My recent post suggesting three simple reforms to financial markets provoked a bit of a squall on Twitter. The Free Market Fundamentalist Tendency especially seemed incensed that any restrictions on markets was a good idea.
Most of the criticisms were either simply abusive – such as that I’m “bonkers” – or ideological rants with little substance. But a few were at least thoughtful attempts to refute or critique what I had suggested. Chief amongst the latter was an extended critique by Christie Malry.
So let’s examine a few of these criticisms.
First, the proposition that “markets are inherently a good thing” and I am apparently against them.
Wrong on both counts. Markets are no more inherently “good” than, say, the state is – they are merely one, partial, way of structuring human affairs which works well in some circumstances and not so well in others. Markets have their upside – they have helped create the huge surge in human wealth over the past two centuries. But they also have their downsides – tendency towards monopoly; periodic crises; failure to address certain human needs; neglect of ‘externalities’; etc.
So I am not against markets – I think they are part of the human condition and will always be with us. They have huge benefits, but also huge downsides if left to themselves.
I was also only writing about financial markets, which I was suggesting have a set of rules all of their own that seem to be separate and apart from those governing ’normal’ capitalist markets.
Next, my argument that you shouldn’t be able to sell stuff you don’t own (as in short selling) is answered thus:
“There are all sorts of legitimate reasons for short-selling. And, indeed, plenty of businesses sell stuff they don’t own. At the risk of reiterating material I already wrote in an earlier blog post, here are some instances of short-selling in business:
- Just-in-time manufacturing. Efficient manufacturing businesses sell goods they don’t own, then manufacture them quickly once they’ve been ordered. This helps businesses by reducing their need to hold significant quantities of inventory (which might fail to sell, go bad or get stolen).
- Bespoke printing. I understand that Amazon will print up books for you ‘to order’. They don’t exist at the time of ordering, but they’ll print them, bind them and send them to you.
- Airlines. Airlines don’t actually have “a seat on a flight from London to New York at 8:50am on 23 February 20X2″ when you order it. But we don’t seem to have a problem with allowing people to buy one.
- University courses. Similarly for university courses. Professor Talbot doesn’t actually have any of the courses his university is selling. Nor, to the extent that they’re examined courses, have any of the exam papers yet been written.
- Writers. Publishers often provide advances to authors, sometimes before even a single word has been written. What’s that, if not short-selling?” on Christie Malry‘s blog.
All of which just shows he doesn’t understand property rights. In every one of the above cases the sellers own the property rights to what they are selling, even if they haven’t materially produced it at the time of sale.
JIT sellers own the right to sell their furniture or whatever, even if they don’t have it at the moment. Authors own the rights to their writings, even if they haven’t finished them. Universities own the rights to their courses.
In short selling the ’sellers’ do not own the property rights of what they are selling – period. They hope they will, but they don’t when they ’sell’. It is fundamentally different.
“Free markets” are a good thing.
Well, so might be unlimited free energy, but that doesn’t exist either. I don’t know how many times this has to be repeated but there is no such thing as ’free markets’. They are a myth. Markets only ever exist within a set of rules – of property rights, contract, currency, etc – created by external agencies – most usually governments. Governments have regulated markets for at least 5,000 years, long before markets became a such a significant factor in human development as they have in the last two or three centuries.
We have the odd example of “free” markets not regulated by governments. One is the international illicit drugs trade, which has its own methods of enforcing property rights, contracts and currency, which I think most of us would rather didn’t exist.
Another are the ’dark’ markets in international financial instruments of which we have had so much positive experience recently. The latter have, probably, destroyed far more value than they have created. As I’ve recently written according to Hernando de Soto these “markets” have excelled in creating paper without assets, or what we used to call good old fashioned fraud.
The argument of free-market fundamentalists boils down to ’anything that (financial) markets can do they should do’. But there are lost of things markets cannot do, and also they should not do. The issue is not whether we draw lines between what is acceptable for “the markets” to organize and what is not, but where we draw these lines. For some reason in the past 3 decades financial markets seem to have been exempt from these considerations. After the past 3 years that exemption must end.