THERE IS NO SUCH THING AS A FREE MARKET
Today, even the most ardent free-market proponents in Britain or other
rich countries would not think of bringing child labor back as part of the
market liberalization package that they so want. However, until the late 19th
or the early 20th century, when the first serious child labor regulations were
introduced in Europe and North America, many respectable people judged child
labour regulation to be against the principles of the free market. Thus seen,
the "freedom" of a market is, like beauty, in the eyes of the
beholder. If you believe that the right of children not to have to work is more
important than the right of factory owners to be able to hire whoever they find
most profitable, you will not see a ban on child labor as an infringement on
the freedom of the labor market. If you believe the opposite, you will see an
"unfree" market, shackled by a misguided government regulation. We
don’t have to go back two centuries to see regulations we take for granted (and
accept as the "ambient noise" within the free market) that were
seriously challenged as undermining the free market, when first introduced.
When environmental regulations (e.g., regulations on car and factory emissions)
appeared a few decades ago, they were opposed by many as serious infringements
on our freedom to choose. Their opponents asked: if people want to drive in
more polluting cars or if factories find more polluting production methods more
profitable, why should the government prevent them from making such choices?
Today, most people accept these regulations as "natural." They
believe that actions that harm others, however unintentionally (such as
pollution), need to be restricted. They also understand that it is sensible to
make careful use of our energy resources, when many of them are non-renewable.
They may believe that reducing human impact on climate change makes sense too. If
the same market can be perceived to have varying degrees of freedom by
different people, there is really no objective way to define how free that
market is. In other words, the free market is an illusion. If some markets look
free, it is only because we so totally accept the regulations that are propping
them up that they become invisible.
PIANO WIRES & KUNGFU MASTERS: Like many people, as a child I
was fascinated by all those gravity-defying kung fu masters in Hong Kong
movies. Like many kids, I suspect, I was bitterly disappointed when I learned
that those masters were actually hanging on piano wires. The free market is a
bit like that. We accept the legitimacy of certain regulations so totally that
we don’t see them. More carefully examined, markets are revealed to be propped
up by rules – and many of them. To begin with, there is a huge range of
restrictions on what can be traded; and not just bans on "obvious"
things such as narcotic drugs or human organs. Electoral votes, government jobs
and legal decisions are not for sale, at least openly, in modern economies,
although they were in most countries in the past. University places may not
usually be sold, although in some nations money can buy them – either through
(illegally) paying the selectors or (legally) donating money to the university.
Many countries ban trading in firearms or alcohol. Usually medicines have to be
explicitly licensed by the government, upon the proof of their safety, before
they can be marketed. All these regulations are potentially controversial –
just as the ban on selling human beings (the slave trade) was one and a half
centuries ago.
There are also restrictions on who can participate in markets. Child
labor regulation now bans the entry of children into the labor market. Licenses
are required for professions that have significant impacts on human life, such
as medical doctors or lawyers (which may sometimes be issued by professional
associations rather than by the government). Many countries allow only
companies with more than a certain amount of capital to set up banks. Even the
stock market, whose underregulation has been a cause of the 2008 global
recession, has regulations on who can trade. You can’t just turn up in the New
York Stock Exchange (NYSE) with a bag of shares and sell them. Companies must
fulfill listing requirements, meeting stringent auditing standards over a
certain number of years, before they can offer their shares for trading.
Trading of shares is only conducted by licensed brokers and traders. Conditions
of trade are specified too. One of the things that surprised me when I first
moved to Britain in the mid-1980s was that one could demand a full refund for a
product one didn’t like, even if it wasn’t faulty. At the time, you just
couldn’t do that in Korea, except in the most exclusive department stores. In
Britain, the consumer’s right to change her mind was considered more important
than the right of the seller to avoid the cost involved in returning unwanted
(yet functional) products to the manufacturer. There are many other rules
regulating various aspects of the exchange process: product liability, failure
in delivery, loan default, and so on. In many countries, there are also
necessary permissions for the location of sales outlets – such as restrictions
on street-vending or zoning laws that ban commercial activities in residential
areas.
Then there are price regulations. I am not talking here just about those
highly visible phenomena such as rent controls or minimum wages that
free-market economists love to hate. Wages in rich countries are determined
more by immigration control than anything else, including any minimum wage
legislation. How is the immigration maximum determined? Not by the
"free" labor market, which, if left alone, will end up replacing
80–90 per cent of native workers with cheaper, and often more productive,
immigrants. Immigration is largely settled by politics. So, if you have any
residual doubt about the massive role that the government plays in the
economy’s free market, then pause to reflect that all our wages are, at root,
politically determined. Following the 2008 financial crisis, the prices of
loans (if you can get one or if you already have a variable rate loan) have
become a lot lower in many countries thanks to the continuous slashing of
interest rates. Was that because suddenly people didn’t want loans and the
banks needed to lower their prices to shift them? No, it was the result of
political decisions to boost demand by cutting interest rates. Even in normal
times, interest rates are set in most countries by the central bank, which
means that political considerations creep in. In other words, interest rates
are also determined by politics. If wages and interest rates are (to a
significant extent) politically determined, then all the other prices are
politically determined, as they affect all other prices.
IS FREE TRADE FREE? We see a regulation when we don’t
endorse the moral values behind it. The 19th-century high-tariff restriction on
free trade by the U.S. federal government outraged slave-owners, who at the
same time saw nothing wrong with trading people in a free market. To those who
believed that people can be owned, banning trade in slaves was objectionable in
the same way as restricting trade in manufactured goods. Korean shopkeepers of
the 1980s would probably have thought the requirement for "unconditional
return" to be an unfairly burdensome government regulation restricting
market freedom. This clash of values also lies behind the contemporary debate
on free trade vs. fair trade. Many Americans believe that China is engaged in
international trade that may be free but is not fair. In their view, by paying
workers unacceptably low wages and making them work in inhumane conditions,
China competes unfairly. The Chinese, in turn, can riposte that it is
unacceptable that rich countries, while advocating free trade, try to impose
artificial barriers to China’s exports by attempting to restrict the import of
"sweatshop" products. They find it unjust to be prevented from exploiting the only resource
they have in greatest abundance – cheap labor.
Of course, the difficulty here is that there is no objective way to
define "unacceptably low wages" or "inhumane working
conditions." With the huge international gaps that exist in the level of
economic development and living standards, it is natural that what is a
starvation wage in the U.S. is a handsome wage in China (the average being 10
per cent that of the U.S.) and a fortune in India (the average being 2 per cent
that of the U.S.) Indeed, most fair-trade-minded Americans would not have
bought things made by their own grandfathers, who worked extremely long hours
under inhumane conditions. Until the beginning of the twentieth century, the
average work week in the U.S. was around 60 hours. At the time (in 1905, to be
more precise), it was a country in which the Supreme Court declared
unconstitutional a New York state law limiting the working days of bakers to 10
hours, on the grounds that it "deprived the baker of the liberty of
working as long as he wished." Thus seen, the debate about fair trade is
essentially about moral values and political decisions, and not economics in
the usual sense. Even though it is about an economic issue, it is not something
economists with their technical tool kits are particularly well equipped to
rule on. All this does not mean that we need to take a relativist position and
fail to criticize anyone because anything goes. We can (and I do) have a view
on the acceptability of prevailing labour standards in China (or any other
country, for that matter) and try to do something about it, without believing
that those who have a different view are wrong in some absolute sense. Even
though China cannot afford American wages or Swedish working conditions, it
certainly can improve the wages and the working conditions of its workers.
Indeed, many Chinese don’t accept the prevailing conditions and demand tougher
regulations. But economic theory (at least free-market economics) cannot tell
us what the ‘right’ wages and working conditions should be in China.
Of course, the difficulty here is that there is no objective way to
define "unacceptably low wages" or "inhumane working
conditions." With the huge international gaps that exist in the level of
economic development and living standards, it is natural that what is a
starvation wage in the U.S. is a handsome wage in China (the average being 10
per cent that of the U.S.) and a fortune in India (the average being 2 per cent
that of the U.S.) Indeed, most fair-trade-minded Americans would not have
bought things made by their own grandfathers, who worked extremely long hours
under inhumane conditions. Until the beginning of the twentieth century, the
average work week in the U.S. was around 60 hours. At the time (in 1905, to be
more precise), it was a country in which the Supreme Court declared
unconstitutional a New York state law limiting the working days of bakers to 10
hours, on the grounds that it "deprived the baker of the liberty of
working as long as he wished." Thus seen, the debate about fair trade is
essentially about moral values and political decisions, and not economics in
the usual sense. Even though it is about an economic issue, it is not something
economists with their technical tool kits are particularly well equipped to
rule on. All this does not mean that we need to take a relativist position and
fail to criticize anyone because anything goes. We can (and I do) have a view
on the acceptability of prevailing labour standards in China (or any other
country, for that matter) and try to do something about it, without believing
that those who have a different view are wrong in some absolute sense. Even
though China cannot afford American wages or Swedish working conditions, it
certainly can improve the wages and the working conditions of its workers.
Indeed, many Chinese don’t accept the prevailing conditions and demand tougher
regulations. But economic theory (at least free-market economics) cannot tell
us what the ‘right’ wages and working conditions should be in China.
I DON'T THINK WE ARE IN FRANCE ANYMORE: In July 2008, with the country’s
financial system in meltdown, the US government poured $200 billion into Fannie
Mae and Freddie Mac, the mortgage lenders, and nationalized them. On witnessing
this, the Republican Senator Jim Bunning of Kentucky famously denounced the
action as something that could only happen in a "socialist" country
like France. France was bad enough, but on 19 September 2008, Senator Bunning’s
beloved country was turned into the Evil Empire itself by his own party leader.
According to the plan announced that day by President George W. Bush and
subsequently named TARP (Troubled Asset Relief Program), the U.S. government
was to use at least $700 billion of taxpayers’ money to buy up the "toxic
assets" choking up the financial system. President Bush, however, did not
see things quite that way. He argued that, rather than being
"socialist" the plan was simply a continuation of the American system
of free enterprise, which "rests on the conviction that the federal
government should interfere in the market place only when necessary." Only
that, in his view, nationalizing a huge chunk of the financial sector was just
one of those necessary things.
Mr. Bush’s statement is, of course, an ultimate example of political
double-speak – one of the biggest state interventions in human history is
dressed up as another workaday market process. However, through these words Mr.
Bush exposed the flimsy foundation on which the myth of the free market stands.
As the statement so clearly reveals, what is a necessary state intervention
consistent with free-market capitalism is really a matter of opinion. There is
no scientifically defined boundary for free market. If there is nothing sacred
about any particular market boundaries that happen to exist, an attempt to change
them is as legitimate as the attempt to defend them. Indeed, the history of
capitalism has been a constant struggle over the boundaries of the market. A
lot of the things that are outside the market today have been removed by
political decision, rather than the market process itself – human beings,
government jobs, electoral votes, legal decisions, university places or
uncertified medicines. There are still attempts to buy at least some of these
things illegally (bribing government officials, judges or voters) or legally
(using expensive lawyers to win a lawsuit, donations to political parties,
etc.), but, even though there have been movements in both directions, the trend
has been towards less marketization.
Thus seen, opposing a new regulation is saying that the status quo,
however unjust from some people’s point of view, should not be changed. Saying
that an existing regulation should be abolished is saying that the domain of
the market should be expanded, which means that those who have money should be
given more power in that area, as the market is run on one-dollar-one-vote
principle. So, when free-market economists say that a certain regulation should
not be introduced because it would restrict the "freedom" of a
certain market, they are merely expressing a political opinion that they reject
the rights that are to be defended by the proposed law. Their ideological cloak
is to pretend that their politics is not really political, but rather is an
objective economic truth, while other people’s politics is political. However,
they are as politically motivated as their opponents. Breaking away from the
illusion of market objectivity is the first step toward understanding
capitalism.
Extract From “23 Things They Don't Tell You About Capitalism”
By Ha-Joon Chang who teaches in the faculty of economics at the
University of Cambridge. His other books include "Bad Samaritans: The Myth
of Free Trade and the Secret History of Capitalism" and "Kicking Away
the Ladder."
Download the Book For Free Here
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