www @political

The Market Paradox
The International Monetary Fund, better known as the IMF, helps countries in dire need of financial assistance by arranging structural assistance programs. The IMF sends teams of economists to the country needing help and studies their banking system, their infrastructure, their industries and culture. After a thorough examination of the information at hand, they invariably come up with their "one size fits all" economic reform plan: open your markets.

Libertarians are some of the most ardent supporters of open markets. They seem to want to privatize everything. Privatize schools. Privatize prisons. Privatize utilities. The Holy Grail of the free market grants economic immortality.

But what the heck is the market? The market is nothing more than human observations of human behavior in a limited context. Like the frictionless plane of physics, this market is merely a model. The difference is that no one worships at the altar of the frictionless plane. The market is the best way we've come up with to regulate an economy, but it is not a holy thing. The market is as false a god as the golden calf.

At its core, the "market" is simply people buying and selling things and, like people, it's fallible. The "model of the market" attempts to describe how people buy and sell things. However, just as a model of the Space Shuttle is not the Space Shuttle itself, the model of the market is not the market. The problem is that some forget this and overlook the fact that the model requires something that the actual market only gives grudgingly: information.

How do you know which vendor offers the best deal for what you're buying? Unless you're a televangelist getting news directly from God, information isn't magically beamed into your head. You have to search for this information. Searching takes time and many don't bother. Most customers shop at the supermarket closest home. Comparison shopping becomes glancing at the bottom shelf prices; never mind that the store in that run down neighborhood is offering the same goods at a better price.

You would never dream of buying a car if the seller wouldn't tell you the price. That's a basic piece of information, but you might negotiate a better deal if you knew what the dealer paid. Maybe you go to your bank and get a pre-approved loan and then go to the dealership knowing the invoice price of the car. You feel confident. You also know about the "dealer incentive" the salesman doesn't want to bring up. You feel very confident. You negotiate a great price and the salesman finds out your loan is at 8.5%. "What if I can get you an 8% loan?"

You accept, but what the salesman didn't tell you is his loan is actually at seven percent and the extra one percent goes to the dealership a common practice in the auto industry. Had you known this, you might have gotten yet a better deal. The salesman, of course, wants to make as much money as possible and, by withholding information from you, he increases his chance of doing so.

This isn't an indictment of car salesmen. This is all business, all the time. Had Enron provided full, accurate, and timely information about their finances, their employees would have made different investment choices. If you find out that your fancy new running shoes were made by child labor, you might not have bought them. This points to a central paradox of the market. You can't make the best decisions without good information, but the actors in the market have every incentive to keep information from you.

There is no platonic ideal of the market. Unlike a dog or a car, you can't point to the market. But while markets are nebulous things, that's not saying that markets don't work. We know that it's a great way to decide how to allocate resources, but we often refuse to acknowledge that it's not a Utopia. That's a shame, because the sooner we admit that the market is as fallible as the people it describes, the sooner we can start figuring out what we really need, rather than letting some silly bureaucrat yell "free markets" and think it solves everything.
05 Jan 2004 by Curtis "Ovid" Poe


Valid CSS! Valid HTML 4.0!
Join the Blue Ribbon Online Free Speech Campaign