The Market Delusion
Dr Christopher Scanlon
First published in the Canberra Times, 13 October 2008
The unfolding debt crisis and the US government's bail out of Wall Street has shattered some of the deepest delusions about the market. Three that come to mind immediately are, firstly, the notion that markets are simple affairs in which individuals trade goods and services; secondly, that markets are natural and work best when politicians get out their way and let them function as they must; and thirdly, the idea that markets are free of ideology.
All three have been exposed as myths propagated by the cheerleaders of the free market in the press and, in more recent times, by authors of popular economic books with titles like The Undercover Economist and Hidden Order: The Economics of Everyday Life.
For these commentators, markets are just spectacularly brilliant machines which, left to their own devices, will produce the best of all possible worlds, unencumbered by sectional values or interests. As Tim Harford puts it in The Undercover Economist, ‘The free-market supercomputer processes the truth about demands and costs, and gives people the incentive to respond in astonishingly intricate ways'.
While these are nice sentiments, the events in recent weeks have shown them to be, at best, half-truths or, at worst, complete tosh.
The idea that modern markets are no more complex than individual trading goods and services is based on the naïve assumption that markets haven't really changed since Adam Smith wrote The Wealth of Nations. While in some respects it's true to say that markets are still made up of exchanges, the US debt crisis has shown that these transactions are a tad more complex about buying a coffee. The truth is that markets are now littered with products and instruments of such mind-bogglingly complexity that almost no one can explain how they work — least of all the authorities who are charged with the task of regulating them.
The past few months have also made it abundantly clear that markets are not natural and nor do they magically produce a good society of their own accord. The truth is that governments create and sustain markets.
The evidence for this is the unseemly haste with which free marketeers have run to government demanding that it save them from their own greed. These are the same people who have spent the last 40-something years blaming governments and bureaucratic regulation for every conceivable social and economic ill.
When it comes to the pointy end of capitalism it seems, everyone's a believer in big government.
The idea that government regulation of markets is a problem in and of itself is ideology pure and simple. You don't have to be a card-carrying socialist to hold this view. As Newsweek editor Fareed Zakaria wrote recently: ‘This crisis should put an end to false debates about government versus markets. Governments create markets, and markets can exist only with regulation. If you want to be truly free of regulation, try Haiti or Somalia'.
Of course, the fact that whole US suburbs are being repossessed and lives destroyed is small beer to the committed ideologue. In her comments during the US Vice Presidential debate, for example, Republican nominee Sarah Palin claimed ‘Patriotic is saying, government, you know, you're not always the solution. In fact, too often you're the problem so, government, lessen the tax burden on our families and get out of the way and let the private sector and our families grow and thrive and prosper'.
Despite what Palin and popular economics writers and other free market cheerleaders might believe, the debt crisis shows that there are limits to the market. Fixing the debt crisis will begin when we exorcise the delusions about free market. This isn't an implicit argument for central economic planning or five-year plans. Nor is it to suggest that free markets are about to wink out of existence.
It is simply recognition of the fact that that markets are social inventions that can and should be made to serve social ends.
Christopher Scanlon teaches journalism at La Trobe University and is online editor of www.arena.org.au.