A Free-Market Perspective

[Anonymouse]

Re: Free-Market Economics

I never said I dislike it. Free Market economy is perhaps the soundest 'economic model' around today. However, economy and politics can clash if they are not symbiotic, that is if they don't compliment each other.



Simple example from an Armenian perspective: Just because Turkey or Israel or Saudi Arabia or Great Britain are wealthier than Armenia and have billions to invest worldwide, it does not mean Armenian authorities have to surrender to the elemental/fundamental concepts of a Free Market economy by selling its national assets to the highest bidder. It would be smart for a nation like Armenia to nationalize its airports, its communications network, its arms industry, its natural resources... Incidentally, pushing through the Free Market concept by force (military, financial or political) is precisely how the West subjugated the rest of the world in the aftermath of the Second Wold War, and is precisely the reason why we are in this current mess. The way the geopolitical world has been set up since the days of the great empires of old, and taking into consideration human nature, the safest form of governance, especially for emerging nations, is National Socialism or Constitutional Monarchy. Incidentally, the reason why Russia broke out of its degradation and stagnation of the 1990s was because of their current style of political rule, which could rightfully be considered a disguised form of National Socialism. I can bring up many such examples, but I'm pressed for time currently.

It's precisely because of "human nature" that socialistic governments fail and lead to more ruin. The reason Russia is the way it is is because of 90 years of socialist policies that have bankrupt and destroyed that whole culture. Russia is only now attempting to even remotely recover from it's century of socialism.

The free market is never about 'force'. I disagree. What the "west" pushed was a mercantalist and imperialist model. I think there is a misunderstanding of "free market."

[Anonymouse]

Re: Free-Market Economics

What Is the Free Market?

Daily Article by Murray N. Rothbard | Posted on 1/24/2006

The Free market is a summary term for an array of exchanges that take place in society. Each exchange is undertaken as a voluntary agreement between two people or between groups of people represented by agents. These two individuals (or agents) exchange two economic goods, either tangible commodities or nontangible services. Thus, when I buy a newspaper from a news dealer for fifty cents, the news dealer and I exchange two commodities: I give up fifty cents, and the news dealer gives up the newspaper. Or if I work for a corporation, I exchange my labor services, in a mutually agreed way, for a monetary salary; here the corporation is represented by a manager (an agent) with the authority to hire.

Both parties undertake the exchange because each expects to gain from it. Also, each will repeat the exchange next time (or refuse to) because his expectation has proved correct (or incorrect) in the recent past. Trade, or exchange, is engaged in precisely because both parties benefit; if they did not expect to gain, they would not agree to the exchange.

This simple reasoning refutes the argument against free trade typical of the "mercantilist" period of sixteenth- to eighteenth-century Europe, and classically expounded by the famed sixteenth-century French essayist Montaigne. The mercantilists argued that in any trade, one party can benefit only at the expense of the other, that in every transaction there is a winner and a loser, an "exploiter" and an "exploited." We can immediately see the fallacy in this still-popular viewpoint: the willingness and even eagerness to trade means that both parties benefit. In modern game-theory jargon, trade is a win-win situation, a "positive-sum" rather than a "zero-sum" or "negative-sum" game.

How can both parties benefit from an exchange? Each one values the two goods or services differently, and these differences set the scene for an exchange. I, for example, am walking along with money in my pocket but no newspaper; the news dealer, on the other hand, has plenty of newspapers but is anxious to acquire money. And so, finding each other, we strike a deal.

Two factors determine the terms of any agreement: how much each participant values each good in question, and each participant's bargaining skills. How many cents will exchange for one newspaper, or how many Mickey Mantle baseball cards will swap for a Babe Ruth, depends on all the participants in the newspaper market or the baseball card market — on how much each one values the cards as compared to the other goods he could buy. These terms of exchange, called "prices" (of newspapers in terms of money, or of Babe Ruth cards in terms of Mickey Mantles), are ultimately determined by how many newspapers, or baseball cards, are available on the market in relation to how favorably buyers evaluate these goods. In shorthand, by the interaction of their supply with the demand for them.

Given the supply of a good, an increase in its value in the minds of the buyers will raise the demand for the good, more money will be bid for it, and its price will rise. The reverse occurs if the value, and therefore the demand, for the good falls. On the other hand, given the buyers' evaluation, or demand, for a good, if the supply increases, each unit of supply — each baseball card or loaf of bread — will fall in value, and therefore, the price of the good will fall. The reverse occurs if the supply of the good decreases.

The market, then, is not simply an array, but a highly complex, interacting latticework of exchanges. In primitive societies, exchanges are all barter or direct exchange. Two people trade two directly useful goods, such as horses for cows or Mickey Mantles for Babe Ruths. But as a society develops, a step-by-step process of mutual benefit creates a situation in which one or two broadly useful and valuable commodities are chosen on the market as a medium of indirect exchange. This money-commodity, generally but not always gold or silver, is then demanded not only for its own sake, but even more to facilitate a re-exchange for another desired commodity. It is much easier to pay steelworkers not in steel bars, but in money, with which the workers can then buy whatever they desire. They are willing to accept money because they know from experience and insight that everyone else in the society will also accept that money in payment.

The modern, almost infinite latticework of exchanges, the market, is made possible by the use of money. Each person engages in specialization, or a division of labor, producing what he or she is best at. Production begins with natural resources, and then various forms of machines and capital goods, until finally, goods are sold to the consumer. At each stage of production from natural resource to consumer good, money is voluntarily exchanged for capital goods, labor services, and land resources. At each step of the way, terms of exchanges, or prices, are determined by the voluntary interactions of suppliers and demanders. This market is "free" because choices, at each step, are made freely and voluntarily.

The free market and the free price system make goods from around the world available to consumers. The free market also gives the largest possible scope to entrepreneurs, who risk capital to allocate resources so as to satisfy the future desires of the mass of consumers as efficiently as possible. Saving and investment can then develop capital goods and increase the productivity and wages of workers, thereby increasing their standard of living. The free competitive market also rewards and stimulates technological innovation that allows the innovator to get a head start in satisfying consumer wants in new and creative ways.

Not only is investment encouraged, but perhaps more important, the price system, and the profit-and-loss incentives of the market, guide capital investment and production into the proper paths. The intricate latticework can mesh and "clear" all markets so that there are no sudden, unforeseen, and inexplicable shortages and surpluses anywhere in the production system.

But exchanges are not necessarily free. Many are coerced. If a robber threatens you with "Your money or your life," your payment to him is coerced and not voluntary, and he benefits at your expense. It is robbery, not free markets, that actually follows the mercantilist model: the robber benefits at the expense of the coerced. Exploitation occurs not in the free market, but where the coercer exploits his victim. In the long run, coercion is a negative-sum game that leads to reduced production, saving, and investment, a depleted stock of capital, and reduced productivity and living standards for all, perhaps even for the coercers themselves.

Government, in every society, is the only lawful system of coercion. Taxation is a coerced exchange, and the heavier the burden of taxation on production, the more likely it is that economic growth will falter and decline. Other forms of government coercion (e.g., price controls or restrictions that prevent new competitors from entering a market) hamper and cripple market exchanges, while others (prohibitions on deceptive practices, enforcement of contracts) can facilitate voluntary exchanges.

The ultimate in government coercion is socialism. Under socialist central planning the socialist planning board lacks a price system for land or capital goods. As even socialists like Robert Heilbroner now admit, the socialist planning board therefore has no way to calculate prices or costs or to invest capital so that the latticework of production meshes and clears. The current Soviet experience, where a bumper wheat harvest somehow cannot find its way to retail stores, is an instructive example of the impossibility of operating a complex, modern economy in the absence of a free market. There was neither incentive nor means of calculating prices and costs for hopper cars to get to the wheat, for the flour mills to receive and process it, and so on down through the large number of stages needed to reach the ultimate consumer in Moscow or Sverdlovsk. The investment in wheat is almost totally wasted.

Market socialism is, in fact, a contradiction in terms. The fashionable discussion of market socialism often overlooks one crucial aspect of the market. When two goods are indeed exchanged, what is really exchanged is the property titles in those goods. When I buy a newspaper for fifty cents, the seller and I are exchanging property titles: I yield the ownership of the fifty cents and grant it to the news dealer, and he yields the ownership of the newspaper to me. The exact same process occurs as in buying a house, except that in the case of the newspaper, matters are much more informal, and we can all avoid the intricate process of deeds, notarized contracts, agents, attorneys, mortgage brokers, and so on. But the economic nature of the two transactions remains the same.

This means that the key to the existence and flourishing of the free market is a society in which the rights and titles of private property are respected, defended, and kept secure. The key to socialism, on the other hand, is government ownership of the means of production, land, and capital goods. Thus, there can be no market in land or capital goods worthy of the name.

Some critics of the free-market argue that property rights are in conflict with "human" rights. But the critics fail to realize that in a free-market system, every person has a property right over his own person and his own labor, and that he can make free contracts for those services. Slavery violates the basic property right of the slave over his own body and person, a right that is the groundwork for any person's property rights over nonhuman material objects. What's more, all rights are human rights, whether it is everyone's right to free speech or one individual's property rights in his own home.

A common charge against the free-market society is that it institutes "the law of the jungle," of "dog eat dog," that it spurns human cooperation for competition, and that it exalts material success as opposed to spiritual values, philosophy, or leisure activities. On the contrary, the jungle is precisely a society of coercion, theft, and parasitism, a society that demolishes lives and living standards. The peaceful market competition of producers and suppliers is a profoundly cooperative process in which everyone benefits, and where everyone's living standard flourishes (compared to what it would be in an unfree society). And the undoubted material success of free societies provides the general affluence that permits us to enjoy an enormous amount of leisure as compared to other societies, and to pursue matters of the spirit. It is the coercive countries with little or no market activity, notably under communism, where the grind of daily existence not only impoverishes people materially, but deadens their spirit.

http://mises.org/story/1973

[jgk3]

Re: Free-Market Economics

[B][SIZE="6"]A common charge against the free-market society is that it institutes "the law of the jungle," of "dog eat dog," that it spurns human cooperation for competition, and that it exalts material success as opposed to spiritual values, philosophy, or leisure activities. On the contrary, the jungle is precisely a society of coercion, theft, and parasitism, a society that demolishes lives and living standards. The peaceful market competition of producers and suppliers is a profoundly cooperative process in which everyone benefits, and where everyone's living standard flourishes (compared to what it would be in an unfree society). And the undoubted material success of free societies provides the general affluence that permits us to enjoy an enormous amount of leisure as compared to other societies, and to pursue matters of the spirit. It is the coercive countries with little or no market activity, notably under communism, where the grind of daily existence not only impoverishes people materially, but deadens their spirit.

http://mises.org/story/1973

Yeah, this makes more sense to me now actually. There's a lot of stigma about free market system because in everyone's mind, its associated with mercantilism that was craftily disguised under the label of capitalism/free market.

[Armenian]

Re: Free-Market Economics

It's precisely because of "human nature" that socialistic governments fail and lead to more ruin.

The same would eventually apply to any system created by mankind.

The reason Russia is the way it is is because of 90 years of socialist policies that have bankrupt and destroyed that whole culture. Russia is only now attempting to even remotely recover from it's century of socialism.

I agree. However, you are not taking into account the simple fact that there are fundamental differences between Communism/Bolshevism and National Socialism or Constitutional Monarchy. The inflexible, insular, unwavering and oppressive nature of Bolshevism coupled with a conglomeration of international forces acting against it bankrupted the Soviet Union. Russia is today recovering not only from Communism but also from the "Free Market" economy of the 1990s. Russia is rebounding today due to a disguised form of National Socialism. Putin and the FSB have made sure that Russia's vast wealth in natural resources and its strategic heavy industry are government controlled and not put up for sale on the Free Market stage, as it was during the 1990s. By the way, isn't China flourishing under a form of National Socialism as well?

The free market is never about 'force'.

I agree with you but the Free Market cannot exist in a vacuum, it needs geopolitical entities/sponsors to be implemented. And anytime you mix a concept/theory (however good it may be) with human nature you get an aberration/corruption of the original concept.

I disagree. What the "west" pushed was a mercantalist and imperialist model. I think there is a misunderstanding of "free market."

Anon, I am not misunderstanding the Free Market concept. Fundamentally I agree with your assertions about the Free Market and the positive role it can play within the global economic system. My departure from you here is based upon my understanding/interpretation of basic human nature and more importantly the harsh realities of international geopolitics. In my opinion, when a geopolitical entity has secured its national assets (whatever they may be) and ensured that hostile nations with disposable wealth wont be able to exploit them, then and only then can then implement the Free Market. In other words, the top layer has to be government controlled, especially for developing nations like Armenia.

Let me ask you a question -

Do you think a small developing nation with many wealthy/powerful enemies (a nation like Armenia) should or should not oversee/regulate its national communications network, its energy power grid, its nuclear power station, its financial system, its natural resources, its heavy industry, its arms industry?

In your opinion, how can you apply the Free Market concept to the aforementioned nation's economic infrastructure - yet ensure that hostile entities wont exploit it?

[UrMistake]

Re: Free-Market Economics

u simply make a partly free market,making political-economical agreements with foreign countrys,in case of armenia we focusing making a base that will develop all other economical transactions,make a stable foreign investment,create new jobs and expand carent,next step u sell to the world ur products,and so u have strong currency,in theory i think its simple only u must have somthing to give,already our president in the past said that we have unexplored potentials,can some 1 explain to me why world bank dosent give big loans to Armenia?Eny ideas of ivesment at making bisnes in armenia for about 3000-6000 euros?

[jgk3]

Re: Free-Market Economics

It is true that the geopolitical reality of the world cannot be ignored and you could argue that free market was ideal for a land like America back when it was being built from the bottom up. It was separated from the rest of the world by two oceans. So long as it could keep the mercantilists out, all its resources were for keeps to the American people.

This just isn't the situation with Armenia. I agree with the idea that we'd have to wait before deregulating all the sectors of our economy, but what fault do you see in deregulating property ownership rights Armenian?

[Anonymouse]

Re: Free-Market Economics

The same would eventually apply to any system created by mankind.

I agree. However, you are not taking into account the simple fact that there are fundamental differences between Communism/Bolshevism and National Socialism or Constitutional Monarchy. The inflexible, insular, unwavering and oppressive nature of Bolshevism coupled with a conglomeration of international forces acting against it bankrupted the Soviet Union. Russia is today recovering not only from Communism but also from the "Free Market" economy of the 1990s. Russia is rebounding today due to a disguised form of National Socialism. Putin and the FSB have made sure that Russia's vast wealth in natural resources and its strategic heavy industry are government controlled and not put up for sale on the Free Market stage, as it was during the 1990s. By the way, isn't China flourishing under a form of National Socialism as well?



I agree with you but the Free Market cannot exist in a vacuum, it needs geopolitical entities/sponsors to be implemented. And anytime you mix a concept/theory (however good it may be) with human nature you get an aberration/corruption of the original concept.



Anon, I am not misunderstanding the Free Market concept. Fundamentally I agree with your assertions about the Free Market and the positive role it can play within the global economic system. My departure from you here is based upon my understanding/interpretation of basic human nature and more importantly the harsh realities of international geopolitics. In my opinion, when a geopolitical entity has secured its national assets (whatever they may be) and ensured that hostile nations with disposable wealth wont be able to exploit them, then and only then can then implement the Free Market. In other words, the top layer has to be government controlled, especially for developing nations like Armenia.

Let me ask you a question -

Do you think a small developing nation with many wealthy/powerful enemies (a nation like Armenia) should or should not oversee/regulate its national communications network, its energy power grid, its nuclear power station, its financial system, its natural resources, its heavy industry, its arms industry?

In your opinion, how can you apply the Free Market concept to the aforementioned nation's economic infrastructure - yet ensure that hostile entities wont exploit it?

I don't think we have any fundamental disagreements. Our only point of contention seems to be the issue of nationalization.

Who are "hostile entities" that would "exploit it"? What is "it" that they will exploit? I fail to see the connection between what you are asserting and what can be. If a foreign company wants to invest and buy capital and infrastructure in Armenia, what is so bad about it? How is it exploitation if they make an offer for a bid, and there is a sale? If they can invest capital and create jobs and perhaps handle a certain industry more efficiently, how would that be "exploitation"?

How do we apply the free market? Simple. You allow that transaction to take place.

Ever since 1992, Armenia has moved steadily in the direct of more market oriented reforms. That is the right direction. In fact, the Heritage Foundation ranks Armenia 28 in terms of economic freedom. That is astounding!

http://www.heritage.org/research/features/index/countries.cfm

http://www.heritage.org/Index/country.cfm?id=Armenia

[Anonymouse]

Re: Free-Market Economics

It is true that the geopolitical reality of the world cannot be ignored and you could argue that free market was ideal for a land like America back when it was being built from the bottom up. It was separated from the rest of the world by two oceans. So long as it could keep the mercantilists out, all its resources were for keeps to the American people.

This just isn't the situation with Armenia. I agree with the idea that we'd have to wait before deregulating all the sectors of our economy, but what fault do you see in deregulating property ownership rights Armenian?

In fact, that is one of the things Armenia needs more emphasis in, property rights.

[Hye_Psycho]

Re: Free-Market Economics

privatisation of water.. have you Americans experimented with this idea yet?


Irrational fears of big bad markets hobble economy

Ken Henry
The Australian

Let demand and supply operate without government meddling, writes Ken Henry

WHEN I came to work in the Australian Treasury in 1984 and applied for a home loan from one of our trading banks, I was told that I had to join a queue.

Bank-originated mortgage interest rates had been capped under the previous Coalition government at 13 per cent. The cap was removed by treasurer Paul Keating in April1986.

When a product has an administered price ceiling below the level that would emerge in a free market, it will be in excess demand and some mechanism will have to be found for rationing access to it. Sometimes, the rationing will be left to the seller.

Thus, in response to regulated interest rates, Australian banks developed lending criteria that rationed access according to increasingly tough credit risk standards that gave very high weightings to accumulated wealth.
Remarkably, people in power were surprised to find that the interest rate cap was having a regressive impact.

It's a wonder the political response wasn't to set up a bureaucratic apparatus to undertake the housing loan rationing task on a more equitable basis.

An innovative minister might even have proposed using vast sums of taxpayers' money to develop imaginative programs that would have reduced the funding needs of borrowers with larger houses as a means of releasing more funds to go around the system.

Think that far-fetched? If you do, then you don't know much about water. If we had a well-functioning market in water, all users would pay a price that reflected not only the amortised costs of water storage and reticulation infrastructure, but also its scarcity value.

Moreover, while water wouldn't have the same price everywhere, arbitrage would ensure that any difference in the prices paid for water between any two places and/or any two points in time would be no larger than could be explained by the costs of transport and storage in moving water between those two places or points in time.

In times of drought, water prices would rise in order to equate demand and supply; how high they would rise depends not only on the severity of the drought, but also the price-sensitivity of market demand and supply.
In a well-functioning water market, drought-induced increases in the price of water would reallocate water among users, with a higher proportion of it flowing to those who valued it more highly.

In any place, or at any time, at which its marginal value fell short of its price, water would not be used.

On the other hand, if a suburban gardener valued her roses sufficiently highly, she wouldn't have to stand by and watch them die.
The supply response is even more important.

The drought-induced increase in price would provide the signal for investment in additional supply, including things such as desalination plants, new dams and water recycling plants.

When brought on stream, these investments would reduce the price of water.

That is the logic of markets: additional supply reduces price rather than, as under present water arrangements, increasing it.

Obviously, we don't have well functioning water markets; not in the cities, and not in irrigation areas either.

Instead, we have administered prices, legal protections on restraint of trade and, as a consequence, rationing.

Rationing tends to be egalitarian.

For example, in towns and cities the common practice is that odds and evens water restrictions are first imposed, then progressively more restrictive, but persistently uniform, levels of access are mandated.

And in the irrigation areas, where nascent markets remain severely restricted by institutional, legislative and administrative barriers, the rationing can be even blunter: the Dethridge wheels stop turning and the computerised flume gates run bone dry.

Egalitarian rationing must be popular.

Perhaps it appeals to basic communitarian instincts accepting of the need for common sacrifice in times of adversity.

Even so, it isn't long before neighbours start checking on one another over the back fence to see if there is any cheating; neighbourhood vigilante groups spring up; and the water administrators are forced to employ a team of highly visible taxpayer-funded water monitors to defuse neighbourly tensions. Tragically, there are never enough taxpayer resources to prevent every instance of water rage, and it isn't long before we have human casualties.

Water rage is an appropriate label.

Its better known cousin, road rage, is also a consequence of excess demand; in that case, an excess demand for the road surface.

Traffic congestion performs the allocation task. Like water rationing, the allocation is extraordinarily inefficient: the Bureau of Infrastructure, Transport, and Regional Economics has estimated that traffic congestion costs the Australian economy about $9.4 billion a year.

About 2 1/2 years ago, I identified energy, water and land transport as three key candidates for the development of national markets, arguing that the case for governments facilitating the development of highly efficient national markets for key business inputs in a country as remote and geographically fragmented as ours is overwhelming.

Our achievements to date have fallen well short of that goal. It may not be too much of an exaggeration to say that the only significant business inputs for which we do have national markets are financial capital, post, telecommunications and aviation.

You will hear many explanations for the slow rate of progress in the development of national markets. Existing institutional arrangements are complex, characterised by many agents with competing objectives, often parochial, super-sensitive to blame shifting and cost shifting, and accustomed to travelling well-worn paths to deeply entrenched positions.
But while these features are descriptive of present arrangements, they don't explain them.

The central explanation for slow progress in these areas is an aversion to the logic of markets. That aversion seems to be based on a fear of distributional consequences.

Of course, there are legitimate reasons for governments to be concerned about the distributional consequences of markets.

But Australian governments have numerous policy instruments available to them to ameliorate distributional consequences.
And they have not been afraid to use them.

For example, since the early 1970s, social security and welfare payments excluding unemployment and sickness benefits and payments for Aboriginal advancement have been lifted from 3 per cent of gross domestic product to about 8 per cent of GDP.

That increase in redistributive transfer payments is worth more than $55 billion a year.

Transfer payments are not without their problems, including adverse effects on work and saving incentives, but they generally achieve more transparent distributional -- as well as more efficient -- outcomes than interference in markets through administered prices and rationing.

[Armanen]

Re: Free-Market Economics

Mouse, do you really want a turkish firm to own property in Armenia, let alone property in security related sectors?