A Case for Competitive Markets

Jim Carlton speaks at the launch of Richard Morgan’s “Lessons of the Global Finance Crisis: The relevance of Adam Smith on morality and free markets” HERE

“…this book is the most effective antidote I have seen in a long time to the inanity being peddled by those with a deep mistrust of the marketplace, usually coupled with a naïve confidence in the capacity of governments to produce results in areas outside their sphere of competence…

… The usual form of attack is to define free markets as laissez faire, anything goes forms of economic activity. As anyone who actually bothers to familiarize themselves with what Adam Smith actually said, and as Richard Morgan demonstrates, on no account does Smith advocate laissez faire. To quote Richard Morgan on page 47, “For Smith, a ‘well governed’ society provides for free competitive markets, law and order and infrastructure. If these elements are not in place, he warns, living standards will decline and indeed in extreme cases ‘go backwards.’

The use of the phrase “free competitive markets” is instructive. When we use the shorthand “free markets” we do leave ourselves open to willful or ignorant misinterpretation. Markets are not, in fact free, in the sense we mean it, if they are not regulated to ensure competition. Enemies of the market economy also seize on the word “deregulation” to suggest a descent into laissez faire…

… Another aspect of the Morgan book that appeals to me is that he has drawn from both Smith’s great works, The Theory of Moral Sentiments, and Wealth of Nations, to stress the underlying morality, and dare I say it, the deep compassion for the underprivileged, inherent in Smith’s writings.”

Comment
These few quotes from Jim Carlton’s speech at the launch of Richard Morgan’s new book are a blast of fresh air in Australian political economy.

In parts of the speech not reported here, Jim Carlton discusses the long term problems of the Australian economy and political policies followed by successive governments that shaped the legislative illusion that markets do not matter and can be replaced by lawyers and vested interest (a down-under version of the corporate state, if I may say so), until reality intruded and wage determination by courts, not free bargaining between employers and labour was gradually re-introduced in the 80s and 90s, leading to the strong economy Australia has today (unlike Britain, for example, which is now not the ‘sick patient’ of Europe, it having graduated to the 'sick man of the global economy' with pretensions that Britannia stills rules the waves) under the ‘spend and tax’ ‘labour’ government of Blair and Brown, since 1997.

As an example of the truth about Adam Smith’s intended legacy, which includes his Moral Sentiments, 1759, as well as Wealth Of Nations , 1776, Jim Carlton’s speech, and Richard Morgan’s “Lessons of the Global Financial Crisis”, are first rate introductions.

Buy Richard Morgan’s book from Amazon.

Is Edmund Conway Innocent?

Edmund Conway’s "50 Economics Ideas You Really Need to Know" published by Quercus at £9.99,is "well timed".

"Each of the topics – from Adam Smith’s invisible hand through to the more modern “happynomics” – follows the same four-page template, with bite-sized sections, timelines and key quotations pulled out.

Conway, the economics editor of The Daily Telegraph, has clearly done his research and the book is well-referenced given its compact size. It should be essential for anyone keen to make sense of the causes, ramifications and solutions to the current crisis and should be on the desk of everyone working in the City.

Purists may hate it, but then it is worth remembering that it was some of the purer economic theories that got us into this mess."

Comment
I have ordered my copy and will comment again when I have read Conway’s book.

“Purists may hate it, but then it is worth remembering that it was some of the purer economic theories that got us into this mess.”

I agree, but it depends what he interprets as ideas we need to know.

For example, if Conway thinks we need to know about “Adam Smith’s invisible hand” as presented by modern economists along the usual lines of it controlling a process by which self-interests (in the extreme, even ‘selfishness’) are processed into always benefiting the public good, I will make an objection on the “purist” grounds that this is a wholly invented notion by the same modern economists who got us into the mess by turning an 18th-century metaphor into a myth.

Worse, they are unapologetic about what they taught their students since the 1950s that led them to believe the myth that gave comfort to entrepreneurs, politicians, media folk, and hapless employees and consumers, which inevitably had the result that reckless speculation, plus (never forget this) the role of governments and those who influenced them, together caused for the rest of us.

Anyway, let’s await the arrival of the book first, before damning Edmund, who may well be innocent of my premature suspicion.

Government Failure Also Endemic

Kevin Williamson writes in National Review Online, “Taming ‘Animal Spirits”
(‘Investors sometimes behave irrationally, and so do regulators’)
HERE:

“Animal spirits are indeed at play, and mischievously so, both in the marketplace and among those who seek to govern the marketplace. It is characteristic of our academic caste that Professors Shiller and Akerlof attend to the former case but are blind to the latter, and so they have produced an essay that is not so much conventional as convention itself, arguing, in a series of bland metaphors, that economic exorcists in Washington must be deployed against animal spirits in the marketplace: “If we thought that human beings were totally rational and acted mainly from economic motives, we, like Adam Smith and his followers today, would believe that governments should play little role in regulating financial markets. . . . But on the contrary, we believe that animal spirits play a significant and largely destabilizing role. Without government intervention, employment levels will at times swing massively, financial markets will fall into chaos, scoundrels will flourish, and huge numbers of people will live in misery.”

“There is no need to address the problems of that passage beyond cataloguing them: We have lots of government intervention in the economy, but employment levels do swing, financial markets have fallen into chaos, scoundrels do flourish with great exuberance, etc. And neither Adam Smith nor his intellectual heirs believe that economic man is an icy rationalist, or even that he is rational, broadly defined. Ludwig von Mises put the idea into theoretical form, but it has long been understood that man acts rationally in the sense that he takes actions that seem to him sensible in order to achieve a certain end, but that end itself may be irrational, erroneous, or criminal: Scientific researchers act rationally to achieve certain ends; so do serial killers, religious fanatics, drug addicts, and Wall Street traders.”

Comment
A most interesting article with which I mostly agree. Basically, it criticises the Homo economicus model of human(?) behaviour upon which so much of modern economics is based. Partly, the model was inevitable once it was decided to find a way to make political economy ‘scientific’, with maximum/minimum maths using calculus (Pareto, following Walras), out of which the mathematisation of economics into what it became from the mid-20th century.

The scribbles of modern economists influence public policy, often without the qualifying assumptions of the scribblers, and a whole host of dubious ideas get traction in the daily grind of politics.

The idea that markets are liable to fail, unless regulated, is having a renewed run just now, as if the regulators are some version of supermen and superwomen, who do no wrong, are immune to other than the public good and above reproach or suspicion. Being made of the same stuff as ordinary humans (absent from the models), regulators can be at least as bad as the worst market-makers, and on occasion, even worse.

I suggest you read Steven Medema’s, The Hidden Hand: taming self-interest in the history of ideas, Princeton University Press (2009), for an excellent account of the 1930s debate about the assumed probity of the selfless public servant in Pigou’s "Welfare Economics".