Afraid of the free market? Err ... why?

Afraid of the free market? Personally, I'm afraid of the opposite.

I could leave it at that, but I think the concept of the free market is under a lot of pressure right now, pressure that may be undeserved. And maybe a bad time is a good time to scrutinise this.

And wow, is this a bad time. The world order is in an uncomfortable state ... I for one have considered that my money would actually be better off under the mattress.

You may have seen the posts of various bloggers who are concerned too, and who have picked different facets from the chaos (the greed/need contrast crops up more than once):

like this one from janelle where she highlights the case of a Belgian banker walking out of a disaster with millions of euros in his back pocket
or this one from family affairs who describes how the employees of the failed Lehman Brothers are nevertheless going to get their bonuses paid by Nomura
or this from bush mummy in which her friend Gav, surviving a cancer operation, hits out at inequity: "when I run the world we will swap nurses' and bankers' salaries over..."

You will have seen more of the same. No one, I suspect, has trouble identifying with their sentiments.

But when we look at the financial turmoil of the world right now are we really seeing the results of greed, unbridled capitalism and the failings of free markets?

I'm not so sure. And I (brave, stupid or both) intend to try and make my case here.

Let's take the case of senior executives leaving failing enterprises with fat severance cheques, lovely index-linked pensions and the like.

What are we seeing? We are seeing civil contracts being honoured. When they were hired, the shareholders represented by the boards were so keen to have these individuals that they gave them very attractive contracts, including severance terms should those contracts be prematurely terminated.

While that might stick in the craw, the fact is the world would be a whole lot worse off if people could, at their whim, fail to honour contracts. This would affect us all - buying and selling houses, making an insurance claim, replacing something under guarantee ...

If the other party could just say, "Sorry things have changed and I now have a poor opinion of you, so I'm not going to pay up" then we would really be in the shit.

Are they greedy? Well, maybe, but that's another matter. Keep the money, give it to charity, that's up to the executives concerned. But honouring contracts is central to civilised life.

How about swapping the salaries of bankers and nurses?

Well, that's an interesting idea and one that has already been tried (I'll come to that). The new state would not last long. Why? Because you would have the worst paid bankers in the world and the best paid nurses in the world. The bankers would go and do other things (the resulting shortage would have their salaries bid up in no time) while the nursing profession would be flooded by incomers (the resulting oversupply would have their salaries crash in no time).

I said it had been tried.

Time Out is a what's on magazine established by Tony Elliot in 1968, originally as a London Guide. In a fit of egalitarianism everyone was originally paid exactly the same wage. He said (it was his words I borrowed, above) "We had the worst paid journalists in London and the best paid cleaners". The journalists could not wait to leave, while the premises were besieged by frantic wannabe cleaners. It did not last long.

The only alternative is to have the state legislate that your salary shall be X while you, yes you over there, your salary shall be Y.

Thanks, but no thanks. Not a world I want. (It too has already been tried).

The fact is that in a free market people are paid what they are worth, no more and no less. No legislation is needed; it is automatically regulated by supply and demand. Bankers are paid outrageously precisely because (a) not many people have their skills and (b) not many people would like the demanding life style.

But, hey, there's no closed shop. If you want a banker's salary, don't bitch about it, go for it. And see if you like it.

One of my daughters is in the City. She's crammed all her life - GCSEs, slogging to get the A levels results that allowed her to be selected for Cambridge, four years at Cambridge slogging her guts out to get the first she needed to have a chance of getting a training contract by the right kind of corporate law firm, two more years at law college, another training year in the firm (she's at that stage now), nights and weekends mean nothing - the firm gets first call on those hours ... and then, in a year or two, yes, she will be on a six-figure salary. You want all that? Really? I don't.

Result - very little supply, unmet demand, huge salary. It's not rocket science.

Or you can be a nurse. A lot of people want to do it. A lot of people can do it. Therefore it does not pay very well.

So it's not unfairness, or greed, or altruism, or someone manipulating something. Nurses may be saints and bankers may be wankers. But there are, apparently, more saints than wankers. QED.

What about the free market and its failings?

Problem is, markets are seldom free. Consider oil and its yo yo pricing that has been a pain for all of us. The exact opposite to a free market. OPEC is a cartel, sets prices and production quotas and then polices its members to make sure they stick to it.

Another, exact opposite to a free market example: agricultural production, and the obscenity of groaning surpluses in one part of the world and starvation in another. Western governments guarantee prices so there is no market feedback to the producer. In a free market, a grain surplus would lead to falling prices which would have two positive effects - poor countries would benefit from the falling price and farmers would switch to other outputs so that the surplus would self-correct. We hit poor countries again by imposing quotas and otherwise making it difficult for them to sell to us (even though you and I may want their products).

Banks. The exact opposite to a free market. Heavily regulated, unable to set their own interest rates (base rates are set by central banks/governaments), operate on a fractional reserve system which has been passed into law by our governments - which means they actually can't pay us if there is a run on a bank; even in good times!

Don't get me wrong. Many banks have behaved like arses and exposed themselves to enormous risk.

So do we punish them by allowing them to fail?

Nope. We guarantee deposits and nationalise them to recapitalise them and punish our tax-payers twice. First, by making citizens shareholders (whether they will or whether they won't) of some pretty dodgy enterprises. Second by hitting the value of their savings by printing money to make up the loss of liquidity.

And by the way, where did all this risk arise? Well in the UK trillions are being lost in the housing market. The banks lend money against assets (land and buildings). When people default, the banks have found that they can no longer cover themselves because the asset value has fallen. This is why sub-prime is such a panic. The shortfall is huuuuuuge.

But the housing market has been, yep, the exact opposite to a free market. For years various governments pushed people into house ownership by giving them tax breaks on mortgages, but no tax breaks on rent payments. Then they choked off the supply of land by zoning restrictions. So on the one hand they stimulated demand and on the other hand they restricted supply, leading to decades of house price inflation. And everyone felt rich. Yippee.

Yes. I respect the self-correction of the free market, its flexibility, its responsiveness and the way it aligns the needs of buyers and sellers. There really is nothing like a free market. And what we see around us is nothing like a free market.

OK. That's my rant. I've put my tin hat on. Tell me where I'm wrong.