Kay on Free Markets (3) Diffusion of Power

Free markets diffuse economic and political power. John Kay says that a major benefit of free markets is that rent seeking is constrained.

Rent seeking is the process by which the ambitious find it more rewarding to batten on the wealth created by other people than to create it themselves. Rent seeking takes, and has taken, many forms – castles on the Rhine, the Wars of the Roses; ten per cent on arms sales, or seven per cent on new issues: awarding yourself control over former state assets, stealing the revenues from your country’s resources deposits, seeking protection from foreign competition, blocking market access by new entrants; winning sinecures or overpaid positions by ingratiating oneself with public servants or corporate employees. The mechanisms of rent-seeking range from the application of armed force to victory in democratic election; the methods pursued range from lobbying on Capitol Hill and in the restaurants of Brussels, through access to the King or the Chief Executive.

But while rent seeking is ineradicable, we can have more of it, or less. Politics everywhere used to be dominated by rent seeking; factions would battle for control of the state and when they won such control would use it to steal as much as they could get their hands on. In much of the world, it is like that still. ‘It’s Our Turn to Eat’ is the stomach churning title of one fascinating recent book about the corrupt – and moderately – democratic politics of modern Kenya. We have come to recognise the resource curse – wealth from national resources does more harm than good in many countries because of the rent-seeking it attracts – and foreign aid may have some of the same characteristics. But in Western Europe, at least, corrupt politics has ceased to be an avenue for rent-seeking.

The ability of a political/economic system to resist rent seeking depends on the degree of economic decentralisation. If there are concentrations of economic power. Individuals will try to get their hands on the rents concentrations of power attract whether they are found in the public sector, in private businesses, or in groups of private business. The wider the extent of the opportunities this created, the greater the tendency for individuals to gain wealth and influence for themselves by attaching themselves to power rather than exploiting their own individual talents and by developing distinctive capabilities in their own economic activities…

The ability of a market economy to restrict rent-seeking, its capacity to channel the desire for acquisition into channels that create wealth rather than extract it, depends on measures both to prevent the concentration of economic power and to limit the terms of access to such concentration. These are constraints on the economic power of the state: constraint on the concentration of economic power in large businesses: constant vigilance at the boundaries between the state and business: and a mixture of external supervision and internal restraint which prevents individuals who pull levers of economic power from using these levers to direct renting to themselves.

Because the last decades have confused a pro-business stance with a pro-market stance, we have emphasised some of these conditions at the expense of others. Western – and especially Anglo-Saxon societies – have constrained the economic role of the state. These measures have reduced the scope of one focus of rent-seeking, that by organised groups of public employees. A substantial element of such rent-seeking remains in areas that remain inescapably within the public sector. And, despite the furore over MPs’ expenses, we have continued to do well in maintaining the financial, if not necessarily the intellectual, integrity of our politics and politicians. Few people enter British, or west European, politics for the money. If the worst we have is the odd moat-clearing or duck-house, and the occasional sale of a peerage, we are not doing badly: although it is important we should continue to make a fuss about these issues. Corruption is a slippery slope, long and gentle.

There was a recent time, however, when similar restraint applied in large business: when people knew, as people in the UK Treasury do know but people in the Kenyan Treasury do not, that a lot of money may pass through your hands without any of it being yours. The senior managers of large British industrial companies before the 1980s did not pay themselves large salaries because they did not think it appropriate to do so. They would have been insulted by the idea of a bonus or success fee in much the same way as a doctor or teacher would still be insulted by a bonus or a success fee. They saw their jobs as a responsibility rather than a reward. These conventions have gone: and in the United States, the problem of the diversion of a substantial part of the rents earned by large corporations into the hands of senior managers is now a serious issue.

This is, however, a side show. The larger issue is the concentration of power of large business, or groups of large businesses, and the use of the leverage that power gives to strengthen established positions and enhance the economic and political power still further.

The most dangerous form of rent seeking in the modern economy is the collusion between governments and the financial sector.

Kay on Free Markets (2) Process of Discovery

John Kay says there is a good deal more to the power of markets than the price mechanism. Markets are a process of discovery based on freedom to experiment, combined with discipline in which unsuccessful experiments are terminated quickly. A chaotic process of experimentation is the means through which a market economy adapts to change.

The world is uncertain: not just risky, but uncertain, in the sense used by Keynes and Knight. Not only do we not know which future outcomes will happen: we are unable to specify at all fully what these possible outcomes will be. If we could predict or anticipate the invention of the wheel, we would have already invented it. Market economies do not predict the future, they explore it. That is a fundamental – perhaps the fundamental – difference between a planned and a market economy.

Hayek continues to be the most eloquent exposition of the concept of the market as a process of discovery. His argument was a priori , but vindicated by the failures of the eastern bloc in the post-war era. These planned economies failed in the development, not just of consumer products, but of business methods. Their technological development was disappointing in almost all not related to military hardware. Centralised systems experiment too little. They find reasons why new proposals will fail – and mostly they are right in finding reasons why they will fail because most experiments do fail. Market economies thrive on a continued supply of unreasonable optimism. And when, occasionally, the experiments of entrepreneurs succeed, they are quickly imitated. It is a sad fact of the market economy that even for innovations that are commercially successful, few are commercially successful for the innovator.

If market economies are better than planned societies at the origination and diffusion of new ideas, they are also better at disposing of failed ideas. Honest feedback is not welcome in large bureaucracies. In authoritarian regimes, such feedback can be fatal to the person who delivers it. In less draconian contexts, unwanted messages can be fatal to careers. And when I talk about large bureaucracies here, I am talking just as much about large private bureaucracies as large public ones. Disruptive innovations most often come to market through new entrants – from Google, EasyJet, Amazon. Incumbents have good reasons to be suspicious of novelty and protective of their established markets and activities.

The health of the market economy depends, therefore, on constant replenishment of the business sector by new entry. If, as planner or sponsoring department, you had been planning the future of the computer industry in the 1970s, would you have asked Bill Gates and Paul Allen?, If, as planner or sponsoring department, you had been planning the future of aviation in the 1980s, would you have asked Stelios Haji-Ioannou? If, as planner or sponsoring department, you had been planning the future of retailing in the 1990s would you have asked Jeff Bezos? Of course not: whether you were the politburo or permanent secretary you would have asked men in suits like yourself.

Watching the impact of electronics and the internet on children and grandchildren, makers of business and public policy have at least understood these issues. Committees of the middle-aged Twitter about technology like embarrassing adults trying to have fun at the teenagers’ disco. But, like those adults at the party, we are not really serious. Whether planners or governments of a market economy, we see industries through the eyes of established firms in the industry. And in doing so. miss the pluralism that is the market economy’s central dynamic.

Most people who develop a new business to try out a new idea fail. The few that succeed change the economy. This process of discovery is what has made the free market successful.

Kay on Free Markets (1)

The neo-classical economic model claims that free markets lead to an optimal economic situation. The proof of this claim requires so many restrictive assumptions that the proof is not worth much.

In the Future of Markets, John Kay takes a much less perfectionist approach. He suggests three elements to the triumph of the market economy. He says that economists focus too much the first and not enough on the second and third.

1. Efficient resource allocation
2. Markets as process of discovery
3. Diffusion of political and economic power.

Kay says that a defence of the free markets must include all three elements.

There is one central theme that runs through all three strands in the success of the market economy, a theme which I have called disciplined pluralism. When prices act as signals decentralised enterprises and decentralised information are brought together to create a coherent result. Markets as a process of discovery are based on freedom to experiment, combined with discipline: unsuccessful experiment is acknowledged and terminated. Markets as a means of decentralising power are the determinant of the areas where politics and economics meet.

1. Efficient Resource Allocation
The price mechanism is generally a better guide to resource allocation than central planning. John Kay says,

The model of ‘prices as signals’ describes how self-interested agents – individuals or firms – might, through independent decisions, make consistent and efficient choices about how to organise production and distribution and the allocation of capital, labour and other resources. In a loose formulation, this idea has been around since the beginnings of economics. Many people interpret Adam Smith’s famous remark about ‘the invisible hand’, and his observation that it was not the benevolence of the baker, but his self-love, that furnished our table in this way. In an astonishing demonstration of the power of spontaneous order, decentralised markets manage the process of coordinating complex production systems better than centralised direction.

Free Markets (28) - Generosity Everywhere

Caring for the poor is not just a virtue for Christians. God expects everyone who has prospered to share with those in need. This is even more urgent during tough times.

A generous man will prosper;
he who refreshes others will himself be refreshed.
People curse the man who hoards grain,
but blessing crowns him who is willing to sell (Prov 11:25,26).

During a famine, people who hoard grain might get a better price, but they will lose the blessing of God. Sellers of the basics of life must not take advantage of people in desperate straits.

The same applies when a poor person is looking for work.

Do not take advantage of a hired man who is poor and needy, whether he is a brother Israelite or an alien living in one of your towns. Pay him his wages each day before sunset, because he is poor and is counting on it. Otherwise he may cry to the LORD against you, and you will be guilty of sin (Deut 24:14-15).

In a free market, a poor and needy person will accept very low wages because they desperate. God warns employers not take advantage of people who are frantic for work.

People with economic resources must not abuse those who are in difficult circumstances. Those who ignore God’s concern for the poor place themselves under a curse. When people who have prospered stop being generous to the poor and needy, they bring a curse on their land, which harms everyone.

Christian should challenge everyone with plenty to be generous to those in need, but they will only have credibility, if Christians are leading the way in compassion. If Christian prophets are calling on kings and government to remedy poverty with force, they will be ignored.

Conclusion
Buying and selling in free markets is better than theft and force, but not as good love and compassion. Free markets are better than theft and force, but they will not produce a perfect world. More love and compassion is what the world really needs.

See this full series at

Markets and Morality
Markets and Evil
Markets and Efficiency
Markets Add Value
Markets and Equality

Free Markets (27) - Deacons

God’s tool for dealing with poverty is the ministry of the deacon. If theologians were really concerned about equality and poverty, deacons would be the most important ministry in the church. Unfortunately, the modern church does not understand the role and has changed it to something different. In Baptist Churches, elders are often called deacons. In the Catholic Church, deacons are priests in training. In other churches, deacons are responsible for raising money and maintaining buildings.

The deacons in the New Testament cared for the poor. They were the social welfare arm of the church. The record of the appointment of the first deacons is in the book of Acts. When the number of disciples had increased, some of the disciples complained that their widows were being overlooked in the daily distribution of food.

So the twelve gathered all the disciples together and said, "It would not be right for us to neglect the ministry of the word of God in order to wait on tables. Brothers, choose seven men from among you who are known to be full of the Spirit and of wisdom. We will turn this responsibility over to them and will give our attention to prayer and the ministry of the word. This proposal pleased the whole group so they appointed seven men who were full of the Spirit…. They presented these men to the apostles who laid hands on them (Acts 6:2-4).

These deacons used the offerings of the Church to provide for the needs of the poor and the sick. They were fulfilling the parable of the Good Samaritan. When he found a person in trouble, he took action to meet the immediate need. He then took further action to find a permanent solution, taking responsibility for the cost himself. This is a good pattern for the ministry of a deacon. The work of the first deacons had immediate effect.

So the word of God spread. The number of disciples in Jerusalem increased rapidly (Acts6:7).

Crucial Ministry
The ministry of the deacon is the second ministry to be mentioned in the New Testament. The twelve were appointed to be apostles by Jesus. Deacons were established in Acts 6. Evangelists are first mention in Acts 7 and 8, but Philip and Stephen had already served as deacons when they emerged as evangelists. Pastors are not mentioned until Acts 20, and they were elders not the CEO/Pastors we have today. The first prophets appeared in Acts 11. They were not interpreting biblical prophecy, but in encouraging the flow money to people suffer from a famine. This suggests that deacons are more essential for the fulfilment of the churches calling than pastors, prophets and evangelists.

The importance of deacons is confirmed in Paul’s letters. He devoted several chapters to teaching about their role. The fact that this ministry has disappeared suggests that something is drastically wrong in the church.

Free Markets (26) - Tithing Trumps Compassion

The modern church has not done well at compassion, because its own needs come first. Running the modern church is really expensive, so tithing to support the pastor-manager and maintain the church system has become the top priority.

Tithing to the church has become the accepted standard for giving. This is sad, because tithing is easy. Once the money has been given to the church, the believer’s responsibility is complete. Helping someone who is poor is more difficult. They will need training and guidance. The responsibility is not complete until they poor person has escaped from poverty.

Theologians worrying about the limitations of free markets should be teaching churches how to shift wealth from the rich to the poor, and how to help the poor escape from poverty. Unfortunately, most church leaders teach more about tithing than caring for the poor. Paul was different. He never mentions tithing to the church, but wrote incessantly about giving and sharing.

Bill Gates recently gave a large chunk of his wealth into a foundation that is committed to helping the poor people of Africa. I am glad that he is not a Christian. If he were a Christian, his pastor would be advising him to tithe, build a ten thousand seater auditorium and setup a Christian television station.

Great Wealth Transfer
Many church leaders are looking for a great wealth transfer. Most prophecies suggest that this wealth will be transferred from the world to the church. God is not interested in giving more wealth to the church. He does not need larger auditoriums, more professional pastors or, television ministries. God wants more “living letters” from which the world can read the gospel.

You yourselves are our letter….. known and read by everybody. You show that you are a letter from Christ…. written not with ink but with the Spirit of the living God, not on tablets of stone but on tablets of human hearts (2 Cor 3:2-3).

Living letters do need huge tithes. They do not require large wealth transfers. The great wealth transfer that God is seeking is a transfer from the rich to the poor. This flood of wealth will not be complete until equality is achieved.

Free Markets (25) - Good News

The gospel is good news for the poor. What does that mean? One possibility is that Jesus wants people facing poverty to have “peace in their heart” while their belly is empty. I do not think so.

Jesus expected that the gospel to produce a great flood of wealth from the rich to the poor. This started, as soon as the Holy Spirit was poured out.

Selling their possessions and goods, they gave to anyone as he had need (Acts 2:45).

The gospel was good news for the poor at the beginning. And the church carried on as it has started.

There were no needy persons among them (Acts 4:34).

Two things were essential for the success of the gospel: caring for the poor and healing the sick. The gospel really was “good news to the poor” and “recovery of sight for the blind”.

The only good news the modern church has for the poor is God will multiply their seed if they tithe. The inequality that pervades the modern world is not a sign of market failure. Rampant inequality represents the failure of the church to proclaim and produce good news for the poor.

Free Markets (24) - Upset by Inequality

Christians should be upset by inequality of incomes, but they must be precise about their response. Concern about inequality can mean either of two things.

1. I got too much income from market activity.
2. Those people over there gained too much.

The first possibility is easy to deal with. People who think that they have earned too much can give some away. Many of them already do.

The second option is different. It usually has a corollary:

The government should force those with too much to give it others.

Many people just assume that governments should take from those who gained “too much” and give it to those who are poor. No justification is given.

If they people have used force or stolen from others, they should be forced to make restitution to their victims. If they have gained “too much” by honest trading, or by producing good quality products, or by producing services that many people want, it is hard to understand why they should be punished.

Those who expect the government to deal with inequality are really saying,

• I do not like the state of the world
• I want the state to force the world to change.

Church leaders and theologians assume that the state should be involved solving poverty and inequality, but they do not think about what this means. What they are really saying is:

• Love cannot change this situation.
• Compassion will fail.
• We must use force.
• Only coercion can deliver the required change.

I can understand Marxists being advocates of force and coercion, but Christians have a better way. Love and compassion should be our trademark.

God has a Solution
God is actually more concerned about poverty than most Christians. His gospel is “good news to the poor”. Paul was certain that He does not want inequality.

Our desire is not that others might be relieved while you are hard pressed, but that there might be equality. At the present time your plenty will supply what they need, so that in turn their plenty will supply what you need. Then there will be equality (2 Cor 8:13-14).

God objective is equality, but his solution is unique as it does not require force or coercion. God’s solution to inequality is love and compassion.

God’s requires people with plenty to give generously to those who are hard pressed. He expects people who have prospered to demonstrate compassion for those who have not done so well. Compassion and sharing create equality.

Theologians who are concerned about inequality should be teaching Christians how to assist the poor. Paul did this all the time, because caring for the poor was the heart of his gospel. His letters are full of exhortations about giving.

Now about the collection for God's people…. On the first day of every week, each one of you should set aside a sum of money in keeping with his income, saving it up, so that when I come no collections will have to be made (1 Cor 16:1-3).

Paul taught the Corinthians about the Lord’s Supper, because he was concerned about their lack of sharing (1 Cor 11:20-22).

Free Markets (23) - Unequal Outcomes

The exchange of goods and services in a free market will often produce unequal outcomes. People will generally reject transactions that make them worse off, but a few will make mistakes that push them into poverty.

Some mistakes will be made when naïve or innocent people are “ripped off” by bad people (they should be forced to make restitution), but most poverty is not the result of evil actions, but flows from the vagaries of life. Trade in free markets can push people into poverty without any immoral action being taken.

• A bad decision in a free market can produce a huge loss.
• An unwise offer will sometimes be accepted.
• A desperate seller may be forced to accept a very low price.
• Some people are foolish buyers.
• Others are foolish sellers.
• Some people are not as clever as others.
• People with rare skills can achieve higher pay than others.
• People who do not use their skills and capital may find themselves in poverty.

  Lazy hands make a man poor (Prov 10:4).

• The sick and handicapped will struggle to prosper by buying and selling.
• Producing goods that no-one wants will leads to losses.
• People with surplus goods can improve their situation.
• Market only benefits those who participate.
• People in desperate circumstances may have not surplus to sell.
• People with nothing to sell gain nothing from free markets.
• Many are harmed when the people they depend make mistakes.
• Employees are harmed by the mistakes of their employers.
• Economic power is really the power to harm other people.
• People caught up in a war can lose everything they produced.
• Droughts, tornadoes and floods push innocent people into poverty.

Markets provide opportunities, but some people will be unable to take them up. Some people will benefit more than others. Transactions in a free market can produce inequality, even when every participant is honest and good.

Free Markets (22) - Economic Providence

Many people expect free markets to act as economic providence. They assume that when Adam Smith referred to an “invisible hand” working through markets, he was saying that it can “work all things together for good”. The common assumption is:

Invisible Hand = Providential Force

Anyone who understands how markets function knows that this is not true.

Markets are not rational entities, so they cannot act to produce a perfect world. Adam Smith understood this well. He only referred to the invisible hand three times in his writings. He used the term to describe situations where a business owner acting in self interest does things that benefits society in a way that he had not intended. Smith never described the “invisible hand” as a hidden divinity that would work all things for good. He had a more realistic view of the way that free markets function.

A belief that free markets work everything for good is totally unrealistic. Those who equate markets with providence have trusted in a false religion.

Different thought have arisen, so I will get back to this series after the weekend.

See this full series at Markets add Value.

Free Markets (20) - Theology and Value

Theologians are expert on values.

• God is good
• Murder is evil

They understand these values, but when it comes to economic issues they get confused. Free markets allow business to create value, yet theologians make statements like these.

• Free markets are morally flawed.
• Capitalism is evil.
• Making money is wrong
• Profits are bad

They tend to support actions that destroy value and object to institutions that add value. Despite their expertise, they seem to be confused about value.

Theologians tend to see profits as a sign of immoral behaviour. They assume that money is made by cheating people. This is not true. Successful businesses must offer things that people want. This is not easy, because people will only buy products that:

• are more valuable to them than the price they have to pay for it;
• are more valuable to them than any other product at the same price;
• makes them better off than they were before making the purchase.

If a business cannot produce things at a price that fulfils these conditions, buyers will go to other producers or buy different products. Producers who do not make people better off will not make a profit for long.

Adding Value
Profit is a crude measure of the extent to which the business has made people better off. The costs of production reflect the value of components, materials and labour used in production. The price received reflects the value to buyers purchasing the product. The difference between sales and costs reflects the additional value created by the producer.

Profit = income – expenditure
Profit ≈ value added

This is new value that did not exist before. The producer created the value by making the product and by finding people who valued it.
To make a profit, a business must add value. They must take some components and put them together in a way that makes them more useful to other people. The components must be worth more when put together in the product than they were worth separately. That is adding value.

We want producers to add value, so we implicitly want them to make a profit. Therefore, profit is good. This is acknowledged in the scriptures.

All hard work brings a profit, but mere talk leads only to poverty (Prov 14:23).

The plans of the diligent lead to profit as surely as haste leads to poverty (Prov 21:5)

Businesses make money by adding value. They must have produced goods or services that made people better off, so making money is good.

Free Markets (18) - Information and Efficiency

Producers and consumers need good information to make wise decisions. Markets do not make decisions, but they are excellent conveyors of information. To make sales, producers must share information to the market about the products and prices they are offering. Consumers and producers can use this information to enlighten their decisions.

Prices draw consumers towards the most efficient producer. If two sellers are offering exactly the same a product, but one offering a much lower price than the other, a wise consumer will accept the best offer. The efficient producer will be encouraged to produce more. The offers of inefficient or greedy producers will be rejected. They are not forced to change, but they will feel the pressure, if the want to sell their products.

Prices provide producers with information about the value of the resources they have used. This information flows right through the economy from extraction of raw materials to the retailing of final goods. Wise businesses respond to market information by adapting their production processes to eliminate waste and increase efficiency.

Markets do not “work all things together for good”, but they do convey some of the information that people need to make good decisions. Market information will never be perfect and it will never be complete, but the wisdom of consumers and producers would be severely constrained without it.

Free Markets (17) - Efficiency

Efficiency is Human
This following statement frequently heard.

The market is efficient.

This statement is not true. Markets cannot think, assess, decide or act, so they cannot decide what is efficient. Markets cannot be wise.

Efficiency is a human concept. Only people can be efficient. Some are clever, others are highly skilled, but everyone is better off, if producers want makes wise decisions. An economy becomes more productive as wise producers find more efficient ways to do complex tasks.

Japanese auto makers found ways to make their production processes more efficient, which enabled them to offers better cars at lower prices. This wisdom and efficiency resides in the Japanese managers and engineers, not in the market. Free markets provided a way for consumers to access their efficiency and buy high-quality cars a low price.

Specialisation and Efficiency
Specialisation generally increases efficiency. When a person can concentrate on one set of tasks, they the can learn to do them more effectively. Specialisation benefits everyone, but people can only specialise, if there is a way for other others to obtain what they have produced (without using force or theft, and not relying on compassion). Markets where goods and services can be offered for sale allow people to specialise in the activities which they do best.

The people who designed my computer produced an efficient product. If there were no markets and no specialisation, they would spend their days cultivating crops and hunting game. They would be worse off and I would be worse off too, because I could not make a computer in a thousand years.

Freedom to offer goods for sale on a market allows people to specialise, but the person who chooses to specialise immediately comes under pressure to operate efficiently. A person or business that decides to produce goods to offer in any market immediately faces a compelling dilemma. They must offer the goods for sale at price sufficient to cover their production costs, but pushing their offer price to high will dramatically reduce their sales.

The market producer must choose between higher prices and more sales. This dilemma forces an ambitious business to reduce the costs of production by finding ways to be more efficient. This allows them to increase their income, without increasing prices and losing sales. Markets facilitate efficiency.

This full series is at Markets and Efficiency.

Free Markets (16) - Preventing Mistakes

Advocates for market regulation are really wanting to prevent people from making mistakes. This is a noble ideal, but is impossible to apply in practice. Regulators would need two forms of knowledge to prevent mistakes when buying and selling.

1. They would need to know what everyone should want and need. Parents may know what is good for their children, but a market regulator can never know everything that other people need.
2. They would need perfect knowledge of the future.

Market regulation assumes the regulators have exceptional knowledge of both human needs and perfect knowledge of the future. These godlike regulators simply do not exist.

Political power amplifies the impact of mistakes. Ordinary people make mistakes that affect themselves. They sometimes make mistakes that harm their families. Politicians and regulators can make mistakes that damage the entire economy and harm the whole of society.

Business Cycles
The business cycle is caused when widespread mistakes are made worse by government policies. Ups and downs in economic activity are the result of changes in human mood. There will always be times of widespread exuberance and times of mass fear. Markets reflect these moods, but do cause them.

Joseph explained to Pharaoh that the seven good years would be followed by seven bad years. This is normal. During good years, people naively assume they will continue forever. They live it up, when they should be putting the surplus aside for the bad years that will inevitability follow.

People decide how they will respond to changes in moods and season. We should not blame markets for the mistakes of fickle and foolish of people. Given time they will work themselve out.

The business cycle gets serious when governments amplify the mistakes of ordinary people. The laws that govern the modern banking system are flawed. This allows banks to exaggerate the business cycle by inflating the currency during times of exuberance and contracting leverage in response to fear.

Free Markets (15) - Mistakes

Free markets are morally superior to theft and force. The reason is that an exchange in a free market will only occur, if both parties think that they will be better off after the transaction is completed. This is good, but transactions must be agreed on the basis of what buyers and sellers think and know at that time when time then the deal is finalised.

Mistakes are made because people have imperfect knowledge about the future. When buying and selling, we have to act on what we know at that time. We do not know what the future holds. If the future is different from what we expected then a transaction may turn out to be a mistake. If his brother arrives unexpectedly to stay for a couple of months, John might wish he had kept the car. He might begin to think that he had made a mistake in selling the car. Unexpected circumstances can turn good decisions into mistakes.

People make more mistakes when they are under pressure, Esau sold his birthright for a meal, when he was famished (Gen 25:29-31).This was a free market. Jacob did not have to sell his stew (although he probably should have had compassion for his brother). Esau freely sold his birthright, because it would bring no benefit until way in the future, whereas his hunger was there now. Short-term thinking places a higher value a meal in the present than on a future blessing. Esau made a mistake, because hunger clouded his judgment.

Mistakes also occur because people change their minds about what they want. Bob bought John’s car because it was blue. After driving the car for a month, he might get tired of blue and start thinking he would prefer a red car. As his thoughts about colour change, he might look back on the transaction later and think that he had made a mistake.

People make mistakes all the time when buying and selling, but if markets are functioning freely, they can be corrected easily, albeit at a cost. John can buy another car, if he chooses. If Bob decides that he really must have a red car, he can sell his blue car and buy a red one. He may lose some money in the process, but he is the only one who suffers for his mistake.

People learn from their mistakes. Bob will not want to make the same mistake twice, so he will think more about colour, before buying another car.

Free Markets (14) - Economic Power

Many people claim that economic power must be controlled. There is a lot of confusion behind this belief.

The basic assumption is that political power is good and economic power is bad. This is just assumed never proven. The reality is that political power has done terrible evil throughout history. There is no reason why political power should be trusted.

Economic power is never defined. A common assumption is that size equates with economic power. That is not true. General Motors is huge, but its economic power is fleeting. GM cannot force a single person to purchase a car. I bought a Honda several years ago and GM was powerless to do anything about it. GM wanted me to buy one of their cars, but I defied them. I defeated the Goliath of the auto industry all on my own.

In the last few months, General Motors have fallen by half and they have been powerless to prevent this. So much for economic power.

General Motors has done better with political power than using economic power. When they went down to Washington with the rest of the Big Three, they got billions of dollars from other people.

This is generally true. Economic power generally proves to be unreal. What appears to be economic power is generally political power. Those with economic power have generally gained it by persuading the political powers to give them a privileged position. People who are worried about economic power should be more precise about what they mean.

Free Markets (13) - Zero Sum

Option 3 and option 4 om my previous post are compulsory zero sum options. They both make John worse off against his will. He suffers with no choice. Theft and force are not good methods for transferring goods from one person to another.

Love and compassion are noble, but they do not extend very far. They cannot facilitate all the transfers of goods or services that are necessary for a well functioning society. Theft and force make some people worse off, so they are not a solution. Buying and selling in a free market is better. Trade is not as noble as love and compassion. Buying and selling in a free market are more noble than stealing or using force to get what you want.

I do not mind people criticising free markets, if they advocate love and compassion, especially if they choose to demonstrate love and sharing themselves. What I find is that most people criticising free markets claim to be acting out of love and compassion, but are actually advocates of force. This is quite deceptive. Critiquing markets because they do not meet the standards of love and compassion, but then proposing the use of force to remedy the situation is twisted logic.

Buying and selling in a free market are not as noble as love and compassion, but they are morally superior to theft and force. Those who want to regulate a market are advocates of force. The Bible teaches that force is justified to remedy theft, but it does not advocate forced compassion or love.

This full series is at Markets and Morality.

Free Markets (12) - Best Method of Exchange

Every transaction in a free market provides a benefit to both parties. The reason is simple. If either the buyer or the seller thinks they will not benefit, the transaction will not proceed. This is quite amazing. A process that benefits every participant and harms no one really builds up the harmony in society. People who complain about free markets do not understand how markets work.

There are only four other ways that Bob could get John’s car.

1. Love. If Bob were John’s son, he might give him the car for free. Love is very generous, but it does not stretch very far. It is generally limited to close friends and families.
2. Compassion. John might feel sorry for Bob and decide to give him the car. Compassion reaches further than love, but is less generous.
3. Theft Bob could steal John’s car. This gives Bob what he wants, but John loses. The Bible forbids theft, so this is not viable option.
4. Force Bob could persuade someone bigger and tougher than John to force him to hand over the car. This method has been common throughout history and can take various forms. Bob might simply thump John. He might get a gang of friends to intimidate John into signing over the car. Bob could persuade the government to confiscate the car from John and hand it over to him.

All four options have something important in common: they are zero sum. In each case Bob benefits, but John is worse off. In the first two options John freely chooses to be worse off, so that is acceptable. He still has the right of veto. If he decides not to show love or compassion he can keep the car. If he is forced to love, it ceases to be love and becomes force. If John is forced to show compassion, the transaction stops being option 2 and becomes option 4.

This full series is at Markets and Morality.

Free Markets (11) - Benefits

Free markets are good, because well-functioning markets allow people to exchange things they do not want for things that they need. This enables them to improve their situation in life.

In a world without markets every person has to produce everything that they need. If there is no way of exchanging goods and services, everyone has to be self sufficient (unless a generous person gives them something or they steal from someone else). Making everything that you need is very difficult, so a self-sufficient rarely moves above subsistence level. People spend so much time producing food and shelter, they did not have time to develop and make other products that they may want.

A free market changes everything, because it allows people to specialise and trade. One person specialises in growing grain. Another specialised in catching fish. A third person specialises in baking bread. Each one does what he is most skilled in doing. By focusing on one task, each person can increase their skills and find ways to do a task more efficiently.

The person who specialises can produce more than they need to survive. They can trade their surplus production with others to get all the things they want. Trading in a free market improves the situation of almost everyone, because specialisation makes everyone more productive.

I do not have a clue about how to make a computer or a flat screen TV. I could not make a decent automobile, if I worked on if for a hundred years. If I made my own clothes, I would look like a caveman. However, by specialising in tasks that I am skilled at doing, I can afford to buy all these things and many more.

Not a Zero Sum Game
What takes place in a market is not a zero sum game. In a zero sum and action that makes one person better off makes someone else worse off. Consider a family that has only one doll. If they take it off one child and give it to another, the situation of one child improved, but the other is worse off. In a zero sum situation, benefitting one person always harms another.

The functioning of a free market is totally different. A market is not a zero sum game, because every transaction that takes place in a market makes both parties to the transaction better off. If Bob sells his car to John for $5,000, the transaction improves the situation of both. This is hard to believe, but it happens because different people place different valuations on the same good or service (the technical name for this is subjective value). The transaction described above benefits John, because the car was of more use to him than the $5,000. Bob also benefits because he places a greater value on $5,000 than he does on the car.

The experience of Bob and John is not a rare example. They same thing is repeated in every transaction that takes place in a free market. A transaction cannot occur unless both parties benefit. If Bob thought his car was worth more than John was willing to pay, he would not sell it. If John felt that Bob was wanting too much for the car, he would refuse to buy it. This is the situation with every transaction in a free market. Both parties to the transaction have a right of veto. If either the buyer or the seller thinks, they are will not benefit from the transaction, they can simply walk away.

Free Markets (10) - Fallible

Those who have lost faith in markets had a false understanding of what markets can do. They tended to assume that allowing markets to function freely would lead to a perfect world. They assume that when Adam Smith referred to an “invisible hand” working through the market, he was saying that the invisible hand will “work all things together for good”. Anyone who understands how markets function knows that this is not true. Those who believed this view trusted in a false religion.

“The market” cannot think or act, so it cannot produce a perfect world. Adam Smith understood this well. He only referred to the "invisible hand" three times in his writings. He used the term to describe a situation where the a business owner acting in self interest does things that benefit the rest of society in a way that he had not intended. He never described the “invisible hand” as a hidden divinity that would work all things for good. He had a much more realistic view of the benefits that free markets bring.

This utopian view of free markets is really just a “straw man” set up so it can be knocked down. The idea that free markets work everything for good is totally unrealistic, but that does not mean that free markets are evil. Free markets cannot create perfection, but they provide considerable benefits. Those who are switching to faith in the government should understand these benefits before changing religion. The benefits of free markets will be described in the next three posts.

A perfect utopia cannot be created on this earth. Governments cannot create perfection. Markets cannot create perfection. The score is nil each.