Tuesday, July 23, 2013

Myths of Capitalism: Markets

This is the last in a series of blogs I've written about myths of capitalism. These myths, I've tried to argue, are not propaganda (although they can and are used that way). Rather, they are misunderstandings about the character and nature of the economic system that has -- and always has -- formed the basis of Canada. This last myth is about the naturalness of markets. Markets are complicated things. They are the basis of capitalism; allowing for optimal distribution, etc. They provide the means through which capitalism is supposed to function: providing incentives to address market shortages (price increases) or overproduction (going out of business).  Markets are such an important part of capitalism that they take on a life that appears, at times, God given. They seem to have a life outside of human beings and independent of them.  They seem natural … as if they have always been there.

This is both is and is not true. First, some markets have indeed been around for a long time. A capitalist might argue that they function well and some markets might, in fact, serve a useful purpose. The real test of the efficacy of a market, as I've explained before, is empirical; not ideological. Markets are not inherently better or more cost efficient than other forms of economic organization and they are not inherently more just. But, in some instances, markets might make sense and might be useful and fair. Consider, as an example, a flea market. Here we have a market in pretty close to its pure form. Large numbers of buyers and sellers compete with each other to buy and sell. If I am a buyer (I used to go to flea markets), I can talk to the seller and see if they will negotiate a different price. I can, in other words, make an offer on a specific good that I might want to buy. This is the negotiation of capitalism and the market. Moreover, this give and take allows me to make up my mind about how much the good that is for sale is worth to me (the real test of its value). I might, for instance, see a piece of furniture that interests me, say a bookshelf. This shelf is listed at $10.00. I won't pay that much for it but I might be willing to pay $5.00 and so I go to the seller and make that offer. The seller can then respond, perhaps telling me that he cannot let it go for less than $7.50. I can, then, make up my mind (I can continue to banter about price or decide yes or no to that new price).  This is how a market is supposed to function: it matches buyers with sellers at a certain price point.

Other markets are so intricate and so long-standing that it is difficult to figure out what we would do without them. Consider the market for cars. It is not near as old as flea markets (which were called different names but which must go back in one form or another thousands of years) but making cars is a complicated business. Parts are coming from all over the place and assembled in various locations. This market might not work as well as car companies would like but it does work. It takes an incredibly complicated productive process and creates a remarkably useful good out of it. Moreover, it does respond, more or less, to market signals. Because of the economic recession, people are not buying cars at the rate car companies would like. They have, therefore, extra stock. As a result, they lower the price, particularly through incentives (free gas for a year, low interest rates, added extras like satellite radio, etc.) to lure buyers into making a purchase.

None of this, of course, means that markets are natural. What I have just said can be an argument in favour of markets, but it cannot and should not be taken to mean that markets are God given … or, existing in a state of nature. As I've pointed out in other blogs (and here, I lean on the work of a great number of scholars), humans have organized their economies in a variety of different ways. Some had markets (even black markets); some did not. In the past, for example, prices were often determined by some combination of tradition and the religious authority. Keeping goods off the market (something that is perfectly natural and acceptable to capitalism) so that the price increased, was viewed as hoarding and was illegal or immoral.  In Canada, the Original Peoples of the Pacific Northwest viewed accumulation as a high moral failing and they prized and honoured those who gave things away … for free! In Christian theology, we are told that the early church fed all who asked from its resources that were given free by disciples. Said differently, they did not use markets to allocate goods. They may have had markets as part of their economy, but their economy was, overall, organized around a different set of values and institutions.

What this means, as you might imagine, is that markets are created by people. And, they are created every day. I'll give you a couple of examples to illustrate my point. Recently, there has developed a whole new industry (or, a dramatically expanded old industry) in financial planning. A friend of mine is, in fact, a financial planner. One of the things they plan is your retirement. You meet with the planner and review your income, how much money you have in the bank, your pension contributions, etc., and a determination is made (using a formula) about how much more you need to put into a savings account (or some other form of savings) so that you can retire comfortably. One of my brothers employs a financial planner. My parents planning is done through their bank.

Now, there have been financial planners for a long time but … they were a small niche market catering to the very rich. They did not deal so much with retirement as tax shelters, investments and the like. The expansion of the market for financial planning into the middle class is, in fact, the creation of a whole new market that did not exist twenty-five or thirty years ago (outside of the rich, as I said, or perhaps self-employed professionals but even here it was new thirty years ago). What has happened? Well, I can't describe all the details but think about how pensions used to be done. One worked and as part of one's employment one earned money that was set aside for retirement. So, when you retired, you had an income. The new approach commoditizes one's retirement. The people who do financial planning (again, industry that did not really exist a generation ago) don't work for free. They usually take a commission (a small percentage of the income you earn from investing with them). In other words, they make their money off my retirement by providing advice to me on how to save for my senior years. My "golden age," said differently, becomes a commodity.

What is more … they can buy and sell this commodity. Don't believe me? Imagine this scenario. A financial planner convinces me to save an extra $100.00 per week toward my retirement. Where do I save this money? No worries, the planner tells me, my company will look after that. We'll create a savings account for you and each time you're paid, we'll set it up so that money is automatically transferred from whatever account your pay goes into to this account. So far … so good. Nothing shocking here. But, a year down the road, the company for which my financial planner works is sold to another company. What is sold … my savings. Now the other company still owes me my money (banking laws) but you see what has happened.  I started working with one company and ended up with another that I did not choose. It purchased the assets of the first company (which included my retirement savings account) and, what is more, it did this not to help me out (to be nice or because it cares about my retirement) but because it is gambling that it can make money off of my retirement. Regardless of what my financial planner thinks (who might be a decent human being), the company that bought out his company sees me -- my retirement -- as a cash cow. My retirement -- to me -- might be my golden years. For this company, it is simply a source of profit in which they will invest as long as they think they can make money out of it. The minute they can't … they will sell me off to some other company or (as we saw in the US) go bankrupt (that is, be driven from the market). What happens to my retirement savings at that point … well, let's hope that there was a government insurance plan that covered them because otherwise, I am not going to retire.

Here is the key: none of this is antithetical to capitalism. In fact, it is the way capitalism is supposed to function. For someone who is about to say … sure, but the profit motive will ensure that the company does  right by you because only by doing right by you … do they make money. This is a version of the harmony of interests argument that I debunked in a previous blog. I won't go into it again (you can read it if you want) but it is just not true. Capitalism is predicated on antagonistic relations; not a harmony of interests.

What I am trying to show, however, is how new markets are created. They do not exist naturally but are called into being by people who are trying to make a living or a profit or whathaveyou. This market might be good and useful; but that is an empirical question. What we need to know, however, is that there is no reason to accept the naturalness of the market. So, every time you hear someone say "the market will decide what is right" as if the market simply existed … you should start to question them because they are recycling a myth.
Post a Comment

"A Better Loss": Updated Thoughts on the Jays

With due credit to Tom Dakers at BlueBirdBanter for the headline .  One thing I like about Dakers reporting is that he continually searches ...