Wednesday, June 03, 2009

Markets as a First Choice

There’s a real distinction between being in favor of free markets and being in favor of whatever business does”, from a heading in Death and Taxes Blog reporting a lunchtime talk and subsequent Q & A session between Milton Friedman and the audience HERE:

It’s not clear if Milton Friedman actually put it that way, but it is pretty clear from his talk and answers to questions that he did not exempt businesses from criticism for their actions in practice.

How could he? He already had the excellent example of Adam Smith noting almost unanimously in Wealth Of Nations the scheming monopolistic tendencies of ‘merchants and manufacturers’, small groups of tradesmen in the town Guilds system seldom meeting even for merriment and diversion and ending up conspiring to raise prices, and he knew how legislators and those who influenced them proposed legislation that benefited their business sponsors by curtailing supply with tariffs and prohibitions to widen their markets and raise prices.

In short, for over 250 years businesses pursued their individual self-interests precisely in their self interests. The antidote was not, is not, nationalisation or regulation; it was and remains extending competition through freer markets.

I remember listening in astonishment to an MP, shortly after Mrs Thatcher’s government deregulated the exchange in foreign currencies so that licensed people could open little Bureau du changes in the high street to compete with local banks. The MP complained that in his constituency these new licensed exchange bureaus were charging much more to trade foreign holiday currency than the local banks. ‘It is a rip-off’, he cried, and wanted legislation to stop it. And this was a Conservative Party MP!

The answer, instead’ surely was to publicize the higher prices and the profits. That’s all it would take to induce new entrants into the exchange rate business in pursuit of the alleged ‘high’ profits, and let competition do its work (which is what happened, eventually).

Freer market advocates do not defend all, or any specific actions, of business entrepreneurs; they advocate using markets were possible to allow the impartial gales of competition to discipline market behaviours and benefit consumers.

You don’t need to introduce battalions of inspectors (and their plus premises, supervisors, pensions, and expenses) to patrol the country looking for ‘excess profiteering’ – and battalions of lawyers to be engaged in prosecuting and defending alleged profiteers. Nor does it require business personnel to meet in lobbying organisations – with their expensive staffs and insider contacts – to look after their interests, monitor legislation proposals, and generally subvert the independence of the legislature (and compromise the integrity of 'insiders'. Competitive markets are the best available instrument.

In that prescription, Lost Legacy and Milton Friedman are in agreement with Adam Smith.



Blogger Gavin Kennedy said...

Michael The question of whether the statement: 'The interests of the individual do not always coincide with the interests of the group' is true, must be answered in the affirmative.

I don't think I have heard this asserted in the negative by anybody, certainly not be Smith.

It applies in so many case as its not worth enumerating them, wherever queues or Latin crowds at a service point convene, or a line of troops crossing a road under fire from a single-shot sniper who can't shoot fast enough to hit them all.

The examples in the article of road traffic choices are right but not very interesting.

Indeed, traffic regulations based on driving on the left or right don't much matters as long as a single rule (left or right) applies to all using the same roads. Individual preferences to drive contrary to the general rule would be disastrous.

12:52 pm  

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