Tuesday, June 10, 2008

Markets are good for you

Here are two tales that are related in theme and to the book I am reviewing after a fashion. Not long ago I had a frank and open discussion with a couple whom I have known for some time. Highly educated academics and teachers, they are vaguely on the left though not extremely so. The discussion was about the fact that they could not do anything about turning the lease they held on their very pleasant Central London flat into a freehold and, indeed, had to obey the rules set by the freeholder, in this case the Grosvenor Estate.

Obviously, they sneered, your belief in the free market is quite wrong as it can result in a situation like this. The husband then pointed out to the wife that probably I did not think that she should want to live in Central London. I explained that I had no views on that subject but thought that the pros and cons of every situation had to be weighed up.

If one aspect of what you owned was overwhelmingly important then you simply accepted what might be the downside. If you really wanted to own that ultra-chic Zac Posen outfit then you did not mind paying the fabulous sum extracted for it, assuming you had that sum available. If that meant not going on holiday that year, so be it. If it meant getting into debt and paying interest, so should be that.

Similarly, if you wanted to live in Central London, you had to accept that there were very few freeholds available and the rules on the various estates tended to be quite stiff. But there were many advantages.

What the lady in question felt, though she denied it, was that the free market ought to let her have what she wanted, as long as she was prepared to pay, without any disadvantages. In other words, she wanted to abolish the whole concept of exchange and of property rights, both of fundamental importance, in order to extract more than the maximum benefit for herself. She would have liked to do away with “search costs” and “transaction costs”, all of which have to be taken into account in a voluntary exchange that is a true market. Probably, she and her husband would have liked to see some legislation on the subject.

They certainly wanted to abolish the whole concept of inheritance as it seemed very unfair to them that people should acquire property without having worked for it. Once again, it proved impossible to explain, though several people tried, that the benefit of one’s heirs may be one reason why one prefers to work and accumulate property or to look after it.

The other tale concerns that utterly useless institution, the London Assembly and London’s street markets. One of the committees produced a report on those markets. It remained unread by all except those who were duty-bound to do so. In my days of One London Blogger I did read it and comment on it.

The report seemed to mourn the fact that many “traditional” markets did not do well and there were empty spaces. Something had to be done about that. As it happens they also let slip that farmers’ and specialist markets were doing rather well and new ones were opening all the time. Yes, but that was not the point. They were not “traditional” markets and, anyway, that was just markets developing in response to customer demand not according to the rules as defined by the wisdom of the London Assembly and its members.

As part of that report, the committee members visited Shepherds Bush Market, with which I am well acquainted. As it happens, the market has not been doing terribly well and, naturally, the fault lies in someone else – TfL, who owns the land, various shops around there and, of course, the not yet opened new shopping centre around White City. This is all rubbish, though TfL does seem to have reneged on some of its contractual obligations, which will not surprise our readers. (Sorry, that’s Transport for London.)

Curiously enough, one of the complaints to the committee, whose members spent a whole morning at the market but did not notice that it had lock-up shops as well as stalls, was that the various stallholders all bought the same goods from the same wholesalers. The complaint came from the stallholders themselves, who clearly did not think that they should do something about it, even if they were losing customers.

They, too, thought that someone should help them out because they had not been able to keep another cardinal rule of market economics: provide choice and anticipate customer demand.

All these people, the highly educated professor, his equally highly educated wife and the less than well educated but reasonably smart stallholders should read Eamonn Butler’s new book: “The Best Book on the Market”. It is easy on the brain though not on the eye, what with random pull-quotes on every page. Dr Butler is the Director of the Adam Smith Institute and a world-renowned wonk on the free market.

The book explains the market as a physical entity and as an idea; how they work and why nobody loses out. It deals with the various problems and the way the state and certain private enterprises can mess the process up – think subsidy, high tax, over-regulation, price control and wage control. In the end, even those who think they benefit do not.

We have seen the outcome of continued price control in the recent bread riots in various countries. We know the problem of farmers reacting to subsidies rather than consumer demands. We know the difficulties a monopoly or monopsony can cause. And we know which countries have grown rich and developed well in history: those who traded.

Naturally, no everyone will like this book despite or because of the ease and clarity with which the ideas are explained. There are many eurosceptics, for instance, who would like to introduce a great deal of protection and substitute HMG for the EU as giver of subsidies.

There are those who think that African countries should stay in poverty in the name of glorious self-sufficiency, otherwise known as subsistence economy. Their only hope is to weigh up where their relative advantage lies (hint: labour intensive production as labour is so cheap) and trade.

Finally, there are those who are simply afraid of freedom for themselves and, even more frequently, for others.

For all of that I suggest that as many people as possible read Dr Butler’s very slim tome. A great deal can be learnt from it. Oh and you will love the subtitle: “How to stop worrying and love the free market”.

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