27 February 2009

The Economy - Let Them Eat Cake

They say you can't fool all of the people all of the time, but the wealthiest 0.5% seem to have managed to fool enough of the other 99.5% of the population into thinking that salaries in excess of £200k are justifiable on the grounds that 'the market has spoken' and that it is somehow possible for one person to be this productive and earn such ridiculous amounts.

The recent collapse of right-wing neo-liberal dogma has opened many eyes to the unjustifiable wages at the top. It now seems laughable to think that CEOs on these astronomical wages, that have driven us into such an economic mess, should now continue to get such largesse, yet still some argue that these very same people who have destroyed our economy are the ones we need to pay well to get us out of the mess we are in. Really? In what other sphere would an employer trust someone who has failed so spectacularly in his job to then put things right?

Why has the invisible hand of the market failed us? Maybe because, as Adam Smith knew well, the market can never be fair, because to do so, it would have to be perfect, and the first thing you learn in economics, though some on the right choose to ignore this inconvenient fact, is that perfect markets need perfect knowledge and perfect competition which needs an infinite number of competitors. This of course is impossible in the real world and the market is in fact full of imperfections and distortions and can only work well (and fairly) if properly regulated. This is why CEOs can manipulate pay structures and pay themselves such huge salaries - it has little, if anything to do with merit or worth, yet alone fairness. Democracy may be a direct challenge to the 'free' market, but the market can never be truly free anyway, it is just a convenient label for the rich to use to defend their unjust rewards.


  1. Another thing about Adam Smith and his Invisible hand gang: they say that having a terrific number of people selling similar things maximises the chance of near perfect competition but ,at its height, the UK property market had hundreds of thousands of people competing to sell their houses to hundreds of thousands of buyers- and still prices went out of control -not much of the much vaunted equilibrium.

  2. DBC, the restrictive planning laws we have produce an artificial restriction on supply.

    If the supply of a product is limited prices will rise, normally this would encourage people to produce more of the product and then the price would gradually come down.

    Oh the joys of government restrictions on markets. The limitations may be in place for what people believe are good reasons but it is a bit rich to blame the result on market failure.

  3. falco-"bit rich to blame market"- i think it does show its limitations though. I mean land is finite, so is the environment and people's lives. This is why the state has to intervene. Now don't get me wrong, i'm not saying we don't need markets, cos we do, just that thatcherism was as wrong as karl marx. N.b karl marx not the perverted form of marxism without democracy that occurred in soviet union and china etc.

  4. Markets do have limitations and they split into two distinct types.

    Firstly, there are natural monopolies where competition cannot last. For instance, I live on the Isle of Wight where there is very little competition on the ferries. Even if a company could raise the capital to enter the market and get planning permission for docking facilities the two firms would fight to the death. You would end up with only one company operating on each route.

    The second limitation is the one commonly attacked and comes from a misunderstanding of what markets are. This is the fact that markets have no moral agency, they simply allow people to use their resources as efficiently as possible.

    For those situations in the first example, a case for government intervention can be made, (although there is no guarantee that government intervention will produce better results than even a poor market). For the second, government should stay well away as they are highly likely to do more harm than good.

    As far as housing is concerned, I agree that there could be a useful role for government to play, (suing every time someone builds near you is likely to be even more inefficient). However, the current system is so restrictive as to be a major problem and (I speak from experience here, (on the receiving end)) often corrupt.

    A free market is the best system we know of and restricting the market is simply shorthand for restricting people’s ability to buy and sell as they wish. Controls on the market need very strong justification and thorough consideration of adverse consequences.