3. The Free Market

Capitalism has delivered up a complex and difficult set of problems, some of which seem to be inherent in the social structure itself. Knowing the right questions to ask might lead in the right direction, assuming we have the political will. It’s a learning process for both individuals and groups. When the environment is stable, all seems well. When the environment changes, there is an immediate and overwhelming drive to find equilibrium and a stable foothold. Compared to this, democracy is slow and deliberate.

It is frequently said that the stock market is not the real economy, but anyone who lived through the stock market crash of 1929 would disagree.   If all the big players of today’s stock market had their own casino, it would not be a problem. They could win or lose from each other using the house chips bought at the door and exchanged on the way out. The real economy and the stock market are all connected via the currency however, backed up by courts and contracts. Use of the same currency is like being connected at the umbilical cord. The Fed can influence both the economy and the stock market by putting pressure on the value of the currency.

Allocation of Resources

Zero interest money (ZIRP), derivatives, and complex financial instruments have driven the stock market into the sky. If the stock market is 3 times the real national output, then the S&P is a casino. Investors try to guess what other investors will buy or sell, rather than invest in companies that have long term value to the economy. Derivatives are a bet that a stock will go up or down, leveraged to give a higher payback and minimize potential losses. It is unlikely that this is Friedrich Hayek’s allocation of resources by the free market.

Besides price discovery, does GDP measure the ability to move UI in general? Maybe not. A free market can also increase the supply of misinformation. A seller does not tell the buyer what the absolute minimum he or she would take for goods or services nor does the buyer tell the seller what she or he would be willing to pay. A merchant, even an honest one, is unlikely to divulge information about the market around the corner where the same item can be bought for less. Can we buy our way out of the serious challenges that lie ahead? It depends on our objectives and where we spend our money. How will people react? What questions we will discover?   What questions are we willing to entertain?

The increasing income gap between rich and poor is an issue that demands attention. Does it require a re-distribution of wealth, a Robin Hood taking from the rich and giving to the poor? In the short run this might work, but in the long run finding and moving UI may be more important. Economists then should also look at policies that encourage the creation of structures that help to find and filter information at the local level for maximizing security at that local level. There is a need for micro-restructuring, but only temporarily, and only for the purposes of finding and moving UI.