Better Markets

MarketRulesLets be clear, there is no such thing as “The Market”; there are markets. A market is a human invention and, like all human inventions, sometimes they work well and are very useful; sometimes they don’t work and can be malign.

A market is defined by a set of rules, so, for example, a street market, like the one where I buy my vegetables, has a well-established set of rules known and understood by the traders.

Other markets, other rules. Rules are not immutable and if the market does not work, then they can changed.

It is to everyone’s advantage that any particular market should work well, so that particular issues can be regulated automatically in a neutral way.

However there are certain markets that do not work properly and could be improved. But before considering particular cases, let us look at what markets do in the longer term:

When I go and buy a cabbage at my local market, the price depends on the cost of growing it. If they are in short supply, then the price goes up and there is a greater incentive for farmers to grow more. In short the market is a controller for the production of cabbages and the price is the control signal.

This is a bit analogous to controlling, say, the temperature of an oven. There is a temperature sensor which sends a signal to the controller which switches the power to the oven off when the temperature too high and on when it goes too low. This is an example of a “control system”. The point I want to make here is that a seemingly simple system can show complicated and often counter-intuitive behaviour. If the control system has been set up correctly temperature of the oven can be regulated with remarkable accuracy; however, if it has not been set up properly, the regulation can be wildly unstable, with drastic results, maybe the destruction of the oven. (I speak from experience!)

With markets the situation is much more complicated but the message is the same, get the control system wrong and disaster follows, as was dramatically demonstrated by the crashes of 1928 and 2009, with global malign results.

When a control system or market works properly, it can be left to do its job automatically and the user can get on with more important things.

Some markets deal in money. (Money is another human invention and is defined by an agreed set of rules.)

The idea of capital seems to be a useful one, and markets in capital seem to also be useful; but there are issues.

I suggest these include:
• Exactly what is “capital”? and could we use the idea in a better way?
• The governance of money markets. This seems to controlled by the people that profit most from dysfunctional governance. Not a good idea.
• Currently the natural trend of these markets is towards causing greater inequality.
• The rules that define them have evolved from historical usage. This leads to the totally irrational view that they are an unchangeable, god-given natural law. They are not. These markets are just as much a human invention as any other and we can change the rules. It is just rather difficult to do so.

There are also issues in the market for labour. The cabbages in the street market do not care about their price, but wages matter.

The operation of the labour market, over time, results in a relentless erosion of all wages and thereby towards inequality. Historically this trend has been opposed by industrial strife which imposes a heavy political burden on the whole of society.

From every point of view this is dysfunctional. A market that systematically generates industrial strife is a bad market and giving unions a special place in the democratic process is bad for democracy.

There is an urgent need for better rules. (ok, not a trivial problem!)

What to do?

I do not think there is a single fix applicable to all markets. Some just need better governance. Some could be improved by upgrading the rules. In others it could be a case of developing a parallel market that does the same function better. The development of crowdfunding is interesting in this context.

There are situations, such as some of the service industries where a crude market system has been imposed We should do what was really needed, the more difficult task of developing proper governance.

Some markets have failed because they have fallen into effective monopolies, particularly in the field of IT, eg, Windows, Google, Amazon and various social media. This new technology seems to be in need of a more appropriate type of market.

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13 Responses to Better Markets

  1. Pingback: What can we agree on? | The Friday Room

  2. Martin Sears says:

    A very topical subject John but haven’t you ignored the elephant in the room? Economics makes the assumption that people will always act rationally in markets. Complete nonsense at every level. Actual share price movement of IT companies demonstrate that ‘investors’ are irrational causing wild upward swings when a company first floats only to be followed by devastating crashes later.

    The lessons that should have been learnt from the global near financial meltdown of 2008/2009 (on a scale that makes IT share movements look very small beer) are in danger of being glossed over by the likes of Boris Johnson.

    The tragedy is that, in this country, the irrational, xenophobic, discussion on the ‘wicked’, bureaucratic EU is likely to scupper the one chance of making fundamental changes to the global financial markets that our full-hearted membership of the EU and participation in the financial reforms advocated could deliver to the benefit of the mass of the population.

    • Martin: I have not so much ignored the elephant in the room as pussyfooted around it. There is an entrenched and pernicious view that “The Market” has an unquestionable authority and we should surrender governance to market forces.
      As you say, there is a large element of destructive irrational behaviour in real markets which gives substance to my view that “The rules that define them have evolved from historical usage. This leads to the totally irrational view that they are an unchangeable, god-given natural law.”
      I suspect that there is actually a great deal of bunk in economics but I make no claim to really understand it, so this is a case of The Emperors New Clothes!

  3. John Catt says:

    John Greenwood said:
    “The operation of the labour market, over time, results in a relentless erosion of all wages and thereby towards inequality. Historically this trend has been opposed by industrial strife which imposes a heavy political burden on the whole of society.”

    This has to be incorrect, otherwise our population would be poorer than it was 100 years ago. In fact the wages in China, India, Vietnam etc. have been rising as a result of investment and the need for labour. Of course this has often been as the expense of labour in developed economies that did not previously have to compete with these sources of supply. Overall average incomes across the world have increased, but in the developed world some have lost out.

    This surely is the result of a shift from a local to a global market for labour.
    See http://www.prosperity.com/KeyFindings-1.aspx

    • The reason our population is not poorer than 100 years ago is because of a lot of industrial strife. My point is that union activity works but that the cost has been considerable.
      The economic improvements in the countries you list is interesting but remember that they have high inequality and corruption.
      Is it significant that there are anti-corruption campaigns at least in China and India?
      Thanks for the link. It looks as though the ranking follows the trend that less corrupt and less unequal countries do better.
      Sometime I will download the data and analyse it.
      You will of course looked at: http://www.john-greenwood.co.uk/FairnessPays/

      • Martin Sears says:

        John, it is not industrial strife that has made the population better off. Quite the reverse. Economies of scale and mass production techniques driving down unit costs, allowed the innovative products from cars, washing machines and vacuum cleaners to jet aircraft (facilitating flights to any part of the world), fridges and tumble driers to become very widely available (not forgetting the machinery that allows farming to be far more productive than in previous centuries).

        Consequently the mass of the population share in the increase in living standards enabled by the above and many other electronic innovations. Industrial strife has meant countries where that was endemic eg Britain in the sixties, seventies and eighties did less well than the countries not so afflicted eg Germany, Japan and the Scandinavian countries.

      • I did not choose my words well!

        When John Catt argued that when I said “…industrial strife which imposes a heavy political burden on the whole of society.” that this implied “our population would be poorer than it was 100 years ago”

        What I am claiming is that industrial strife has reduced inequality. The effect on overall wealth is not clear and as you point out, the technological advances mattered more. There is no suggestion that it has made the population worse off.

        A political burden is not the same as an economic burden.

      • John: I have looked at the Prosperity Index site you mention and correlated the ranking with fairness. As expected we see that corruption and inequality are the joint enemies of prosperity:
        Fairness vs prosperity rating

  4. John said: “When I go and buy a cabbage at my local market, the price depends on the cost of growing it. If they are in short supply, then the price goes up and there is a greater incentive for farmers to grow more. In short the market is a controller for the production of cabbages and the price is the control signal.” It’s not that simple. The initial asking price for a cabbage may well be related to the production cost but the selling price is related to what the buyer wants to pay. What is a commodity worth to the person buying it? If hardly anyone in Loughborough likes cabbages then the stall-holder may have difficulty selling them at any price and given that they are perishable might be forced to sell at a loss rather then get nothing at all. I suspect this happens in real life to real farmers. On the other hand if there is an irrational craze for cabbages, the stallholder may be able to charge far more than cost price plus reasonable profit margin. A less likely scenario, granted.

  5. Martin Sears says:

    Steve is right regarding virtually every commodity, good or service apart from agricultural produce. Farmers are heavily subsidized to keep producing (also sometimes for not producing!) when the world price is below the cost of production for EU farmers. This represents a double whammy for ‘third world’ producers when linked to quotas and import taxes if, as has happened in the past, the subsidized surplus produce is dumped on the world market at lower than world prices.

  6. Steve, John, Martin; Yeh yeh, you’re are right of course. But this post is about “reframing the narrative” not being right.

    The current accepted wisdom / narrative / hegemonic view, is that the market is king. We want this replaced by a new narrative: that markets are very useful but are sometimes flawed, and we want this to become the common sense view of the disillusioned majority.

    The Marxist narrative, that has the market as the root of all evil, won’t wash either. (Tell this to Left Unity!)

    • Martin Sears says:

      The accepted wisdom that the market is king is as outdated and irrational as the idea that an unelected head of state (king or queen) and an unelected second ‘upper’ chamber are compatible with the concept of democracy.

      ‘The Market’ is not the root of all evil. Human nature (and the egotism that goes with it) is. And we are all human. It is the great paradox of the modern age that our leaders have convinced themselves and, regrettably, large sections of the population, that they can regulate the trends in global climate change but not the trends in global financial markets. The latter, unlike the former, are a totally human construct and can be regulated if the will is there.

      In my book, the EU provides the best opportunity for regulating the global financial sectors, initially with the introduction of the financial transactions tax, which the euro zone countries are already actively pursuing and implementing while our coalition government sits on the sidelines wringing their hands.

      Another step in the right direction within this country would be to make it compulsory for every adult to participate in personal pension schemes (not employment based), the aggregated funds of which would be tightly regulated and be limited to investment in the real economy and infrastructure projects such as rail, power stations, affordable permanently fixed rate mortgages for first time buyers, schools etc. The target return on investment should be, say, 3% pa. It should be made illegal to use the funds for transactions involving hedge funds, ‘derivatives’ and the short selling techniques which benefit no-one except the traders and ultimately cause financial bubbles/market crashes illustrated by the disaster that was 2008 and now being swept under the carpet by those who want the unregulated flows of money to be seen as ‘inevitable’.

      In addition to the myth that it is inevitable that ‘the market’ is king, an ‘accepted’ wisdom is that the current local government structure is the right way of ensuring the social/health welfare of local people. The nineteenth century structure of local government was made obsolete by the creation of the NHS yet the ‘powers that be’ insist on shifting serious money from the NHS to the unreformed, bureaucratic, local councils. Madness. (IMHO)

      btw The individuals that make up the disillusioned ‘majority’ will have differing ideas as to what constitutes ‘common sense’. Real democracy allows for this.

  7. Pingback: Reframing Politics | The Friday Room

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