Does the credit crisis indicate the failure of the “free market”
Posted September 30, 2008on:
Matt McCarten was someone I enjoyed listening to when I was a young Alliance supporter many years ago – however, even in the heyday of teenage communist sympathies I would not have agreed with his conclusion that the recent credit crisis is undeniable evidence that voluntary trade does not work.
Now Kiwiblog and Anti-dismal have already gone to task explaining why they don’t believe this is a fair criticism of free trade, and good on them I think they are on the money (David Farrar focuses on why the criticism doesn’t sit well while Paul Walker paints the case for regulation being the cause of the problem – more here). The Hive also mentions dis-satisfaction with his choice of historical comparison. However, even after reading these posts you may still harbour some confusion surrounding the fact that I said voluntary trade instead of free markets.
Ultimately, his criticism of the “invisible hand” draws out something incredibly naive about the point of view that the free market is bad. Supporters of the free market are not so much saying that corporations should be allowed to manipulate information and “defraud” the public as they are saying that voluntary trade among groups is a good thing.
If two people choose to trade, it must be in their benefit and therefore giving people the freedom to trade is an important part of a society – this is what free trade represents.
Now when you think about it, free trade does not imply the absence of regulation, or the absence of government – it merely implies that people can make choices. As David Farrar aptly states:
Free market capitalism is not the total absence of any regulation at all, just as socialism is not the total absence of any markets at all.
This of course stems from the realisation that a sometimes regulation and government can increase individual freedoms. The true question should be, in what ways can government increase individual freedom and propensity. In my Trotskyist teenage years I had a subjective belief that government action was more useful than the current subjective belief I hold – I blame moving closer to government and seeing how it actually functions 😉
Blah blah – but what about recent events?
Recently we have experienced a problem stemming straight from the economics textbooks – bad information was not provided to the market, and so the wrong decisions were made, and now no-one will trust that information.
This is a standard “market failure”. If the government could improve information, then the market participants could trade again (better regulation of the firms providing information on risk could have helped in this regard – if it had occurred many years ago). As they can’t do that they want to jump in and grab a bunch of assets that people are concerned about (namely from these subprime loans). Doing this will allow the market for other assets to function, then when information is revealed (once the default rate on these loans is more obvious) they can sell them back to on the marketplace.
Far from “socialising Wall Street” the goal is to improve information to allow “the market” an “voluntary trade” to continue. This sounds like the sort of market intervention that free market supporters agree with – so I struggle to see how this provides an example of the failures of voluntary trade.