Thursday, 11 July 2013

The free market is NOT perfect: "Knowing" Economics 101 is not enough

I have been thinking about this topic for a while actually and have spent the last week writing down my thoughts on it on various scraps of paper because I thought that I could make it into a series of posts which outline why I am not, nor have I ever been, a believer in the free market.

This may seem strange coming from an ex-investment banker, turned investment professional and also as a person who writes a blog tracking their wealth journey and sharing what my goals and aspirations are.  However I should state up front that government control is a sliding scale - an economy is NOT either free market capitalist or planned socialist.  There is no pure free market capitalist economy in the world just as there are very very few remaining planned socialist countries in the world.

Why did I start thinking about this?

I was motivated to think about this issue when I was watching some clips about the Tea Party movement in the US.  The whole movement struck me as fundamentally odd...the people protesting and joining these movements looked like those who most benefited from government programmes and assistance.  I also wondered about the economic policies and catch phrases that right wing politicians and free market advocates often throw out there which are so simplistic that they are effectively wrong.

And then it struck me...most of the general public has some appreciate of basic economics - they can see, think about and visualise simple economic concepts in a very real way around them.  However I do not believe that most of this same public has an innate understanding of the assumptions that underlie these 'simple' principals nor the consequences of what they are asking for when they demand a free market economy.

As I was thinking about how I would approach this series of posts though, one of my economist friends sent me a link to this article which explains how and why Econ 101 is killing America.  It is one of the best and most succinct articles I have ever seen.  It busts many of the myths that the general public has in their mind.  I highly recommend reading it.

Why does it matter?

It matters because as these movements start to gain steam and momentum, politicians and policy makers start to take notice.  There are some who would
change policies to get the votes of these people and so bad decisions get made in the corridors of power.  It also matters because when politicians believe that they can ride a political movement like this they are not always incentivised to educate their voters.

I was originally happy to leave the Tea Party movement in the US and view it with detached curiosity.  However then I noticed that there were several groups popping up in Australia advocating free capital markets and a more libertarian economic model.  [As an aside I think the term libertarian has been bastardised by free market advocates - it tends to put at it's centre the free market and the benefits that flow from this rather than the freedom of the individual from government intervention]

Knowing Economics 101 is NOT enough

Knowing the few basic catch phrases that free market advocates through out there like "government intervention naturally causes inefficiency", "taxes are detrimental to economic well being", "minimum wages cause unemployment" and "trade is always good" are a problem.  The problem is that they are true in Economics 101 (and is what I learned in my first year university subjects).  However as I specialised in economics at university they introduce more complex subjects and you learn that things are not always black and white.

I am writing a series of posts therefore which I hope will debunk some of these simplistic catch phrases.  I am a believer in market economics and the benefits and incentives it offers to individual players however I think it is too basic to say that the free market is perfect.   I believe that government intervention is necessary in markets for a host of reasons which I will outline over the coming weeks.

If you do not agree with my premise above I would love to hear from you so please post below.

You May Also Be Interested In:
Economics - All Posts
The share market has gone mad - when good news is bad news
What is QE3 and why did the share market react so strongly to it?
Too Big to Fail by Andrew Ross Sorkin (Book Review)

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