Pete’s blog

It’s a classic debate and with the G8 summit, a hot topic at the moment too. Last week, listening to the After 8 Debate on SAFM (yes, I am awake before 8am) I was reminded just how much I hate neo-liberal free-market people. So this little rant is dedicated to them and dispelling some of the myths and garbage they spout.
The villain of the show was a Mr Louw from the Free Market Foundation who made such outrageous claims that I tried to get hold of the transcript so I could quote verbatim – unfortunately without any luck. Most of it you would have heard in one form or another before, so I will just summarise what he said. The debate was on the new Credit Act and what its effect would be. And maybe just as a quick disclaimer, I quite like some of the fights that the Free Market Foundation fight – they are generally good guys … just not this time and not on these principles.
What Mr Louw said and claimed was indisputable and a stone cold fact, was that the countries with the least regulation were the richest countries. You should all know this argument – a free market creates efficiencies and more trade and therefore results in a richer country… or does it? This is actually highly disputable and most current research is proving the opposite to be true. Compare the number of employees in the US bureaucracy to say Kenya’s, or Brazil (if you want a similar land area), or Indonesia (if you want a similar population). Compare the number of accountants and lawyers. Compare the volumes of corporate law and tax legislation. Compare the number of watchdog bodies, consumer protection agencies, bureaus, departments, etc. The truth is that the richest countries are in fact the most regulated. The most free and unregulated market in the world was perhaps Sierra Leone – and what did we have there? Slavery, blood diamonds, child labour, child soldiers, corruption, theft, poverty, a wrecked economy. In fact what a market really needs is clear, predictable, equitable and enforceable regulations. A business wants to know what it can and can’t do, and wants to know that his competitors, partners and customers are bound by the same rules. For a market to thrive, people must know that they have a fair and equal chance of succeeding. An unregulated market will always result in the strongest surviving – and the strongest is often the least ethical (who can get the most money and market share the fastest using all means available). Recent thinking goes that as a country develops, the market itself demands greater regulation as it seeks fair competition and enforceable contracts. Also as the economy grows, the various branches of the bureaucracy expand to handle the greater volume of work. The secret of the whole thing is to allow the market to operate as freely as possible WITHIN very well defined rules and regulations.
While we are on the subject of free markets, I am going to attack a couple of the other myths. Firstly, Adam Smith is normally heralded as the champion of free market economics… well he generally was, but he was also extremely distrustful of the market. The best quote is this: “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.” (The Wealth of Nations, Chapter 10) The frequency and size of price collusion is quite frightening – government competition boards are essential to combat this, but it is often difficult to investigate or prove. In South Africa we have recently had car dealers fixing car prices and currently the cellphone companies are accused of fixing interconnect call charges … and let’s not forget the banks. In Europe recently the largest ever fine for anti-competitive practices was laid against the companies producing vitamins … which was then surpassed this year by a even larger fine against the elevator manufacturers. The worst form of this anti-competitiveness is of course the monopoly. A monopoly has no-one to compete against and can therefore set what ever price it wants and do what ever it wants… Telkom anyone?
This is the biggest and most fundamental myth of free market economics – that markets on their own will naturally produce the best result. Markets may perhaps produce the most efficient result, but efficient is not the same as effective, nor the same as fair, nor the same as best. I am going to try and list the assumptions that the free market model makes and what is wrong with those assumptions:
- Perfect information. There is no such thing as perfect information. People survive in a world of either being bombarded with too much information, being given misleading or false information or not being told what they ought to know. People cannot know without considerable effort where they could buy a product at the lowest price, or which product would actually fulfil their needs the best. You may have been struggling to hand-knit scarves for 10 years, not knowing that your next door neighbour built knitting machines.
- Humans are rational beings. Who of you are rational? Anyone? Any smokers amongst you? Smoking is a highly irrational act, it will cost you money and shorten your lifespan, but we do it any way. Humans often go for immediate gratification ahead of long-term consequences. Do you drive a fancy car? Why? What material benefit does it give you? Have you ever driven your car at its top speed? Do you own Nike clothes? Do you know that poor people made them for less than a Dollar in sweatshop conditions? Do you care? Poor people for whom every cent counts will still buy a Lotto ticket in the 1 in 14 million chance that they might win. Rational? Impulse buying, maxing out credit cards, labels, herd mentality, crazes, fads, fashions … we’re not very rational beings at all. In fact we are so irrational at times that we assume that something that costs more is a superior product…
- There is only one point of true market equilibrium and it is the best result. In fact there are multiple points of equilibrium on any real supply and demand curve (if any of you are interested I can draw some pretty weird curves to show this). Markets can often get stuck in a lower point of equilibrium and need intervention in order to lift them into a high point of equilibrium. This is not even ‘distorting the market’, since you can remove the intervention afterwards and the market will remain in the higher equilibrium point.
- Money is not a scarce resource and is evenly distributed. This is the hidden assumption that never gets mentioned, or you are told is covered in the money supply section and is not relevant to supply and demand of goods. The distribution of money is in fact a major factor in the functioning of the market. People with money available to them make very different choices to those without. Sure that is a very obvious statement, but no-one really thinks about it. A person with money would negotiate a very different wage to someone without – leading to two very different ‘market equilibriums’. Which is correct? Poor people in Vietnam will work for $1 an hour making clothes, richer people in the US will work for $20 an hour. If every country in the world was as wealthy as the US, then clothes would only be made at $20 an hour. But then why are we not paying people in Vietnam $20 an hour? On the other side, every penny spent by a poor person is on essential, survival goods (except perhaps that Lotto ticket) – they are not trying to maximise their marginal utility (sorry economics term, it means the happiness the get out of buying something), they are trying to survive. A rich person of the other hand can choose which shoes to buy, whether to buy a car or take the bus, whether to drink coffee or tea. More money means more choices. “Being poor is about not having choices” (I quote that out of some UN project interviewing poor children).
- Private companies are always more efficient and better than public companies. The good old privatisation argument. Privatise and your economy will flourish… Fortunately for me there have been some recent classic examples of why this is not always the case. Firstly, need I say it – Telkom. Privatising it into a monopoly certainly made a few people very rich, but good for the economy? I think not. South Africa is crippled by some of the highest internet costs in the world. Then there is the tale of good old British Rail. Last year I read that it was now costing the UK government more per annum to subsidise and bail out the various private rail operators than it ever cost to run British Rail. And finally there is the awesome allegation that the cost to the US government of running a completely free healthcare system would be less than the current cost of the administration and bureaucracy involved in running its current healthcare system. One of the most basic flaws of this argument is that governments are unable to run companies efficiently – but why not? Why can a government not run a company exactly the same as a private company? The other problem is that private companies are often more efficient, but very seldom more effective. Take the farmer who lives in the middle of nowhere. Should Telkom connect a 20km telephone line to his farm at a cost of R1 million and how much should they charge him for this service? A private company would say only if he paid us the R1 million, because our other customers won’t be happy subsidising this huge cost, it won’t be efficient. A public company would definitely connect, because the farmer would be able to run his farm better and produce more food, improving the overall economy by R10 million. And of course there are also certain things that cannot and should not ever be privatised. The so-called public good. These are things which everyone benefits from, but not necessarily directly. The army is classic example of a public good, everyone in the country benefits from the army protecting our borders, but who would pay for it if they had the choice? Private armies tend to be employed to protect very small areas – normally just their employer’s assets. And think how a private police force would deal with crime… There are several debateable public goods like health care and education. In fact these two sectors have private counterparts in most economies. But the thing is that everyone does benefit from a public healthcare system. Without it, all the poor people could get sick, resulting in an epidemic that could spread to all the rich people. Or persistent illness amongst workers could cripple the economy. Like whys, everyone benefits from a better educated society.

Okay, well it is late and my brain just went dead, so I will end this here. If I think of more stuff I might do a part 2. Otherwise you should hopefully be getting more regular emails from me.