Have you ever stopped to think how free we are in economic terms? Have you ever applied the politicians’ rhetoric of ‘market forces’ to governmental interference with the same?
The Austrian school of economics teaches that when the government interferes with the workings of the market mechanism this leads to greater harm than that which the government sought to avoid. A key example is the classic Keynesian response to a recession in which governments increase public sector spending and sometimes combine this with tax cuts. The rationale is to ‘stimulate’ the economy into a rapid recovery. In the context of frequent elections such a response is predictable and understandable. However, this interference with the workings of market forces has long terms repercussions – far worse than the short sharp recession that would have occurred had the government decided not to get involved. Marginal business that would have gone bust without the government led ‘stimulus’ remain in business and so there is a long term drag on productivity. Had such marginal companies gone out of business its assets (both workers and capital) could have been acquired by a better functioning company and so this would have contributed to a rise in productivity which is in the long term interest of the economy and so also the people as a whole.
Admittedly, public affection for and dependence on the nanny state [20% of the UK workforce is in the public sector] has grown to such a degree that the ideas of the Austrian school seem unlikely to catch on anytime soon. Despite this, I’ll continue and invite you to consider two key aspects of economics in which governmental interference with ‘free’ markets is clearly evident. Firstly, consider interest rates. As you may know, the Bank of England seeks to determine short-term interest rates. It does this by buying and selling certain monetary instruments that affect the cost of commercial banks that seek to borrow money overnight. Obviously, the actual mechanism of how the money supply is determined is far more complex than this but what is clear is that the market for short term interest rates is not free if we define free as a market in which all participants are motivated purely for financial reasons and accept that governments are motivated, at least in part, by political reasons. While we may concede that some very bright people work for the Bank of England [although Mervyn King’s recent talk of the Maradonna theory of interest rates causes me to doubt] how can the wisdom and experience of bureaucrats outweigh the knowledge of market participants as a whole? Life is far too complex for a government to seek to guide the market without often getting things wrong. What gives governments the right to interefere with short term interest rates? Wouldn’t we be better off as a whole if interest rates – if interest wasn’t forbidden of course! - were determined by market forces? In my view the current high prices of houses can be traced back to low interest rates and a rapid growth of the money supply. Isn’t this a clear indication that the Bank of England got things wrong? [Note: While the government can influence the money supply it can’t control where that money ends up. Currently, a lot of this money has ended up in the bond markets and real estate – not too long it went into ‘tech stocks’ and we know how that ended!]
The second area I would like you to consider is that of money itself. Why do we need legal tender laws? Why aren’t individuals free to decide what they want money to be rather than for the government to impose its choice by fiat? Technology has advanced to such a degree that there is no practical reason why we can’t have numerous currencies in circulation within an economy at the same time for the payment of goods and services? You may retort that it would be inconvenient to have multiple currencies circulating at the same time. Agreed! Murray Rothbard explains that under the conditions of a free market people would gravitate towards a common form of money. My point is that why not let the market do its work so that we can see what that choice would be?
Abdelmenem Jamil Addas is a professor of financial markets at the College of Business Administration and is based in Jeddah. His following words appeared in the Arab News on 4 October 2004:
“It is significant that, historically, gold did not become money because some potentate or government designated it so. Gold (and silver) have been the choice of the people in open markets from antiquity.”
The next time you hear a politician talking about freedom and choice test his rhetoric against fiat money and government controlled interest rates!
References:
“The Demise of the Interest Rate”, Thorsten Polleit, http://www.mises.org/story/1856
“The Danger of the Current World Monetary System”, Abdelmenem Jamil Addas, Arab News, 4 October 2004
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