions about how society should operate are derived without consideration of markets. Markets are merely a tool to realize my goals.

At the core of this argument - at least as it seems to me - is a suggestion that the outcomes of free markets are, in some way, unjust. I'm going to put to one side the argument about "unrestricted free markets" leading to a "relatively poor quality of life" because it seems to me something of a nonsense.

Are free markets unjust? The post in question referenced the opening lines of Adam Smith's other book - "The Theory of Moral Sentiments" and this is, maybe, helpful in looking at justice because it is a central theme in Smith's book:

Society, however, cannot subsist among those who are at all times ready to hurt and injure one another. The moment that injury begins, the moment that mutual resentment and animosity take place, all the bands of it are broke asunder, and the different members of which it consisted are, as it were, dissipated and scattered abroad by the violence and opposition of their discordant affections. If there is any society among robbers and murderers, they must at least, according to the trite observation, abstain from robbing and murdering one another. Beneficence, therefore, is less essential to the existence of society than justice. Society may subsist, though not in the most comfortable state, without beneficence; but the prevalence of injustice must utterly destroy it.

So free marketers much have regard to justice as well as prudence and the most common criticism - seen above in Brian's comment - is that free markets are solely concerned with utility: "Markets are merely a tool to realize my goals". And Brian suggests that, if "unrestricted", those markets may deliver an unjust outcome - we much therefore manage markets so as their outcomes are just.

The problems here are twofold - firstly, are free market outcomes ever unjust? Should we prevent or limit people's freedom to exchange because we fear that some will receive no benefit - or actual harm - from the process of exchange? Secondly, is it right - just - to restrict someone's liberty so as to deliver, we hope, a more just outcome elsewhere?

The problem with Brian's argument (which I'm taking as archetypically left wing) is that he sees a just outcome as being an equal outcome - "I care about reducing inequality". But if the consequence of this equal outcome is that everybody is, on average, poorer, is that a just outcome? We have limited or directed exchange to secure equality of outcome and in doing so have removed value from that exchange - everyone is poorer: equally poorer but still poorer.

What is unjust about free exchange - about me seeking to purchase a second hand Land Rover? Is the injustice that not everyone has the wherewithal to buy a second hand Land Rovers? 4x4s for everyone! But isn't intervening in the market to make second hand Land Rovers cheaper - the outcome that delivers social justice - simply removing value from the people with second hand Land Rovers to sell? And isn't this equally unjust?

For Adam Smith, justice was primarily about how we behave:

The principle by which we naturally either approve or disapprove of our own conduct, seems to be altogether the same with that by which we exercise the like judgments concerning the conduct of other people. We either approve or disapprove of the conduct of another man according as we feel that, when we bring his case home to ourselves, we either can or cannot entirely sympathize with the sentiments and motives which directed it.

So if we behave honestly, honourably and fairly in our exchange - in the market - then justice is served. And, if the market does what markets do, the outcome will also be fair and just because both buyer and seller have obtained value from their exchange. Preventing this from happening or saying only certain parties can engage in exchange is not just. At the level of the individual, not only are markets just but limiting, managing or directing them - ending what Marx called the "anarchy of production" - is unjust.

The problem for The Left, however, is that they see poverty or, more commonly, inequality in society and ask whether - given we've a market society - this is just. Surely, they ask, there is some better way of organising exchange that will mean there isn't any poverty or, more likely, inequality. And this is a noble aim until you begin to ask what happens in a market. When I buy that second hand Land Rover I get a benefit - value - by having the off-road vehicle my heart desires. And the person selling that vehicle has the cash I've given him - value - to use elsewhere in the marketplace to meet his heart's desires. There is no point at which free exchange leads to "relatively poor quality of life for lots of individuals", quite the opposite.

None of this is an argument against regulation, laws - Smith is very definite about the consequences of injustice being punishment - but that those laws should be directed to ensuring that exchanges in the market are honest, honourable and fair. Nor is this a pro-capitalism argument - there's no reason at all why socialist forms of ownership shouldn't operate effectively in a free market. Rather it's an argument that justice and equality are not synonyms and that, if we want a fair society, a free market system is more honest, honourable and just than a system designed by government, however well-intentioned.

It is true, however, that without justice the market is not free but rather that "society of robbers" Adam Smith describes. But justice is not achieved through coercion, price-fixing, artificial monopoly or the damning of commerce. Free markets are just only if we act - through social mores, honour if you will, as much as through laws - to ensure that justice is served. As Smith put it:

If [justice] is removed, the great, the immense fabric of human society, that fabric which to raise and support seems in this world if I may say so has the peculiar and darling care of Nature, must in a moment crumble into atoms.

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Tim Montgomerie perhaps needs to learn the difference between business and markets

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Montgomerie is on about Donald Trump and, in the main his little article is pretty much spot on. Except for this bit:

Conservative Brits may look on in amazement — but it’s worth remembering that Trump does have a point. It wasn’t Karl Marx who accused leading business people of being ‘all for themselves, and nothing for other people’. It wasn’t Friedrich Engels who condemned the ‘mean rapacity’ and ‘sneaking arts’ of many merchants and manufacturers. It was Adam Smith. The father of modern economics wasn’t an uncritical defender of free enterprise. He knew that markets could lead to extraordinary selfishness.

Or rather the last bit. Markets, where they are allowed to operate freely, are not selfish because they depend on the mutual benefit to buyer and seller. Nor was Adam Smith against free markets or even critical of free markets. What Adam Smith hated was mercantilism and the cartel, the core economic position of what I call 'business conservatives'. Sometimes this gets called 'crony capitalism' (a term widely used to illustrate what goes on in the US system and in the EU but was first coined to describe the rapacious kleptocracies of Marcos in the Philippines and Suharto in Indonesia).

We should be now have learned the lesson Tony Blair taught conservatives - that the old adage of the business conservative, "what's good for business is good for the nation", doesn't apply. It is what is good for consumers - for the people - that matters and we know that, in economic terms, 'good for the people' almost always equates to free enterprise and free trade. What Smith railed against was that businesses clubbed together to fix markets, that they pressured governments to introduce protectionism, and that they supported regulations that prevented new competition from developing. For Smith free trade and free enterprise were the solution not the problem.

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We are reminded that unions are not in the consumer interest

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Izabella Kaminska - whose trendy lefty ignorance we've touched on before - says that the good folk who drive cabs for Uber need to unionise:

In the first instance, the Uber drivers working on these systems aim to withdraw supply en masse if rates go below their average break-even rates exposing customers to surge pricing more regularly. But the aim eventually is to gain collective bargaining power against Uber in all sorts of worker-rights disputes.

The point that Izabella is making revolves around here belief that Uber has too many (or rather allows for there to be too many) drivers or "ignoring the law of supply and demand" as she ignorantly puts it.

...Uber doesn’t really care about how many drivers are in the market at any particular time because the company is more concerned about taking a commission linked to total utilised capacity than ensuring supply and demand is ever properly matched. Nor do customers care about market imbalances since they are the temporary beneficiaries of the app’s arguably unsustainable cost structures.

The solution is for the drivers to unionise and to use this 'collective bargaining' to force Uber to place a limit on the number of drivers in any given taxi market. The argument for this this limit isn't consumer interest but a belief that somehow Uber's drivers are a special case in the 'being-exploited' stakes. And that this will happen:

The fundamental truth being ignored in the “sharing economy” is that exploited labour always wises up. That open-ended supply markets always form licensed communities to protect jobs and minimum wages. That unregulated markets inevitably self-regulate from the bottom up. And that workers always have an interest in aggregating and sharing the cost of risk and insurance between them, which is ultimately factored into the cost of service.

Or as Adam Smith put it:

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices”.

Indeed this is entirely what has happened in taxi markets - taxi operators and drivers, aided and abetted by local or national government, has placed expensive barriers in the way of market entry. And one of those contrivances - those conspiracies against the public - is the union. For the entire purpose of the union is to improve the lot of its members. For all the noble purposes laid claim to by unions the bare truth is that their purpose is seldom, if ever, in the interests of the consumers who use the services those union members provide or the products they produce. Indeed Izabella, in her lefty reverie concludes this too:

The core point really is that taxis can never serve customers as well as outright ownership of a private car in optionality terms — because taxis can never be perfectly supplied to meet peak rate time demand without somebody somewhere carrying the cost of off-peak idle capital. Nor can they, for that matter, ever be as cost effective as public transport.

If and when Uber drivers efficiently unionise to reduce the scale of oversupply in the market, we’ll finally understand that.

Let's leave aside the self-evident observation that this point is entirely contained in the fact that a train ride from Bingley to Leeds is less than a fiver whereas a taxi ride will costs you £40 or more. Instead let's consider what's being said here - essentially Uber, by not limiting how many drivers a market can hold, has pushed down prices. As a consumer this is excellent news - although the bus or the tube will still be cheaper, I'll take a 20% drop in fares as well as less reliance on surge pricing (because the increased demand for cabs on say New Years Eve means more drivers come out to meet that demand). If the drivers are unionised and succeed in 'reducing the scale of oversupply' the result will be a system more like the one we have.

It's clear that, wherever we look, unions - by promoting the interests of their members - act to raise costs, limit supply or otherwise act against the consumer interest. This is the case with doctors, lawyers and local government officers just as much as it is with taxi drivers. And this is why the activities of unions need to be regulated and limited - just as is the case with any rent-seeking anti-consumer cartel.

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A special thank you to the Adam Smith Institute for exposing more NEF nonsense.

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As you know, dear reader, the New Economics Foundation is one of my very favourite institutions - a source of endless 'hand-to-face' moments, squeals of delight at ignorance and general 'do these greenie lefies really believe that' occasions.

It seems I'm not alone and the venerable Adam Smith Institute gets a similar pleasure - here commenting on NEF's solution to the housing supply problem:

Well, if you work for the nef, you suggest that taxation on property development should be raised. Quite ignoring that taxing something produces less of it. You then insist that private sector organisations shouldn't be allowed to get planning permission. No, really, reducing supply is well known to reduce prices, isn't it? Finally, we'll bankrupt most of the current developers by taking away their land banks which already have planning permission.

Oh, and joy of joys, they also reinvent the collaterialised debt obligation (CDO)* but this time it's the government's housing benefit payments that provide the collateral.

Great stuff.

*CDOs were at the bottom of the the foetid pile of dingos kidneys that is the US banking system, since you ask

Vince is right about business and competition - but his solution is wrong, very wrong.

We have to disagree with Vince don't we? After all his rhetoric about spivs and gamblers, his comments about capitalism, his anti-business stance - all these things make him wrong and bad?

Well not exactly. Indeed Vince's comment about business and competition is absolutely spot on:

Capitalism takes no prisoners and kills competition where it can, as Adam Smith explained over 200 years ago. I want to protect consumers and keep prices down and provide a level playing field for small business, so we must be vigilant right across the economy – whether in the old industries of economics textbooks or the newer privatised utilities and cosy magic circles in auditing, law or investment banking. Competition is central to my pro market, pro business, agenda.

Understand this dear reader - business is, to the very core of its being, anti-competition. As a businessman my aim is - or should be - to secure some form of monopoly or monopolistic advantage so as to get closer to the nirvana of maximised profits. Whether it's the market trader who objects to another swagman taking a stall in the covered market, the banker who persuades the regulator to prevent market entry or the steelman who bribes the government party to introduce protectionist anti-dumping rules. Or even the horny-handed farmer moaning about the inadequacy of subsidies. All these businessmen - and women - are not interested in promoting competition. They are interested in reducing competition - at least so as it favours their profitability.

Vince referred to Adam Smith who famously said:

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices…. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies, much less to render them necessary.

And that was what Vince was on about - the last labour government (and governments elsewhere and before) facilitated a corrupting association between bankers, financiers and governments that allowed a vast conspiracy against the public interest to damn near destroy our economy. We allowed - just as we have done with health, with education, with agriculture and (increasingly) with social care - the production of the service to take precedence over the consumption of the service. Government has acted against the interests of the people and in the interests of rent-seekers (and spivs and gamblers) seeking to profit from monopolies of service.

We have forgotten what else Adam Smith had to say:

Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer.

I'm not sure Vince - with his faith in the power of 'better regulation' quite understands - almost always, regulation acts against the interests of the consumer by reducing competition, preventing market entry and stifling trade. So, while Vince is right about business not liking competition he is wrong about how to protect that competition:

But let me be quite clear. The Government's agenda is not one of laissez-faire.

And that's where you're wrong, Vince - if you want more competition you have to get Government out of the way, to stop giving in to special pleading, to break down the monoliths of health and education and to institute again a free-trading, free-market, laissez-faire economy. It will work - and we, the consumers, will be grateful for the wealth that our liberty brings.

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How searching for a "new economic model" is a threat to all our futures

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I make no apologies for returning to the theme of economic policy and to the ongoing search for a new economic model. Sometimes – as appears, I hope, to be the case with George Osborne’s recent Mais Lecture – this search is driven by the requirements of rhetoric. Osborne is really talking about economic policy rather than the model of the economy:

"Britain has been failed by the economic policy framework of the last decade. It promised stability, prudence and an end to the cycle - it delivered instability, imprudence and the biggest boom followed by the deepest bust.

We need to head in a completely new direction. We have to move away from an economic model that was based on unsustainable private and public debt. And we have to move to a new model of economic growth that is rooted in more investment, more savings and higher exports. This will require new policies and new institutions."

Now while there is a reference to “a new model of economic growth” the context is about things the Government can influence. Things like higher rates of business investment, more savings and manufacturing that must be predicated on having a much smaller government, less regulation and more trust in the citizen.

But a lot of other people seem to think that prior to 1776, there weren’t any free markets and that Adam Smith designed the “economic model” that has driven the unprecedented growth in human wealth and happiness since that time! These people are stupid and live in the same box as the (overlapping) group who want us all to live on smallholdings, grow our own spuds and keep goats. So let’s look at one of the worst offenders:

The New Economics Foundation:

“There is nothing ‘natural’ about our current economic arrangements. They have been consciously designed to achieve a simple objective: growth. But growth is not making us happier, it is creating dysfunctional and unequal societies, and if it continues will make large parts of the planet unfit for human habitation.”

Did you guys actually read “The Wealth of Nations” before you started saying that our economic arrangements were “designed”? Maybe you can point to the time and place of that design, the people involved and how it was implemented? You can’t, can you because what you’re saying is a lie. Our economic arrangements are the consequence of human ingenuity, the triumph of exchange and the wonder that is the free market.

Oh and the answer to this question you pose:

“At nef, we want to break that vicious cycle by building a new macro-economic model that is geared not towards growth, but towards achieving the outcomes that are important to society and that can be sustained by the planet's finite carrying capacity.”

Is really simple too – it’s called “the price mechanism” and you appear to have forgotten how it works (maybe because it was a long time ago in lesson two of GCSE Economics). The price mechanism is a:

“System of interdependence between supply of a good or service and its price. It generally sends the price up when supply is below demand, and down when supply exceeds demand. Price mechanism also restricts supply when suppliers leave the market due to low prevailing prices, and increases it when more suppliers enter the market due to high obtainable prices.”

If you allow environmental and social goods to be owned and traded – rather than carrying on with the myth of “public goods” – the price mechanism will meet all NEF’s needs. Without us having a “new economic model”.

The problem is that NEF are not really interested in individual initiative, innovation or even in any allowance for private action. What NEF wants is a state-directed and mandated programme aimed at breaking the free market model. Despite the rhetoric of sustainability, social justice and well-being, NEF’s agenda (and that of others involved in “green” economics) is philosophically indistinguishable from this:

"In the social production of their existence, men inevitably enter into definite relations, which are independent of their will, namely relations of production appropriate to a given stage in the development of their material forces of production. The totality of these relations of production constitutes the economic structure of society, the real foundation, on which arises a legal and political superstructure and to which correspond definite forms of social consciousness. The mode of production of material life conditions the general process of social, political and intellectual life. It is not the consciousness of men that determines their existence, but their social existence that determines their consciousness."

A “progressive” government must take command of the economy and direct it to the benefit of all – as determined by the leaders of that progressive government. Now that worked very well here and here and especially here:

“We do not wish to copy anyone; we shall use the experience gained in the course of the liberation struggle. There are no schools, faculties or universities in the traditional sense, although they did exist in our country prior to liberation, because we wish to do away with all vestiges of the past. There is no money, no commerce, as the state takes care of provisioning all its citizens.”

The green economic model threatens not just the wealth and happiness we enjoy but worse it threatens the future opportunities for millions who do not yet have the pleasures of a free market civilization. And all the “sustainability strategy”, “social outcome measures”, “local multipliers” and “zero growth” that NEF and others talk about do not change the truth that the risks associated with a move away from a free system are too great for us to countenance allowing such people lose on our economy.

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