Friday, October 18, 2013

Free market myths

The latest fashionable wisdom is that the free market doesn't work. The GFC is proof. Power prices are proof. The price of fish is proof. Unaffordable housing is proof. Etc etc.

Except we've never had a free market. One of the major reasons being government intervention. And it appears that people who used to champion the free market are amongst those who now say it doesn't work.

So I was attracted to this short list of myths about the free market.

Falsehood: The free market creates scarcity and higher prices.
  • Reality: In any economic system the quantity of a good will typically not be enough to satisfy demand when the price is zero. In a free market, in which people trade their legitimate claims to those resources, prices will tend to rise or fall to the level where the quantity supplied equals the quantity demanded, and in that way prices help us to cope with scarcity.
Falsehood: The free market means the government gives businesses special privileges.
  • Reality: The free market is free precisely because it denies special legal privileges to any person or group.
Falsehood: The free market requires that all valuable resources be privately owned and traded on markets.
  • Reality: Sometimes the alternatives to individual ownership just work better, such as when we "exchange" favors with family, acquaintances, and sometimes with strangers without the need for formal markets and market prices.
Falsehood: The free market is pro-war.
  • Reality: War and the government interventions that inevitably accompany it restrict markets and free association, make it more costly for most people to buy and sell, reduce the purchasing power of households and businesses, and disrupt the peace that is necessary for a thriving free market.
Falsehood: The free market is always efficient.
  • Reality: The real world is populated by real people who don't have complete information, who may have bad information and who may just make mistakes. An "ideal" economic system is not one in which no one ever makes a mistake; it is one in which the mistakes that people inevitably make are corrected as effectively as possible.
 Hat tip NCPA

6 comments:

Brendan said...

Everything about our 'market economy' is regulated, from employment laws though to taxation, building codes, health and safety, minimum wages, wealth transfer, state services, you name it, the Government has been there.

Now I'm not opposed to some aspects of regulation, but the idea that we operate in a free market is just nonsense.

If we had the opportunity it would liberate our economy in much the same way as the long overdue Douglas reforms of the 80's.

The Bookie said...

There is one fee market that can be observed and studied, and that is the one run by the TAB.

Every investor with the TAB has access to same information and as a result, a market forms with (usually) one clear choice by the market, aka The Favourite.

And guess what, the free market is only right in its resource allocation about one third of the time - that's how many favourites win.

CorrectGuy said...

Excellent post Lindsay! Oh for less government intervention.

thor42 said...

Brendan is right.
The market in NZ is anything but free.

Anyway - for those who hate the so-called "free market" - if Labour wins the next election, just wait and see how their massive intervention into everything will screw things up.
Example? The "living wage". If businesses are forced to pay their employees more, then they will *lay off* a number of their employees. So - great if you're one who stays - BAD if you're one of the ones laid off. Result? Unemployment will *inevitably* increase. In fact, I'm thinking of creating a category for that on iPredict -
"Unemployment numbers to have increased as at 12 months after the election of a Labour government".

Moshé said...

A very good post, indeed.

Gekko said...

Good post Lindsay. I think Bernard Hickey is a good example of the kind of turncoat who niw claims markets need managing.
One thing though, a truly free market cannot exist under a govt as we understand it. All coercive govt intervention causes a distortion of market operation. So i think we should be careful about calling anything a free market which actually isn't. Just a market hampered to a greater or lesser degree. Just because it may reach some (subjectively) low-distortion watermark does not make it a free market.