Thursday, 19 January 2012

The fallacy of the 'free market'

When taught economics, one of the first things you are told to accept is that there are so called ‘free markets’. These being ‘free’ in the sense that if untouched by state intervention they will produce efficient outcomes due to the laws of demand and supply and should not fail, most of the time anyway. However this is false. ‘Free markets’ do not actually exist.  Every market has some rules and boundaries that restrict the freedom of choice for consumers and suppliers. The term ‘free market’ is actually not an economic one but in fact a political one. It is used by politicians/organisations who want to introduce market liberalization (normally not on some countries but others i.e the IMF in Asia) and strip back, in many cases, much needed government intervention into certain markets.

Markets develop and change with time and so has the term ‘free market’ also been altered. Even though the actual definition of a ‘free market’ hasn’t changed from that of a market with no government interference whatsoever. Let’s take the example of the 1819 Cotton Factories Regulation  Act in Britain of regulating child labour. At the time the proposal cause massive controversy with opponents seeing it as undermining freedom of contracts and thus the very foundations of the free market. However today it is unimaginable to think that any promoter of the ‘free market’ would advocate for a return to child labour, even though a true believer in such a market would see it as right and just.  Another example is the stock market, one of the most thought ‘free market’ markets where anyone can buy and sell shares as they please. But even the stock market has a degree of government regulation. A person cannot just go to the steps of the stock exchanges in the City of London with shares and sell them. They would have to go through a round of checks and meet certain requirements to begin trading, which is natural practice around the world.

It is well known that the Conservative Party in Britain, and throughout the most of its history, has been an advocate of a small state and letting the markets be relatively ‘free’. With David Cameron saying only today that “I believe that open markets and free enterprise are the best imaginable force for improving human wealth and happiness". However it is also widely known that the Conservative party believes in tighter immigration laws. Both of these ideas however go completely against each other. To believe in a ‘free market’ is to believe in the free movement of labour as firms would demand the lowest cost of labour possible and at the present time this would come from overseas countries such as China, India and many Eastern European states, this would also lead to cheaper goods for consumers (which they would demand) thus leading to market efficiency. However then the Conservative pledge to limit immigration in Britain while also advocating for “open markets and free enterprise” doesn’t go hand in hand. Hypocrisy many would cry.

The belief that markets, if left to their own devices, produce efficiency would suggest that capital (money or assets) would flow to places where success of investment is greater. But as Joseph Stiglitz, Nobel Prize winner in Economics pointed out, that instead of capital flowing from Western Countries to the more prosperous economies such as the BRIC’s (Brazil, Russia, India and China) where the prospect of large profits was greater in the last decade or so. Capital in fact flowed in the opposite direction and the prosperous economies actually fuelled to the Western Countries, creating a culture of people living beyond their means and thus fuelling debt problems, which is now the big problem facing the West and the World. So as some economists and politicians claim that they are trying to defend the market from political interference by the government. They are lying. The government is always involved, in some way or another, in markets and those proclaimed as ‘defenders’ are as politically motivated as anyone else.

Author: Thomas Viegas

Tuesday, 3 January 2012

After the storm: The 2011 Stock Market

As the clock finally ticked down to the dawn of a new year, trading on the world stock markets had finished for 2011. And in a year that saw the USA lose its coveted triple A credit rating after nearly defaulting in early August, Greece effectively defaulting, the euro almost disintegrate, a revolution in Libya, the slowing of the rapid growing economies and the global growth turning anaemic. These events had shaken global markets throughout 2011; the year had been wild, difficult and an ominous sign of things to come.

The year was mostly dominated by the crisis in the euro zone, and markets showed this. With the France’s Cac 40 and Germany’s Dax down 17.5% and 14.7% respectively for the year. Now considering that Germany was the euro zone’s best performer in 2010, this year has marked a dramatic change in its fortunes. Not surprisingly Greek stocks fell by more than half (52%) in 2011 showing that devastating lack of belief by global investors in its future. Another noticeable decline was in the Cypriot market with it falling by a massive 72% in the year, mostly due to the decline of Greece. The UK, where growth had stalled throughout the year as Austerity started to take place, also performed badly on the stock market. The FTSE was down 5.6% for the year but the UK managed to hold on to its triple A credit rating due to its ‘credible’ deficit reduction plan, a view that I do not particularly agree with mainly because of the future prospect of growth looks unlikely.

Across the Atlantic, the US performed better than expected with its stocks actually up for the year. This is despite the reality of defaulting at the end of summer and the clear lack of credibility between both political parties to come to an agreement over deficit reduction. And while this was recognised by credit agency Standard and Poor’s, which reduced the world’s largest economy’s credit rating from triple A (which it had always been since credit agencies had been introduced), it wasn’t by the global investors. The reason being for this was due to events across other parts of the world. With fast growing economies slowing and the euro zone on the brink, the US was seen as a safe haven for investors, especially toward the end of the year. The best performing country of 2011 was also found across the Atlantic but in the southern America. Venezuela’s √ćndice Burs√°til Caracas (IBC) was up a considerable 79% for the year. This has been put down to increased government spending as the country emerged from recession. In addition to it being one of the world’s major exporters of natural gas and oil.
In Asia the year’s picture was relatively bleak on the stock markets. Despite its high growth rates, relative to the rest of the world, China’s SSE Composite Index was lost 22% of its value in 2011. Investors seemed to question the Dragon’s short term growth prospects as global demand slumped thus impacting on China’s exports. Its historical rival, Japan also endured a bad year, in fact a horrific one. With the Tohoku earthquake in the early part of the year, it was always going to be hard for the country in 2011, and investors did not ease the pain on Japanese stocks. The results were that the Nikkei ended at its lowest level since 1982, losing a fifth of its value throughout the year.

As the year ushers in 2012 the prospects for the global economy already look bleak. With Angela Merkel, Chancellor of Germany, warning that this year will be worse than 2011. Furthermore a recent survey of prominent economists done by the BBC in the UK has shown that a euro zone recession looks an almost certainty. And that the euro zone would not remain in its current form by the end of the year, with around 40% of those surveyed predicting a breakup of the single European market. So while the fireworks and partying continue around the world the message is if you thought last year was bad, this year is going to be even worse. Happy New Year!

Author: Thomas Viegas