Arguably, one of the most highly debated issues in the history of economic thought has to be the efficacy of free markets and their capabilities in generating “best” possible outcomes in relation to inter alia the prices at which commodities are traded, the levels of output, the maximisation of consumer and producer surpluses, and the enhancement of completion among firms.
Any such discussions would more than likely begin with the wisdom of Adam Smith and his hotly moot concept of the “Invisible Hand”. Indeed, in his most widely recognised contribution to economic discourse – his vastly admired The Wealth of Nations – Adam Smith’s philosophical perspective is reflected in the fact that he “was guided by one universal principle; namely, self-interest. Every individual has the desire to better his own lot. It was on this belief, that he regarded the entire economic world as a big workshop created by division of labour. He believed that human conduct was governed by self-love, sympathy, the desire to be free, a sense of propriety, a habit of labour and the propensity to satisfy his wants with the help of others. Each man is the best judge of his own interest. If complete freedom is given, he would make efforts not only to better his own lot, but also would take efforts to promote the general good. Thus “An Invisible Hand” is behind all human motives.”
But Adam Smith was only one of several economic thinkers whose contributions to the discipline are reflected in the classical school. No doubt, classical economists believed sincerely in laissez faire. It is no wonder, therefore, that they have advocated “that Government is best which governs least.”
Further, classical economists are the major champions of market economies in which perfect competition dominates. Hence, critical activities such as production, exchange and distribution are best determined by the forces of demand and supply – market forces.
As we look around the globe from the small, open economies of the Caribbean to larger ones in Latin America, Africa, Asia, Europe and North America, there are vastly diffused manifestations of market economies and heavy state or government’s involvements in the management of countries’ economies at play. Well and good!
But the stark reality is that economic outcomes in those countries have not only been mixed over the years, but have also been highly erratic and in many instances lethargic. What those mixed outcomes have done is continue to ignite the fire over the debate concerning the real workings of free markets and their predictable abilities to generate efficient economic outcomes.
It should come, therefore, as no surprise to anyone, that George A. Akerlof and Robert J. Shiller have, in a 2015 book entitled Phishing for Phools: The Economics of Manipulation and Deception taken on the task of critically exploring the usefulness of free markets in generating efficient economic outcomes.
Sometimes, it is rather difficult for me to understand why, with the abundance of proof, whether hard core statistical data or proven and tested economic theories or even anecdotal evidence, we as a people tend to ignore reality and allow other considerations to cloud our very best judgments.
Furthermore, why, when presented with issues of a contentious nature, we sometimes defer to political correctness and ideological perspectives as the basis for our reactions, thus stifling potentially constructive debates on matters of national importance?
Here is a simple example to illustrate the point I am trying to get across to you. In the preface to their book, Akerlof and Shiller had this to say: “It’s “the economy, stupid!” said James Carville, Campaign Advisor to Presidential candidate Bill Clinton in 1992. He wanted to stick it to President George H. W. Bush for an array of economic problems that were tied to the economic recession that started during the Bush presidency. Well, we have a different, broader interpretation of Carville’s statement: that many of our problems come from the nature of the economic system itself. If business people behave in the purely selfish and self-serving way that economic theory assumes, our free-market system tends to spawn manipulation and deception. The problem is not that there are a lot of evil people. Most people play by the rules and are just trying to make a good living. But, inevitably, the competitive pressures for businessmen to practice deception and manipulation in free markets lead us to buy, and to pay too much for, products that we do not need; to work at jobs that give us little sense of purpose; and to wonder why our lives have gone amiss. We wrote this book as admirers of the free-market system, but hoping to help people better find their way in it. The economic system is filled with trickery, and everyone needs to know that. We all have to navigate this system in order to maintain our dignity and integrity, and we all have to find inspiration to go on despite craziness all around us.”
Indeed, the preceding are rather extensive quotes, but done deliberately because those sentiments alone should be sufficient to set you thinking about free markets and hence the role of governments in our Caribbean societies.
How would you react the next time the International Monetary Fund or another highly influential global institution suggests that we should adopt more market-oriented policies? What would be your response to the idea that we in the Caribbean must reduce the size of our governments and consequently their involvement in the management of our economies? How about your take on private sector-led growth and development of our Caribbean economies?
Given the nature of this week’s offering and taking into full consideration your personal knowledge and understanding, I, now, therefore, ask you: In the context of the Grenadian or other Caribbean economy, is a free market a millstone or panacea?
(Dr. Brian Francis, a former Permanent Secretary in the local Ministry of Finance, is currently a Senior Lecturer in the Department of Economics at the Cave Hill Campus in Barbados of the University of the West Indies)