Another Voice

14 February 2009

O ye of little faith! This economic crisis is evidence that the market is working

So amid all the doom-mongering and recanting, I have an assertion to make. The market has not failed. The present collapse is evidence that the market is working. Confidence bubbles are an inherent feature of a free market system. Panics — confidence vacuums — are an inherent feature too. The test of the theory of market capitalism is whether the system provides from within itself the means to prick both.

It does. The first — a confidence bubble — has been pricked. We are now sucking ourselves the other way: into a confidence vacuum. In time this too will be pricked. The market will steady.

The bubble that has just burst was based, worldwide, on financial services. Financial services are a product. It is true they are a product critical to the efficient functioning of the market (so is electricity, so is oil) but that just makes them an unusually important product. From time to time products fail in any market. They may fail through force majeure — droughts, floods, pestilence. They may fail due to inherent flaws — airships, Thalidomide, blue asbestos. Or they may fail through ignorance, trickery or the credulity of human beings — Madoff, the property bubble, the repackaging of sub-prime debt.

The present financial crash has been precipitated by product failure of the third kind. Trade in financial instruments too opaque for even those who traded in them to assess them properly, and bonus incentive schemes that acted against the interests of the companies offering them, fuelled a banking bubble that has now burst.

But ask: what pricked it? Did politicians rumble the trade? Did governments, or international forums or symposiums, provide the sharp instrument? Did academic research and expertise expose the dodgy product? Did statutory regulators apply the pin? No, the free market wised up and pricked this bubble. Politicians and finance ministers (if they had had the power) would have tried to keep it inflated. The market puffed itself up, and then, without intervention — despite intervention — the market let itself down. The speed with which this has happened has been awful, but however inconvenient for many or catastrophic for a few, correction is not a failure of the market, but a success.

New rules and regulations will now be brought in. This, too, is no failure of the market. Free markets require — often demand — limits to the exercise of their freedom. Since the beginning of commerce, society has collectively imposed curbs and safeguards on the market (the very introduction of a law of contract was the first and still by far the biggest act of regulation) and a handful more of these, minor in the context of economic history, will now be applied. There will be no ‘new economic world order’, just some useful tweaks to the old one.

The earth will continue in its orbit, and nature will resume its course. No re-examination of our governing theories of political economy is called for. Calm down, dear, it’s only a market correction.

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wonderfulforhisage

February 12th, 2009 8:27pm Report this comment

How can the global market be considered free when one of the major players, China, controls her exchange rate and Opec distorts the price of oil. It was the surplus cash China and Opec chanelled into the Western banking system that has got us into the mess we're in.

That is not to say that the bankers and politicians and their advisors shouldn't have seen it coming but a free market can't be blamed when the market wasn't really free.

Rob Slack

February 13th, 2009 1:03pm Report this comment

When the car splutters because the carburetter is wrongly set and requires adjustment, it does not mean the car should be scrapped. Perhaps we should have learned that the sub-prime mechanics who set the carb. to save fuel should never again be trusted. Perversely, the opposite is likely to happen.

John Herbert

February 13th, 2009 11:44pm Report this comment

Can you send this article to Kevin Bloody Rudd of Australia. He is a first class reactiony fool who has backflipped his way to total ignomy over this whole correction. please take him off our hands, maybe he and Gordo and can go up the highlands and do a merry dance and never come back.

Ruby Duck

February 15th, 2009 2:14am Report this comment

It wasn't a free market bubble. It was a bubble promoted and artificially prolonged by governments seeking to hang on to power and popularity.

The Masked Marvel

February 18th, 2009 3:51am Report this comment

Calming words such as these will not reach any of those "turning away from the faith". They were never true believers in the first place, but were merely the modern political equivalent of early monotheists. At any hint that the church can't fix the latest problem, out come the old idols.

Tom Burroughes

February 18th, 2009 10:46am Report this comment

Superb article, a sharp dose of much-needed common sense.

Remember also that much of the bubble was created, however unwinttingly, by central banks, which are state institutions. That point is often simply not grasped by all those now proclaiming the demise of "unregulated capitalism".

Rush-is-Right

February 20th, 2009 5:22pm Report this comment

A good article this. The trouble is that, the politicians in charge here and in the USA have adopted policies that are bound to make things much, much worse. They really have turned a disaster into a catastrophe.

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