Even the most devout proponents of free marketry and
hidden hand theories acknowledge the existence of market
failures, market imperfections and inefficiencies in the
allocation of economic resources. Some of these are the
results of structural problems, others of an accumulation
of historical liabilities. But, strikingly, some of the
inefficiencies are the direct outcomes of the activities of
"non bona fide" market participants. These "players"
(individuals, corporations, even larger economic bodies,
such as states) act either irrationally or egotistically (too
rationally).
What characterizes all those "market impeders" is that
they are value subtractors rather than value adders. Their
activities generate a reduction, rather than an increase, in
the total benefits (utilities) of all the other market players
(themselves included). Some of them do it because they
are after a self interest which is not economic (or, more
strictly, financial). They sacrifice some economic benefits
in order to satisfy that self interest (or, else, they could
never have attained these benefits, in the first place).
Others refuse to accept the self interest of other players as
their limit. They try to maximize their benefits at any cost,
as long as it is a cost to others. Some do so legally and
some adopt shadier varieties of behaviour. And there is a
group of parasites - participants in the market who feed
off its very inefficiencies and imperfections and, by their
very actions, enhance them. A vicious cycle ensues: the
body economic gives rise to parasitic agents who thrive on
its imperfections and lead to the amplification of the very
impurities that they prosper on.
We can distinguish six classes of market impeders:
1. Crooks and other illegal operators. These take
advantage of ignorance, superstition, greed, avarice,
emotional states of mind of their victims - to strike. They
re-allocate resources from (potentially or actually)
productive agents to themselves. Because they reduce the
level of trust in the marketplace - they create negative
added value. (See: "The Shadowy World of International
Finance" and "The Fabric of Economic Trust")
2. Illegitimate operators include those treading the
thin line between legally permissible and ethically
inadmissible. They engage in petty cheating
through misrepresentations, half-truths, semi-
rumours and the like. They are full of pretensions
to the point of becoming impostors. They are
wheeler-dealers, sharp-cookies, Daymon Ranyon
characters, lurking in the shadows cast by the sun
of the market. Their impact is to slow down the
economic process through disinformation and the
resulting misallocation of resources. They are the
sand in the wheels of the economic machine.
3. The "not serious" operators. These are people too
hesitant, or phobic to commit themselves to the
assumption of any kind of risk. Risk is the coal in
the various locomotives of the economy, whether
local, national, or global. Risk is being assumed,
traded, diversified out of, avoided, insured against.
It gives rise to visions and hopes and it is the most
efficient "economic natural selection" mechanism.
To be a market participant one must assume risk, it
in an inseparable part of economic activity.
Without it the wheels of commerce and finance,
investments and technological innovation will
immediately grind to a halt. But many operators
are so risk averse that, in effect, they increase the
inefficiency of the market in order to avoid it.
They act as though they are resolute, risk assuming
operators. They make all the right moves, utter all
the right sentences and emit the perfect noises. But
when push comes to shove - they recoil, retreat,
defeated before staging a fight. Thus, they waste
the collective resources of all that the operators
that they get involved with. They are known to
endlessly review projects, often change their
minds, act in fits and starts, have the wrong
priorities (for an efficient economic functioning,
that is), behave in a self defeating manner, be
horrified by any hint of risk, saddled and
surrounded by every conceivable consultant,
glutted by information. They are the stick in the
spinning wheel of the modern marketplace.
4. The former kind of operators obviously has a
character problem. Yet, there is a more
problematic species: those suffering from serious
psychological problems, personality disorders,
clinical phobias, psychoneuroses and the like. This
human aspect of the economic realm has, to the
best of my knowledge, been neglected before.
Enormous amounts of time, efforts, money and
energy are expended by the more "normal" -
because of the "less normal" and the "eccentric".
These operators are likely to regard the
maintaining of their internal emotional balance as
paramount, far over-riding economic
considerations. They will sacrifice economic
advantages and benefits and adversely affect their
utility outcome in the name of principles, to quell
psychological tensions and pressures, as part of
obsessive-compulsive rituals, to maintain a false
grandiose image, to go on living in a land of
fantasy, to resolve a psychodynamic conflict and,
generally, to cope with personal problems which
have nothing to do with the idealized rational
economic player of the theories. If quantified, the
amounts of resources wasted in these coping
manoeuvres is, probably, mind numbing. Many
deals clinched are revoked, many businesses
started end, many detrimental policy decisions
adopted and many potentially beneficial situations
avoided because of these personal upheavals.
5. Speculators and middlemen are yet another
species of parasites. In a theoretically totally
efficient marketplace - there would have been no
niche for them. They both thrive on information
failures. The first kind engages in arbitrage
(differences in pricing in two markets of an
identical good - the result of inefficient
dissemination of information) and in gambling.
These are important and blessed functions in an
imperfect world because they make it more
perfect. The speculative activity equates prices
and, therefore, sends the right signals to market
operators as to how and where to most efficiently
allocate their resources. But this is the passive
speculator. The "active" speculator is really a
market rigger. He corners the market by the
dubious virtue of his reputation and size. He
influences the market (even creates it) rather than
merely exploit its imperfections. Soros and Buffet
have such an influence though their effect is likely
to be considered beneficial by unbiased observers.
Middlemen are a different story because most of
them belong to the active subcategory. This means
that they, on purpose, generate market
inconsistencies, inefficiencies and problems - only
to solve them later at a cost extracted and paid to
them, the perpetrators of the problem. Leaving
ethical questions aside, this is a highly wasteful
process. Middlemen use privileged information
and access - whereas speculators use information
of a more public nature. Speculators normally
work within closely monitored, full disclosure,
transparent markets. Middlemen thrive of
disinformation, misinformation and lack of
information. Middlemen monopolize their
information - speculators share it, willingly or not.
The more information becomes available to more
users - the greater the deterioration in the
resources consumed by brokers of information.
The same process will likely apply to middlemen
of goods and services. We are likely to witness the
death of the car dealer, the classical retail outlet,
the music records shop. For that matter, inventions
like the internet is likely to short-circuit the whole
distribution process in a matter of a few years.
6. The last type of market impeders is well known
and is the only one to have been tackled - with
varying degrees of success by governments and by
legislators worldwide. These are the trade
restricting arrangements: monopolies, cartels,
trusts and other illegal organizations. Rivers of
inks were spilled over forests of paper to explain
the pernicious effects of these anti-competitive
practices (see: "Competition Laws"). The short
and the long of it is that competition enhances and
increases efficiency and that, therefore, anything
that restricts competition, weakens and lessens
efficiency.
What could anyone do about these inefficiencies? The
world goes in circles of increasing and decreasing free
marketry. The globe was a more open, competitive and, in
certain respects, efficient place at the beginning of the 20th
century than it is now. Capital flowed more freely and so
did labour. Foreign Direct Investment was bigger. The
more efficient, "friction free" the dissemination of
information (the ultimate resource) - the less waste and
the smaller the lebensraum for parasites. The more
adherence to market, price driven, open auction based,
meritocratic mechanisms - the less middlemen,
speculators, bribers, monopolies, cartels and trusts. The
less political involvement in the workings of the market
and, in general, in what consenting adults conspire to do
that is not harmful to others - the more efficient and
flowing the economic ambience is likely to become.
This picture of "laissez faire, laissez aller" should be
complimented by even stricter legislation coupled with
effective and draconian law enforcement agents and
measures. The illegal and the illegitimate should be
stamped out, cruelly. Freedom to all - is also freedom
from being conned or hassled. Only when the righteous
freely prosper and the less righteous excessively suffer -
only then will we have entered the efficient kingdom of
the free market.
This still does not deal with the "not serious" and the
"personality disordered". What about the inefficient havoc
that they wreak? This, after all, is part of what is known,
in legal parlance as: "force majeure".
Note
There is a raging debate between the "rational
expectations" theory and the "prospect theory". The
former - the cornerstone of rational economics - assumes
that economic (human) players are rational and out to
maximize their utility (see: "The Happiness of Others",
"The Egotistic Friend" and "The Distributive Justice of
the Market"). Even ignoring the fuzzy logic behind the ill-
defined philosophical term "utility" - rational economics
has very little to do with real human being and a lot to do
with sterile (though mildly useful) abstractions. Prospect
theory builds on behavioural research in modern
psychology which demonstrates that people are more loss
averse than gain seekers (utility maximizers). Other
economists have succeeded to demonstrate irrational
behaviours of economic actors (heuristics, dissonances,
biases, magical thinking and so on).
The apparent chasm between the rational theories
(efficient markets, hidden hands and so on) and
behavioural economics is the result of two philosophical
fallacies which, in turn, are based on the misapplication
and misinterpretation of philosophical terms.
The first fallacy is to assume that all forms of utility are
reducible to one another or to money terms. Thus, the
values attached to all utilities are expressed in monetary
terms. This is wrong. Some people prefer leisure, or
freedom, or predictability to expected money. This is the
very essence of risk aversion: a trade off between the
utility of predictability (absence or minimization of risk)
and the expected utility of money. In other words, people
have many utility functions running simultaneously - or,
at best, one utility function with many variables and
coefficients. This is why taxi drivers in New York cease
working in a busy day, having reached a pre-determined
income target: the utility function of their money equals
the utility function of their leisure.
How can these coefficients (and the values of these
variables) be determined? Only by engaging in extensive
empirical research. There is no way for any theory or
"explanation" to predict these values. We have yet to
reach the stage of being able to quantify, measure and
numerically predict human behaviour and personality
(=the set of adaptive traits and their interactions with
changing circumstances). That economics is a branch of
psychology is becoming more evident by the day. It
would do well to lose its mathematical pretensions and
adopt the statistical methods of its humbler relative.
The second fallacy is the assumption underlying both
rational and behavioural economics that human nature is
an "object" to be analysed and "studied", that it is static
and unchanged. But, of course, humans change
inexorably. This is the only fixed feature of being human:
change. Some changes are unpredictable, even in
deterministic principle. Other changes are well
documented. An example of the latter class of changes in
the learning curve. Humans learn and the more they learn
the more they alter their behaviour. So, to obtain any
meaningful data, one has to observe behaviour in time, to
obtain a sequence of reactions and actions. To isolate,
observe and manipulate environmental variables and
study human interactions. No snapshot can approximate a
video sequence where humans are concerned.