Some elementary economics

Markets are in general not administered systems like some computer programme, but the interactions of attempts by many buyers and sellers, each pursuing their own objects, which may be monetary but need not be. They are spontaneous, as when some kind of object suddenly becomes desirable, such as fashion from a previous period. Some potential buyers want to possess them and potential sellers have them and want to sell.

The left has tried to abolish markets, believing that their functions could be achieved by planners, or control them.

The main two functions of markets are:

1) A Rationing function - deciding who should be able to have what that is available for disposal. The presence of a price, even if fixed by authority, is a sign to potential buyers of the terms on which the object may be obtained. In the absence of markets and prices the allocation would have to be by diktat and government choice, - literally rationing.

2) A Signaling function - movements in prices indicating relative changes in demand and supply are signs to make more available or less available or make more or less be desired by buyers.

Both functions are important in a free society. They are vital in a society which is subject to change in production or in desired consumption. Otherwise there would be regular shortages, (as in Soviet Russia when there were long queues and empty shelves, except for those party members who could purchase in special shops), or surpluses ( when free consumers decided they did not like the goods being offered at the fixed price.)

3) So perhaps there is a third function - to reflect and adjust for changes in a dynamic economy.


The problem is that although many would subscribe to these principles, politicians are always tempted to believe that they can suspend the market or out-perform the market by administration.

Thus price controls, fixing a maximum price below the "natural level", and leaving some buyers unsatisfied, or a minimum above the "natural price", leaving some suppliers unable to find buyers. The Government may also make trading more difficult by imposing transaction costs on top of "production" costs - HIPS, stamp duty on houses, etc., by stipulating quality standards, or by preventing market adjustments.

An example of the last named is the case of intervention t0 keep in existence a firm which is going bankrupt because it is not valued by the market. In the name of job preservation, or in the bank cases savings preservation keeping deposits inviolate. No only could this encourage further reckless behaviour in the future, it is also stopping the transfer of resources in the present. (The physical and human resources are not lost in business failure, but adjustment may be costly to some, and they have votes.)

We are suffering a credit crunch because President Clinton in the middle 1990s demanded an expansion of mortgage provision in those areas where purchasers were higher risk, and we have seen the result, and because Bush, Greenspan and Brown pushed interest rates down and encouraged the accumulation of debt. For political or ideological reasons the self -correcting mechanism of the market was suppressed.