Föhrenbergkreis Finanzwirtschaft

Unkonventionelle Lösungen für eine zukunftsfähige Gesellschaft

Can markets be too free?

Posted by hkarner - 3. Januar 2017

Date: 02-01-2017
Source: The Economist

To mark the publication of “Go Figure”, a collection of The Economist’s explainers and daily charts, the editors of this blog solicited ideas on Facebook and Twitter. This week we publish five explainers suggested by our readers, who will each receive a copy of the book.

ASKED why the Federal Reserve had failed to anticipate the lax bank lending that ultimately led to the global financial crisis, Alan Greenspan, the Fed’s former chairman, said he had the wrong model. He had assumed that bankers, acting in their self-interest, could not blow up their own banks. He was wrong, and the regulation of banks has since become far stricter. Indeed partly as a consequence of the crisis, and the political upsets (Brexit, Donald Trump’s electoral victory) that it helped give rise to, the bias against intervening in markets (for credit, for internationally traded goods, and much else) has greatly weakened. The question for policymakers no longer seems to be “How can markets be liberated?” Rather it is, “Can markets be too free?”

Given the now-general disdain for free markets, it is easy to forget the economic miracles they conjure. In his book, “The Company of Strangers”, Paul Seabright, an economist, uses a purchase of a shirt as an example. His shirt is made in Malaysia using German machines out of Indian cotton grown from seeds developed in America. Millions of shirts of different sizes and colours are sold every day. The wonder, he notes, is that no one is in charge of supplying shirts. Were there such an agency, the complexity of the task would defeat it. The enterprises that make up the many links in the chain supplying Mr Seabright’s shirt are responding to price signals from various markets all along that chain.

The great merit of market prices is that they convey information about what people want to buy and what others want to sell. A branch of economics, called general-equilibrium theory, captures this formally. It says that in a competitive market, prices are a signal of the marginal value of goods to consumers as well as the marginal cost of goods to producers. Indeed it goes further. When prices (and wages) are set in free and competitive markets, the economy’s resources are allocated “efficiently”. In other words, no person can be made better off without making someone else worse off. In this theoretical utopia, markets cannot be too free.

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