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.