Saturday, July 08, 2006

 

About Markets

I've been reading a very interesting post in a blog by David Brin in which he contrasts two beliefs or myths about markets. One myth is that a Guided Allocation of Resources (GAR) brings about the most suitable allocation of resources so that, for example, everyone has afforcable good health care. The other myth is Faith in Blind Markets (FIBM), in which unregulated "free" markets provide the most efficient allocation of resources. Brin's rather long post punctures both of these myths. GAR produces an allocation of resources that benefit the individuals who are doing the allocating, not the general public. FIBM doesn't work because in present day America the markets aren't blind, but rather resources are allocated according to the decisions of CEO's and Boards of Directors of large corporations. Again, these individuals form an aristocratic elite who "Guide the Allocation" of resources to maximize their own and their corporations' profits, not the welfare of the general public.

Economists often cite the work of Adam Smith who advocated an economic system based on unregulated markets in which there were many suppliers of a given product or service and many buyers. No supplier or buyer was large enough to influence the price of a product or service through his own decisions to buy or sell. Prices would be set by the competition of many sellers and many buyers.

Brin and others point out that today we do not have a system of Adam Smith type suppliers. Many products and services that we buy are provided by large corporations. These corporations are able to set their own prices for their products and services. They have interlocking boards of directors. They often secretly collude with each other to set prices.

Joseh Stieglitz won a Nobel Prize in economics a few years ago by pointing out another requirement on buyers and sellers that Adam Smith's present-day acolytes ignore: information equality. Even Adam Smith's scheme won't work if either the seller or the buyer knows something about the product that the other doesn't.

For example, I may decide to sell my house. Now I know that the house has termites in the attic and dry rot in the foundation and has some serious but hidden structural damage from the last earthquake. I propose to sell the house to some poor fool who doesn't know about these problems and doesn't know enough to ask or to get an impartial expert to inspect the house for these and other flaws. If I succeed in unloading my house on this sucker, I have beaten Adam Smith's market scheme. On the other hand, the buyer may know about a hidden treasure buried under the house by an early Spanish settler in the region. I know nothing about the treasure and sell my house for one percent of what the buyer will gain by tearing down the house and digging up the treasure.

David Brin explains why socialism doesn't work. David Brin and Joseph Stieglitz explain why the "free market" model advocated by present-day conservatives won't work. What are we left with? What can work?

What may work is an old model, not a new one. The old model is a mixed economy. Some aspects of the economy are governed by GAR, such as a municipal water and electricity utility. Some aspects are governed by corporations operating under rather strict and well-enforced rules of behavior. Some aspects are left as free markets with little regulation. This old model may not be the best one, but it's one that we Americans have been using and developing for two hundred years. It works best when it's subject to continuous an impartial oversight and review. Changes in the rules are made from time to time as needed to correct obvious abuses.
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