Wednesday, February 01, 2012

A Scotsman Ponders the Big Questions

Allan Massie writes (1 February) in The Scotsman, our national newspaper HERE

There is no such thing as a truly free market”

“THE phrase “the free market” is much bandied about. Capitalism, we are told, depends on the efficient working of the market so that the operation of Adam Smith’s “invisible hand” may make for general prosperity.

Actually, as James Buchan observes in his book on Smith, “the phrase ‘invisible hand’ occurs three times in the million-odd words of Adam Smith’s that have come down to us, and on not one of these occasions does it have anything to do with free-market capitalism”.

The Italian immigrant shoeblack who was asked what he had learned in his 40 years’ shining shoes on Broadway replied: “There is no such thing as a free lunch.” I don’t know whether he required a licence to practise his trade, but he might as well have said: “There is no such thing as a free market.” All markets are regulated to some extent, either by the law or, in the case of illegal markets such as the market in drugs or the market in alcohol in countries where its sale is prohibited, by the gun or the knife.

…… Regulation of the market has always been necessary in the public interest. Everyone recognises this at some point. A few years ago, Gordon Brown was applauding his “light regulation” of the financial services industry. Now it is generally agreed that the regulation was too light, and that regulation must henceforth be stricter. So it is perceived to be in the public, or general, interest that financial markets be less free."

Adam Smith would have agreed. Despite his attributed reputation as an advocate of “laissez-faire” (words he never used), Smith had a keen sense of the need for regulation of certain functions of banks (lending recklessly) or over-issuing low value promissory notes) and general statutory measuring of weights and measures and of quality-stamping of cloths. Above all, he favoured rule by law to protect people from arbitrary torments and general oppression.

He favoured a general role for state funding from taxation (with the equity balance falling on the consumption of luxury goods, not necessary foodstuffs). He lived in a relatively rich economy, compared to most of the rest of the world, but where the poorest sections of society, who did most of the work to create everything that everybody consumed, were left with the meanest share of the annual product (wealth).

He considered it ‘but equity besides’ that the poorest should receive more in the form of higher wages (this was before notions of a welfare state’ and modern version of a ‘living wage’ were thought about). His modest suggestions were many decades before newer ideas became practicable.

Alan Massie is a thoughtful intellectual in Scottish society. I think the rest of his article wanders off track by equating “free markets” with criminality (follow the link). Markets remain the least worst of the alternatives. Markets are preferred where possible (unavoidable regulations and all). The State is an option where absolutely necessary.

Smith was not, however, a utopian thinker. He did not think it likely that free trade would be implemented in Britain. He dismissed it as a ‘utopian’ idea because in the taxation regimes of the 18th century – there was no income tax as we know it, until after he had died in 1790 – some revenue had to be raised on imports if government (that is, defence, justice, public works, and an assortment of smaller things, each with inevitable larger possibilities) was to function at all. The (mainly avoidable) heavy war agendas of the 18th-century required more sources of government revenue (more so when new French wars threatened bankruptcy) and these new sources of revenue went on to finance imperial adventures in Europe and the rest of the world, not education, health and local government. Smith’s dictum, after the American war of independence, that Britain should curtail its ambitious spending agenda to within the limits of the “modesty of its circumstances” (last lines of Wealth Of Nations), was ignored in creating the world’s largest ever Empire.

‘Tis a pity that the British government stumbled, or bumbled, into this track, and the fault lay with the legislature, and those who influenced it, and it continues to be a cause for regret, given also, that Britain continues to make the same error of judgement, by disregarding the true modesty of its current and prospective future circumstances.

Incidentally, there is 'no such thing as a free lunch' - someone, somewhere pays for it.

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