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 (5) - Regulation

A market is just a place where a whole lot of people can display their offers. Once we understand this fact, it is obvious that statement about regulation of markets need a little more content, before making sense. Regulating marketing could mean a number of things.

1. Preventing markets from forming. This does not make sense, because bringing many offers together in one place helps buyers.
2. Limiting the types of offers that can be made. That does not make sense because an offer is benign. Nothing happens until an offer is accepted, so there is no point in preventing people from making offers, even if they are unrealistic.
3. Controlling the price range that can specified in offers. Some people would like to ban offers at low prices. Others would like to ban high prices. Both options seem to be pointless, as if prices are too high or too low, whatever that means, people will not accept the offers.
4. Preventing certain types of people from accepting offers. I suppose children could be prevented from agreeing to purchase cigarettes that are offered to them, but that is really the responsibility of parents. Some suggest that foolish people should be prevented from accepting offers that are unrealistic, but that might be very difficult to assess.
5. Preventing people making offers that are deceptive or fraudulent. This problem is already dealt with by laws against theft and fraud, so I am not sure that regulation is needed for this problem.
6. Enforcing delivery of offered products once the offer has been accepted by a buyer. Laws against theft and breach of contract already deal with the situation where exchanges are not completed, so what can more regulation do.

Markets benefit people by providing information about all the offers that are available. The law already deals with the problems that can arise in a market, so those who want more market regulation must be more precise about what they intend.