DreamKing
Honorary Master
I am also a free market supporter .....
well done WilD_CaT
well done WilD_CaT
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Morgoth
Executive Member
I am a communist! The free market society is way to cruel to be honest.
I am also a free market supporter .....
well done WilD_CaT
I support the free market, but with limitations and regulation. It's interesting how there have been more calls for regulation after the global financial crisis, which was, to a large degree, caused by insufficient regulation.
Pure free market economies make certain assumptions that are simply not true in the real world. As a result, you can have "free markets" in certain micro-environments, but in larger markets, you will end up with significant distortions.
Is government intervention a product of the free market? Please explain how and why you feel this was caused by the free market. Please explain how the US government and central bank played no role what-so-ever in the financial crises.
Government is not a free-market entity unless the entire market voluntarily pays for it, which it doesn't. Central bank is an institution that has a monopoly. How are these 2 entities products of the free-market?
Losing battle. Government(Incl. FED Reserve) intervention caused the financial crises (FED lowered the rates, lending standards were encouraged to drop, interest rate was BELOW MARKET RATE), so the answer is increased government control and the FED reserve intervening - by lowering rates again. So they have prevented the recession from worsening...apparently...by creating the next bubble and just postponing the reckoning till later.
BRAVO!
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The only assertion made that isn't realistic is that in a pure free market there would be no government, which everyone has.
So since government is the problem you want more government intervention?
I would like to know of other assertions that free-market theory makes that aren't realistic? Out of interest. I want to research and investigate them.
Schiff on capitalism
Capitalism is not the problem: "Just like during the 1930's, capitalism got a bad rap for all the damage that government did. Every time government policy interferes with capitalism and then creates a problem it's always capitalism that comes under fire not the government interference that led to the problem," he says. Schiff predicts this behavior will lead to the next calamity, a currency crisis which he claims will be even bigger than the one "we think we've solved."
Capitalism is not the problem: "Just like during the 1930's, capitalism got a bad rap for all the damage that government did. Every time government policy interferes with capitalism and then creates a problem it's always capitalism that comes under fire not the government interference that led to the problem," he says. Schiff predicts this behavior will lead to the next calamity, a currency crisis which he claims will be even bigger than the one "we think we've solved."
Don't misquote me. I said it was largely caused by a lack of regulation, not by the free market.
The basic cause of the financial crisis were:
- A huge increase in subprime mortgage lending in the United States; essentially, mortgage lenders, buoyed by high property prices, made risky mortgage loans to buyers who were not necessarily creditworthy. Combined with a number of flaws in the regulatory systems as well as poor mortgage standards, including attractive mortgage “teaser” rates, this meant that when the housing price bubble burst in 2006-2007, many mortgage holders could not afford their mortgages, and with foreclosures, house prices decreased further.
- Many mortgage lenders chose to securitize the mortgages. Asset-backed securities were created from pools of mortgages, and further derivatives, CDOs (collateralised debt obligations) were in turn created from the asset-backed securities. Rating agencies rated these instruments highly without carefully examining the underlying securities; this would have been difficult, given that there was a significant lack of transparency in the legal and financial aspects. Banks borrowed more money in order to create more securitisation.
- There was a huge market in credit default swaps, an insurance derivative.
- Agency costs contributed too; most financial institutions provided the majority of the financial compensation to senior employees, and especially traders, in the form of year-end bonuses. This focused the attentions of traders on short-term rather than long-term profits, leading to continued trading in the risky derivatives even when a collapse seemed imminent.
As a result of the drop of property prices, the values of these derivatives dropped, and because many institutions had used derivatives to take on more risk rather than to reduce risk, they had little in deposits or even capital reserves, so they collapsed.
I didn't say that. Don't misquote me.
Did someone say they were?
I'm not sure where you're going with your government comments; I didn't mention it.
Some of the assumptions of a pure free market:
- No fraud/criminal activity (that's a big one)
- Dependant on pure supply/demand theory
- No information asymmetry
- No government intervention (taxes, subsidies, monopolies, etc.)
- No barriers to market entrants
- The profit motive is the motivating force
- No external trade barriers
- No market failure (e.g. roads)
- No externalities
Probably a few I've forgotten...
First of all apologies for coming across as the strawman of the century, bad habits are hard to get rid of.
Ok now for the discussionS!
Free market theory doesn't say that crime doesn't happen. Atleast not Austro-liberal free market theory.
It does attempt to explain why crime is so bad from an economic sense and how the free market will be better in dealing with crime than government agencies. Just think about South Africa. If you want protection, protect yourself (Buy a gun for example), get better security, employ security companies, employ private investigators to get problems solved. The system provided by taxes (I.E police) has failed us and we don't have recourse.
If you pay a security company to arrive at your residence within 10 minutes of pressing the security button and they don't arrive, you can sue them for breach of contract for example.
Supply and demand is important in any economic theory. Its a starting point for analysing what would happen if prices, demand or supply would change. Helps us understand what the possible price, supply/demand equilibrium is and once this equilibrium is reached, the market is at its most efficient. Don't know how it isn't realistic or relevant.
Please explain exactly what you mean by information asymmetry. If you mean perfect information isn't available then yes. But thats for every system. Free-market is the best way to deal with this problem as the market works on each individuals interpretations, valuations and actions and entrepreneurs try to predict this. If market players get it wrong they lose.
Compare this to a central planning government which will try predict how all of its citizens act, how the decide things etc. and when the government get its wrong, the citizens pay for it, either through taxes or inflation(debt printing)
As for no intervention, the fact that there is intervention is not a problem of the theory. The theory is sound and works. I'm advocating no government or monopoly privilages, if that was to happen you wouldn't have that problem.
If its the intervention thats the problem why blame capitalism or free-market theory. I think you might be saying that free-market theory doesn't incorporate the reality of interventionism into the theory? According to austro-free market theory interventionism is wrong. The Austrians do explain what will result if interventionism happens but they don't try to make interventionism "work" with the theory. It just says if it happens, it causes various problems and if you don't want the problems, don't intervene in the market.
No barriers - not a problem of the theory. A reality of life but they cause lots of problems. Austrian free-market theory basically says it causes problems, you don't want the problems take away the barriers, make trade more efficient.
Profit is the motivating force - only in the business world, which is how it should be. We know that profitable companies add value to society. It can be numerical proven according to societies subjective valuations on the market.
If a company is operating at a loss but is "doing good" for the community, how can you tell if it is doing atleast enough "good" to offset the financial losses. If it isn't, it is draining wealth from society. When you don't have any basis for calculation you cannot just make assertions (Not saying thats what you are doing just saying in general) without backing your claims with evidence.
External trade barriers - not a product of the free market.
Roads - private enterprise can create computers that can calculate the age of the universe, create oil companies that scour the planet for oil, drill it, pump it, refine it and ship to it a garage near you, it can create cars that can lap the nurburgring in 7 odd minutes can create aeroplanes that travel all over the world it can ship things from one side of the planet, economically to the other - Yet apparently private enterprise is incapable of building roads.
We pay for roads anyway through taxes and such, so instead of paying government why can't we pay private enterprise? That way you can have competing roads. [ame]http://www.youtube.com/watch?v=XUA4h8ctNWM[/ame]
What do you mean by externalities? Could you provide me with an example for better understanding, thanks.
I think the major problem you have (Please correct me if I am wrong) is that you feel the theory doesn't somehow incorporate many of the realities of the modern day world.
There are many economic theories out there. The austrian free-market liberal theory is the one I subscribe to. The austrian theory does mention all the things you have described. It analysis each point according to its understanding of economics and basically allows one to understand whether the point is a problem or not.
If the theory is wrong, it would be in a situation where the theory says as a result of policy A, certain results will happen. If those results don't happen, and the opposite happens, then the theory is wrong.
If the theory says don't do Policy A or you will get these problems, and you do implement policy A, and those problems do arise its not the theory or for example the free market thats wrong, but the policy thats wrong.
Hope I'm making sense.
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My understanding is that the free-market is self regulating. So when you mentioned lack of regulations, I took it as the free-market (Free meaning unregulated, free from restriction or control)
Which is why I was sooo against that statement.
Why was there a huge increase in subprime mortgage lending in the US?
If you had to answer that question in 5 words or less...
It was the federal reserve. That would be my answer, I don't view the FED or any central bank as a legitimate free-market force. All central banks counterfeit money and have a monopoly granted by government.
Thats why I view it as government intervention in the market.
Ah.
The free market is self-regulating in theory, but that self-regulation may not exactly be desirable (monopolies and oligopolies, speculative bubbles, and so forth) in the real world.
In my opinion, greed in combination with insufficient controls/risk analysis.
I'm not sure you understand how central banks work. For one thing, they don't counterfeit money. They can control the country's money supply, through various instruments, but the money itself is created by banks.
I can't speak with any real knowledge on the Federal Reserve, but if we're talking about the SA Reserve Bank, one of its functions is as lender to the banks, and holder of reserves. Basically, what that means is that, by banking regulation, registered banks are obliged to store a certain percentage of their loaned assets in reserve at the Reserve Bank, and the Reserve Bank charges interest for that; that's the interest rate they change when they change the national interest rates. Banks are not obliged to adjust their own rates in line with that - they could charge more or less - but to not do so would seriously impact their own business. That reserve is there in order to guarantee loaned assets; essentially, it provides a large buffer against runs on banks.
(Pardon me if I missed any details - it's been a few years since I did SA economics and financial system.)
FM theory does make allowance for crime, sure, but it does make the assumption that crime and fraud are controlled. Obviously, normal crime could be managed to some degree by the private sector. Fraud and business related crime is a different matter though - where there's deliberate criminal activity in the financial/economic system, the FM model does not make allowance for it.
It's certainly very relevant for FM theory! The problem is that by the FM reliance on supply/demand theory, you get many of the the supply/demand assumptions along with it; things like the assumptions on motivations (i.e. price). While supply/demand theory is a great theoretical framework, it falls down in areas where supply/demand/price are not the only determining factors (where you have things like sentiment, altruism, etc. to contend with).
Basically, some people having far better sources of information than others. If you feel that's something the free market does account for, OK.
The assumption of FM theory is that there isn't intervention. And I agree, many types of government intervention are not desirable, but do you think that unfettered monopolies are a good thing?
The assumption is that there are not barriers to entry. In the real world, there are enormous barriers to entry to some markets; it's as simple as that. You can't just "take away" the barriers.
Sure, it's the major motivating force, but it's not the *only* motivating force. Many people do things for reasons other than pure profit, but FM theory can't account for those.
You're assuming a global free market here. Unfortunately, that's a bit unrealistic. If you had a national free market, you would have external trade barriers to deal with.
Can you think of a way to do this? Seriously, building roads is virtually impossible on any large scale for private enterprise. And we can add in power plants to that too - at least, at the moment.
And what about other forms of market failure? In a free market economy, who pays for traffic congestion?
Sure; the classic one is pollution. A company dumping toxic chemicals into rivers or gases into the air has no free market incentive to stop doing so. Another example is overfishing.
Yep. By it's nature, it's a theoretical construct.
By the way, I've just read up on the Austrian school, and it seems it's not the same thing as pure free-market economics (which I've been addressing). In fact, it looks like some of what I've been saying (for example, the profit motive being unrealistic) is what the Austrians say too.
It is counterfeiting from the Austrian understanding, not from the legal understanding.
The summary is this: In principle if I print money (Illegal counterfeit) how is it in principle different from banks that print money from thin air basically? Because a politician said so? Because a law is made? How does words or writing make the money printed by banks different from money printed by me?
http://www.lewrockwell.com/north/north770.html
What is Money?
Part 6: What makes money different?
Hmmm. You have a bit of a problem here. If you get rid of fractional reserve banking, you essentially destroy the banking system and credit; most transactions will need to be completely backed with cash. What do you propose replacing the fractional reserve system with? And how will free market corporations participate in the free market when they are unable to obtain finance for infrastructure?
I also think you are misunderstanding what I am trying to say.
I totally agree with you the models or mathematical equations are not how we understand the economy. No model or equation can ever reflect the complexity of the market, the economic decision of billions of people.
They are simply useful tools that can be used to help one understand a small number of variables and if they change , ceterus paribus, what will be the result.
The austrian economics not only acknowledge the above fact, they even go so far as to say forget maths equations and models.
The austrian understanding derives from human action or more precisely the study of human action or praxaeology.
They look at the realities of the world and try to figure their effect on the economy, economic transactions and economic progress. All the above you quoted, they view these "realities" or problems as things that hamper and restrict trade and the economy. Having a economy operating at its best is what has, and will continue to uplift human standards of living and allow for a better way of life.
Thus their solution is to get rid of them by removing restrictions and simply allowing the people to solve problems without the restriction of arbitrary laws. All laws as far as I am aware from the austrian viewpoint derive the property rights.
I totally agree with you the models or mathematical equations are not how we understand the economy. No model or equation can ever reflect the complexity of the market, the economic decision of billions of people.
They are simply useful tools that can be used to help one understand a small number of variables and if they change , ceterus paribus, what will be the result.
The austrian economics not only acknowledge the above fact, they even go so far as to say forget maths equations and models.
The austrian understanding derives from human action or more precisely the study of human action or praxaeology.
They look at the realities of the world and try to figure their effect on the economy, economic transactions and economic progress. All the above you quoted, they view these "realities" or problems as things that hamper and restrict trade and the economy. Having a economy operating at its best is what has, and will continue to uplift human standards of living and allow for a better way of life.
Thus their solution is to get rid of them by removing restrictions and simply allowing the people to solve problems without the restriction of arbitrary laws. All laws as far as I am aware from the austrian viewpoint derive the property rights.
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Fair enough; and I'm certainly not au fait with the Austrian theory. On the basis of its support of complexity, and specifically, complex decision-making though, it's quite different from pure free-market theory which relies on the profit motive as the primary motivation. So I suspect I'd agree with a fair bit of it; the real world is a complex place.
I regard the austrian theory as " free market" as they advocate removing regulations or restrictions, I.E. allowing people to trade "freely" as they want. They also call themselves "free marketers". Which is why I use the term a lot. The problem is as you have demonstrated, the austrian understanding is different from the norm so I am talking about free markets, meaning one thing and people are intepreting another.
Not your fault, probably should of tried to explain what I meant by "free market" more clearly.
The austrian view is definately is not the mainstream view of free market theory at all.
Not your fault, probably should of tried to explain what I meant by "free market" more clearly.
The austrian view is definately is not the mainstream view of free market theory at all.