Markets or Mercantilism

 

 

A few days ago, I had a discussion with a co-worker about the need for the government to regulate “The Market”. Consistently, the definition of terms, most certainly economic terms, leads the discussion to devolve into a debate. Each side arguing past the other as definitions of words or terms are taken for granted. Once we agreed upon the definitions of terms, then the discussion returned to being reasonable once again.

Just what do people mean when they discuss the market? There are so many markets; stock markets, money markets, labor markets, commodity markets and so on, that the confusion is quite understandable. To economists “the market” refers to the market of exchange between individuals. Of course the term “The Free Market” can include all of the afore to mentioned exchanges, but by and large, this is what they are talking about. Society and markets are actually very closely related and at times synonymous. The market simply refers to the economic interaction of people.

When people discuss a need for government to regulate the market they normally aren’t referring to the neighbor’s kid and I exchanging $20 to have my lawn mowed. What they mean is the need for government to regulate, control or oversee the exchanges and business transactions in our so-called private sector. That is, the exchanges between businesses with one another and with customers. There is this wide spread notion that the good intentioned members of the nation’s leviathan bureaucratic apparatus are looking out for the regular guy’s best interest. That politicians are elected to stand as bulwarks between the greedy corporations and unwitting consumers. Hogwash!

In a Word, Greed

First of all, we need to understand the first tenant of economics; that individuals act out of their own self interest. Better put, everyone is greedy to some extent. The laborer isn’t showing up to work, day after day, so he can contribute his fair share to the tax rolls. People work for personal gain. They work to be left better off than had they not worked.

Greed is an ever present condition of human nature. No parent scolds their children for sharing too much. Quite the opposite, of course. The inherent need to look out for one’s own self interest is why the species is still alive and hasn’t gone extinct. In a Utopia where scarcity is a thing of the past, greed wouldn’t be necessary as a super abundance of everything would exist, including time. But we don’t live in a Utopia and never will on this physical plane of existence. So, there exists a requirement to best economize scarce resources. Without there being a way to calculate the best allocation of these scarce resources, waste happens and resources are squandered.

Not only waste, but conflict arises over ownership of the resources. Eventually, someone will want to use a resource that someone else has claimed as their own. In the 19th century, Karl Marx and Friederich Engels thought it best to simply disallow the exclusive ownership of property and have all ownership of resources in common. But Austrian economist, Ludwig Von Mises pointed out, in his 1920 work, “Economic Calculation in the Socialist Commonwealth”, that socialists are forgetting that correct economic calculation begins with private ownership. Simply put, resources are best allocated when people have skin in the game. Without the private ownership of the resources to produce goods (the means of production), then resources will not be best allocated into those lines that best fit the desires or needs of consumers.

So what is the best way to allocate resources? Maybe wise overlords in government should decide? The argument usually involves the notion that as economies become ever bigger and more intricate, there requires a need for some kind of overseer. Without government intervention, the argument goes, the economy would fall into chaos. But what this line of thinking fails to understand is that the order we witness day to day in the economy is actually spontaneous.

Imagine you’re sitting in a large auditorium full of people. Which stranger would you choose to best handle your economic decisions? Who gets to hold your wallet? Better yet, ask yourself if there are any of your friends or family you would have to regulate your every economic decision. Which one exactly knows your needs or desires? The answer is glaringly simple, nobody could possibly have the extensive knowledge to make proper economic decisions on your behalf all of the time. Compound that by the billions of transactions, exchanges and decisions that are made every second of every day by billions of people. You get the picture. The idea that a body of governmental overseers to best make economic decisions becomes pretty hackneyed. But we all know under a capitalistic system, without regulations, the bankers and corporations would run rough shod all over everyone and become huge monopolies. Right?

Learning from History

Before the advent of what we call capitalism today, human existence was pretty awful. There were a few rich monarchs and aristocrats and a lot of poor people. Life was egregiously bad. The common man didn’t own much of anything outside of what was needed to keep him and his family alive. Every day life was an endless drudgery for survival. There was no leisure time. Education was considered a luxury. The only way for someone to become rich was to take away someone else’s stuff.

Modern institutions of industry and mass production were unheard of, and quite frankly, unneeded. Most people lived off the small piece of land that was granted to them by a feudal lord. Very few produced anything and those that did were controlled by the guilds. The guilds were composed of skilled artisans and merchants who were granted letters of patent from the monarch. They restricted innovation, trade and entry to any other artisans who were not members of the guild. Through what is known as “rent-seeking” today, the guilds imposed a dead-weight loss on their respective economies. After Europe began to colonize The New World,  governments controlled trade and who could receive exports from the Americas. This system of restricted trade, access to markets and participation in commerce to benefit a select few is known as mercantilism.

Not until the end of the 18th and beginning of the 19th centuries did the guilds start to fade away and with them, mercantilism. Many intellectuals, such as Adam Smith, criticized them for their negative impact on national wealth. Once this happened, the phenomenon we know as capitalism began to grow. Standards of living increased as merchants began to produce goods more cheaply so average citizens could afford to purchase them. For the first time in human history wealth began to spread across the social classes. The middle class emerged as the the division of labor became established. Trade became freer and more open with other nations. People actually began to enjoy life. The average citizen became educated as leisure time became more available.

All of this happened without a central planning committee. There were very few regulations, albeit tariffs were still in place. Yet the narrative is to return to the time of the guilds. Calls to restrict trade, regulate prices and wages, and restrict entry for new businesses through licensing laws are common place. Instead of free markets, we now have crony-capitalism, a modern version of mercantilism, where specific industries or businesses receive protection and tax payer subsidies from democratic governments. Profits are private but losses are social. We no longer rely on the best regulator, competition, to best satisfy the needs of consumers and to keep monopolies in check. Today we have oligopolies, where only a few sellers control the supply of a commodity or service and thus the price. Through the call for more regulations we have returned to the age of the guilds and mercantilism. Our current state of affairs can hardly be defined as free market capitalism.

Conclusion

We started our discussion with self interest, or if you’d rather, greed. It has plagued mankind since the Garden of Eden. Only unhampered free market capitalism has been able to take a negative attribute like greed and turn into something that has benefited the human race since capitalism’s inception over 200 years ago. But because markets are no longer free and we have substituted competition for regulation, we are stepping ever backwards into the guilds. There is no coincidence that the middle class is fading away. The less free the market becomes, the smaller the middle class will also become. The two are not mutually exclusive.  Substitute the term “market” for “society” and we get a better understanding as to why the middle class is struggling for its very survival. Governments will continue to grant special privileges to fewer and fewer business and industries. As these oligopolies increase, consumer satisfaction will decrease within those businesses.

So, think about all of this the next time you may get into that discussion about regulating “the market”. What these people are unknowingly asking for is a return to feudalism, desperation and mass poverty. Am I taking this to an extreme? Take a look around and ask yourself; are we on a path to more freedom or on the road to serfdom?

[Image credit: www.ninapaley.com]