Saturday, August 24, 2013

Return of the Pink Unicorn

What a free market looks like
As I mentioned in a recent post about the deleterious effects of income inequality, free markets are exceedingly rare. This is important because the illusion of free markets informs so much policy-making with regard to the economy. Actually, "informs" is not the right word, since this unchecked assumption is at the heart of so many damaging policies.

As recently reported on the BBC, stocks fell briefly this week when minutes of a U.S. Federal Reserve meeting were released. This body meets periodically to set interest rates and to schedule the sale of U.S. debt instruments. Economists and investors spend an extraordinary amount of their time leading up to each meeting trying to figure out not only what the Fed will do, but also how it will impact markets, and how impacted markets will impact other markets, and so on.

The price of "freely traded" stocks are therefore influenced by fiscal policy, which in turn is the outcome of a political process. The value of money itself is similarly subject to policy decisions -- even the value of money in countries that have no power to set the policies. Even hints about upcoming decisions in Washington sent stocks tumbling in emerging markets in Asia -- billions of dollars lost in a single day because of possible changes in the way markets were to be manipulated.

Essential assumptions may be introduced at the beginning of a course on microeconomics, and they might just apply somewhere -- as in the land of the pink unicorns -- but the limiting nature of the assumptions is rarely scrutinized in mainstream discussions of finance, economics, or trade. The degree to which trading conditions are manipulated on the real Planet Earth is made very clear in the final scenes of the extraordinary documentary Black Gold, which take place at a World Trade Organization meeting in Cancun. In this film about coffee, we see that trade negotiations held in heavily fortified conference centers are structured to continue favoring the rich, while the U.S. trade representative sneers at negotiators from the global periphery for attempting to take a stand on behalf of poor farmers. This disdainful attitude has been shared by trade officials of both major parties at least since the first Clinton administration, because liberals and conservatives alike know that "American prosperity" could not take place in a completely free market.

Whew! Just made it!
Image: PennLive
Former Texas Governor Anne Richards is widely credited with saying that George Bush the Elder was "born on third base and thought he hit a triple." She did not actually say this -- though fellow Texan Barry Switzer did, and many people think further fellow Texan Jim Hightower did -- but it would have been true of either of the Presidents Bush, as it was of candidate Romney: all were born into incredible privilege, created and maintained for them by others, and thought that they had done most of the achieving on their own.

But here is the rub: it is also true for most residents of wealthy countries. To believe otherwise is pure fantasy.

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