Free Market Good or Bad

I noticed some of the new members perhaps think "The free market is bad". Since the GFC, the concept of the free market has lost credibility and is being blamed by large sections of the community for the crisis.

I however, would argue, the crisis has been caused, by the lack of a free market. We have moved further and further away from the free market thanks to governments desire to centrally control the markets. There are numerous examples of this, each has had a hand in creating unsustainable price distortions.

Probably the biggest example of central government interference, was the Federal Reserve. They essentially forced the price money (the base lending rate) far too low, in attempt to stop the .COM recession. This encouraged, huge borrowing and the funds poured into investments deemed safe. Real Estate being the biggest and of course all jumped onto that bandwagon including the banks - there was money to be made. The distortion, that this created lead to the delusion that "house prices never go down". The rest of course is history. If money hadn't been so cheap for so long, there would have been a mild recession, as the free market could have cured it's own small distortions, but instead the "central hand" had to attempt to stop this and in the process create much greater economic distortions, which of course lead to the crisis. In some ways, what the Australian Government has done recently is not too dis-similar... interfering with the markets and creating further distortions.

If the government created a level playing field and let the markets play out, we generally wouldn't get any crisis on this scale and perhaps we may have to suffer some small scale corrections, but normally nothing more. Trouble is most Economists think they fully understand economies, however they need to release that most models are only "hypothetical" and therefore not "Science".

Economic policy should only go as far as aiding the free market and allowing it to do it's thing, not controlling it.

Regards

Mark

The sttock Market always goes up,
House prices never go down,
We've always had Free Market Capitalism
and Santa Claus is coming to town...

I bought this as a bumper sticker for my business partner's birthday.

The Fed is one of only a litany of anti-free market principles.

The key to a free market - which a lot of neoliberals don't understand - is you need consequences.

You need to balance the greed (for want of a better term - rational self interest, desire, wants - whatever) with personal responsibility - i.e consequences.

If you have a system where either or both of these balances are played around with (e.g. limited liability rules, legislative monopolies, limited/zero recourse loans, government guarantees, bail outs, fiscal deficits) then its a free for all. Do what you want - who cares what happens, its "Free".

Why would you bother with the notion of "if I screw up, I'm screwed" when that is replaced by "pfft. Government or a really good lawyer will bail us out. No worries mate, dump that toxic waste".

The regulation of a free market MUST be the full application of justice (not laws written by those who control the markets) against those who do not live up to their obligations, their personal responsibility.

The phrase "unregulated" free markets is an oxymoron - markets need to be regulated by the powers of supply and demand and the justice inherent in full ownership and RESPONSIBILITY of property rights.

Anything else is just a fettered market, controlled by parties for their own gains (self-interest without responsibility), with limited or zero recourse for their actions.

For a full empirical dataset that shows the latter works...for awhile....I give you the GFC. I give you every boom and bust we've had in the modern capitalistic era.

Great thread to start Mark.

__________________
Gold may be a barbarous relic, but in barbarous monetary times, relics do well. Steve Keen
Because Australia suffers from quite acute housing shortages we shouldn't expect to see any significant falls in prices. Chris Joye June 2010
My investment company: www.empireinvesting.com.au
Find me at MacroBusiness

How about this for a thought:

A "true" free market is everyone can do what ever they want, no rules no regulation just the "law of the jungle" that's the ultimate free market. (I think its called Anarchy) It will of course naturally evolve a set of laws but the laws will be constantly evolving and unlikely to be formally written down. Everything will be an arms length transaction at best.

The real challenge is to find a compromise between a totally free market and a totally controlled market. Neither extreme is viable in reality.

The free market idea is more or less an invention by economists as the ultimate solution. Problem is its an ideology and has not really been properly assessed to determine is validity.

The free market idea is that the "invisible hand" makes for the ideal/optimum outcome for everyone on balance (more winners than losers) but reality is the invisible hand does what ever it wants (or the system allows) with absolutely no regard to net benefit of the population.

The invisible hand benefiting humans is a human construct. And its the basis of the free market idea.

Cheers

Justin

Sigh.

No - anarchy is a system of laws and rules WITHOUT a ruler. It is not chaos, which is an unlawful, unjust situation. They have a word for chaos - its called chaos.

Again - you need rules that are agreed to by ALL parties, and can be enforced and arbitrated by a third party BEFORE you can exchange goods and conduct a free market.

a fettered or controlled market is where rules are ignored, made up by one side of the party without the other having an input or changed midway, or certain goods and services are deemed "bad" because they offend someone (even though neither party is aggrieved and the exchange is voluntary) or rules are not enforced by a third party, or worse - enforced by a powerful second party.

Anything else is not free. It is corruptible, fixed, controlled and swindled by more powerful parties. It is certainly not equal, fair or a basis on which to conduct business.

__________________
Gold may be a barbarous relic, but in barbarous monetary times, relics do well. Steve Keen
Because Australia suffers from quite acute housing shortages we shouldn't expect to see any significant falls in prices. Chris Joye June 2010
My investment company: www.empireinvesting.com.au
Find me at MacroBusiness

Slightly missed the point as I was talking about extremes. And total anarchy/chaos is highly unlikely to continue for any length of time in any complex dynamic system. The system will always tend to a set laws or understanding on how things should be done or what is deemed acceptable.

I totally agree with your further comments but I think the concept of a free market is actually lost on most people. I agree that a market should be free within a set of set of rules agreed by all parties. And in reality that is the essence of my comment of finding that compromise.

It has been my experience that the concept of free market in many many contexts is taken to mean let the market sort its self out without hindrance period.

I honestly beleive that public majority (politicians included) don't understand the concept of a free market.

Cheers

Justin

Hi Mark,

Interesting subject. Without denying that there are some good points in your argument, overall I think your interpretation of those points is disputable.

Your basic conclusion is that "the crisis has been caused, by the lack of a free market", due to "governments desire to centrally control the markets". One example was the US Federal Reserve keeping "the base lending rate far too low".

My contention is that (1) indeed the US Federal Reserve did keep the "base lending rate far too low", according to the best monetarist tradition, in the hope that this, together with (2) a lack of supervision (a.k.a. laissez-faire) would allow a self-regulating market to keep growing forever.

So, indeed there was interference (of the wrong kind) but there was also laissez-faire (number (2). The main protagonist in this drama, Mr. Greenspan, has acknowledged that much.

You rightly remark on the first mistake (1), but discount out of hand the second (2):

"If the government created a level playing field and let the markets play out, we generally wouldn't get any crisis on this scale and perhaps we may have to suffer some small scale corrections, but normally nothing more".

And thus, you reach the wrong conclusion.

Just my two cents.

Cheers.

PS: There is also a little question of terminology (nothing substantive, though). Central control of the market, a la central planning, implies establishing quantitative goals, assigned to agents, following a time schedule, and a whole lot of other details. What central banks do (even the US Federal Reserve), while still is an intervention in the economy, not even remotely looks like central control or central planning.

Contrary to popular belief the market mechanism does not lead to equilibrium. capitalism is inherently unstable and while that doesn't mean we should have communism or socialism or w/e ism you like it does mean we need some sort of government involvement in the economy to keep the system from falling on our heads.

The free market is an admirable ideal, but its advocates usually create less free markets. With friends like Greenspan, who needs enemies?

They seem to think that putting all the power in the hands of giant bureaucracies is okay as long as those bureaucrats are unelected, unaccountable, shielded by limited liability, motivated only by private profit-seeking, and theoretically subject to competition.

Marco,
Just trying to understand your alternative view. Lets refer back to the "Greenspan error". I'm saying, interest rates should not have been bought down so low and I will also say, the free-market's self regulation (left alone then) would never have created the GFC! If conclusion is wrong, what is it you are inferring?

Please find me example of capitalism "being inherently unstable" and not leading to "equilibrium" where there was not some kind of interference from government or otherwise. The only possibility I think of is in the case of Monopolies, Cartels, Oligopolies and price fixing, but these are examples of a kind of market interference.

The market is a self-correcting mechanism, when not interfered with and given adequate time. The markets do require appropriate regulation to create a "level playing" field, but further than that, they are best left alone.