So, about this free market thing...
I distinctly remember a discussion regarding whether the academic consensus on virtues of 'Free Market Economics' could be even remotely compared to the consensus regarding evolution as the origin of the species.
Due to my new found addiction to radio 4 (partly enforced by Munchkin's demands on me to sit still with my hands full!!), I've had chance to listen in to much discussion regarding the causes of the current banking meltdown. Phrases like 'Free Market Fundamentalism' and 'lack of market regulation' repeatedly seem to be used by many a well qualified source in explaining how things went 'orribly wrong.
So, about this free market thing, does anyone out there still consider it as the only sane and sensible way forward?
I need proper references to spout my own view, which takes more time than I have - but for what it's worth you may guess I'm not, and never have been convinced that the free market model is globally the best, I think it all depends where it's applied.
The freemarket isn't a good system, it's barely a system at all. But it's the only thing that people will tollerate, the rich amass more than they need and the poor aspire to be the rich it's a top heavy tower and it falls on regular occasions, but people are too busy trying to build it up again to see if they can get a little higher in the pecking order no one stops to actually plan how to make the tower stable.
The free market is a bit like democracy - it's not perfect but the alternatives (which have been tried) are even worse.
That depends on how one defines both the free market and democracy.Originally Posted by Mulder
All modern western societies have deemed in necessary to curb the excesses of both, indeed in their pure forms they would be incompatible with each other.
Would you include the NHS and welfare provision as an alternative to the free market?...but the alternatives (which have been tried) are even worse.
I think of the whole subject in grey terms rather than state control versus absolute market freedom, the latter of which I would also see as being at odds with democracy.
Floppit did ask for references and evidence...prescious little of that so far.
If you have time and willpower start at the beginning and read Adam Smith's "...Wealth of Nations" - it's still valid today and the the core of his argument has been tested to destruction and holds up. If you can't face that amount of reading PJ O'Rourke wrote a couple of very witty books on economics (Eat the Rich and Wealth of Nations).
As a general principle businesses - and especially large busineses like banks - do not like what Adam Smith would call a free market. The understandable need for regulation creates barriers to entry as does scalar efficiency. It is very hard to describe the financial system as a genuinely free market system.
The evolutionary theory link is an interesting one that many economists have examined (http://www.econ.mpg.de/english/research/EVO/discuss.php) and this reflects the (sometimes uncomfortable) fact that no-one invented the free market, nor does it necessarily relate to the circulation of money or the legal structure or nature of what we call a 'business'. Human societies evolved exchange systems that gravitated to the 'win-win' nature of free market exchange. Not because someone ordained that this would happen but because it is the most efficient way of 'fairly' (a tricksy economists definition of this word though) distributing scarce resources.
Throughout history (and probably prehistory) those in positions of power have sought control or monopoly over exchange systems. I would recommend - again a fat read but absolutely brilliant - S E Finer's 'History of Government' for a political science perspective on all this from prehistory to the 19th century (sadly Finer died before completing this work - the culmination of a lifetime's study).
Finally an opinion - managed market theories have much in common with ID. They look OK until you start to examine; 1) the evidence; 2) the basis of the theory.
The pardox at the heart of the ideas behind the "free market", is that it requires regulation in order to exist, despite what you may be told by anarcho-capitalists.
Indeed this paradox can be seen as an extension of the paradox at the heart of liberal-democratic theories, "freedom" is only meaningful if freedoms can be protected, and the only way to protect some freedoms is to curtail the freedom of some to impinge on the freedoms of others in certain ways.
An extreme but easy tog rasp example is that in order for people in the society in which I live in to be free from slavery, I must give up my freedom to own slaves- in order for a market to be free, those in the market cannot be free to commit theft and fraud. Both cases require regulation of some kind.
You are right with the poli-sci Brodski but this is economics and therefore a rather more robust science. Rules (and their enforcement - which is most of the story about the banking collapse) are needed to stop people cheating as anyone who's played monopoly would know.
Essentially you have to take away the ability of some to interfere with fair exchange (e.g. by waving a big club). Sadly Governments are the worst offenders when it comes to fixing markets - usually to support some favoured businesses (e.g. banks) at the expense of consumers.
The liberal democracy stuff isn;t really a paradox when you think about it however. Any communal arrangement has to involve compromise (forced or otherwise).
Free markets are a convenient theoretical construct in economics rather than anything real - circumstances of perfect competition are practically unrealisable but that doesn't make the concept and its proof any less valid. As consumers we should always (the theory says) choose greater competition over less competition as that: 1) drives down prices; 2) reduces the power of the producer to coerce; 3) limits the capacity of government to control meanign they stick to their job of enforcing the rules.
Finally we should note that the free-est market environments are private clubs with their own rules (e.g. stock exchanges).
The "free-market" economy may well be the natural way of doing things, but if taken to extremes it can clash with another strong human instinct - for fairness. This can be seen now in the disgust expressed about the vast bonuses earned by City financiers for gambling with other people's money.
As economists care about this so much we even have theories on, and conduct experiments into fairness...
Affect and Fairness in Economics
http://www.springerlink.com/content/21t693p1k8k06121/
Theories of Fairness and Reciprocity - Evidence and Economic Applications
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=255223
I'm afraid I tend to lump economics in with long-range weather forecasting as far as reliability is concerned. It's great at explaining what has happened once it's all over, not so hot at predicting what's going to happen next. Hence the current mess we're in...
The real problem though is in determining how much regulation there should be, what those regulations should cover and how to enforce those regulations. The current mess here in the US was actually created by OVER regulation by the government.
The idea was advanced that the government needed to do something to make it possible for everyone to own a house. The problem was that some people have lousy credit and no way to afford a house.
A potential homeowner would go to a bank for a home loan and the bank would look at them and say "You have a lousy job with low pay, are often unemployed and are behind on your bills. I'm sorry, but you're too risky to give a home loan to."
The government solution was to pass the Community Reinvestment Act (CRA) back in the 1970s and use Fannie Mae and Freddie Mac as a guarantee that home loans to risky borrowers would be covered. They also stipulated that banks HAD to engage in sub-prime loans or face penalties. Government regulation makes it's presence felt.
Now the banks could tell that same potential homeowner "Don't worry about a thing. You may be a terrible risk, but the government will insure your loan, so let's get to work. Typically you'd barely qualify for $80,000 but because of the government guarantee we'll qualify you for $130,000. Isn't that nice?" Then the poor homeowner goes broke trying to pay for a house he can't possibly afford, the mortgage company starts accumulating foreclosures that it can't sell, Fannie Mae and Freddie Mac can't possibly cover all the foreclosures and the trouble begins.
And now the politicians that created this problem shift the blame to the guy that wasn't even in office when the problem was created.
If the government had kept out of it, the number of failed mortgages would be very low and the whole mess would have been prevented or at least minimized.
The key is minimal regulation and if a business is going under, let it fail. That way the other remaining businesses can learn from the mistakes of the failed businesses.
Yup! It's the law of unintended consequences in action.
Which is a bit like blaming physics or chemistry for an air crash. Things go wrong (if that's the right word) because of our incomplete knowledge of economics plus a tendency (among us politicians) for persistent ideological attachment to theories that are demonstrably false. For example autarky remains very popular despite all the evidence that it destroys rather than protects economies.I'm afraid I tend to lump economics in with long-range weather forecasting as far as reliability is concerned. It's great at explaining what has happened once it's all over, not so hot at predicting what's going to happen next. Hence the current mess we're in...
Where the fundamentals are agreed (e.g. pumping cash into the economy stimulates demand in the short-run but creates inflationary pressure) we can safely argue over the choices as to how we put in that cash. Some favour public works (the 'New Deal' under Rooseveldt and it appears Brown to day) whereas others favour tax cuts (Reagan in the early 1980s, for example) and still other looser monetary policy - cutting interest rates.
None of these approaches are 'right' and all have advantages and disadvantages but all are based on the premise that at the level of macro-economics we can only influence markets, we cannot control them.
Finally, markets that follow rules are predictable - the problem comes (and this seem increasingly to be the case with the current crash) when individuals, groups of individuals or even Governments believe that the rules don't apply to them.
yep - the same problem with long-range weather forecasting
Ah, those dratted people. How stupid and inconvenient they are. Now if we had a system without any people in it, economics would work beautifully!Finally, markets that follow rules are predictable - the problem comes (and this seem increasingly to be the case with the current crash) when individuals, groups of individuals or even Governments believe that the rules don't apply to them.
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