Friday, 28 August 2009

Free Markets, Fake Markets, Real Markets, & The Inquisition

When is a Free Market not a Free Market? The main plea being put up by all the broke banks, the money movers, and financial fiddlers is that if they are called to account, and subject to the ordinary laws that most of us have to obey, then the economic structure that they command, and call “The Free Market” will collapse. This, they allege, would be a terrible thing, and they call up the ghosts of economists and philosophers past to support their claims. Even the Ludwig von Mises Institute (Tu ne cede malis) too often assumes that this present ungodly crew of the greedy, grabbing, and greasers constitutes a Free Market.

There has not been a free market in UK finance for many years. The recent set up in the City has been a cosy fix between bankers, high roll business and property speculators, hedge fund operators, and above all the government who have held the ring, and subsidised to the hilt most of the fancier arrangements that have been made. There have been all the manipulation of indexes and statistics, all those juicy PFI contracts off balance sheet, all those property deals with private equity, all those consultancy and accounting capers round every government department, quangos, and agencies, all those crazy computer crashes, all those defence debacles, railway rollovers, and more lately all that laughable social entrepreneurship with all the usual suspects lined up to take a chunk out of Labour’s local deals.

What is a free market like? The one above, pictured before World War One is Leicester Market, where thirty or so years later David Attenborough might be found looking for grubs at the greengrocers, or crawling after caterpillars. Perhaps Joe Orton studied dialogue there and Engelbert Humperdinck learned voice projection not long after. The famous footballer Gary Lineker when young was behind a stall. Even today, some locals still sing the traditional folk song “I bought a cabbage today from Gary Lineker” to the tune of “La Donna E Mobile”.

At the stalls you knew the prices of everything and could compare them. You had a good idea of seasonality and supply and the reasons for variations in price. You dealt in cash. You could buy or not. There was extensive choice for many basic products; you knew where they came from and who had handled them and much else. When you asked questions you were given clear answers. And the market was regulated by the local council Licensing and Marketing Committee, so everyone knew the ground rules. Also, local knowledge was substantial, the names of traders who adulterated or mispriced their goods or short changed would be exchanged freely and without hindrance by the local population without fear or favour.

So what do we have in the world of modern finance? I quote from Richard Murphy of the Tax Research UK blog allied to the Tax Justice Network:

“We may be at a rare moment when the interests of rich and poor countries are synonymous. At the heart of the current worldwide economic crisis is a lack of transparency in the global financial system. This is the end product of a half century of creating and expanding a shadow financial structure comprising tax havens, secrecy jurisdictions, disguised corporations, anonymous trust accounts, and fake foundations.

Also included in this system are trade mispricing mechanisms, money laundering techniques, and gaps left in national laws that facilitate movement of the proceeds of bribery and theft, criminal activity, and commercial tax evasion across borders.

The consequences of this murky structure and the money it moves are now clear:

In developed countries, credit collapsed in large part due to the difficulty of appraising the quality of assets held by financial institutions that operate partially or wholly within this opaque system.

In developing countries, an estimated US$1 trillion a year of illicitly generated money is shifted abroad through this system, constituting the most damaging economic condition hurting the poor, undermining poverty alleviation, delaying sustainable growth, and weakening democracy and the rule of law”

What it amounts to is a more or less self appointed group of international companies and organizations, with associated oligarchies and local warlords are running a set of operations that are no more a free market than was Al Capone and his Prohibition Booze Runners. What was it that President Eisenhower said about the industrial-military complex? Substitute financial for industrial for the 21st Century version. Shock horror that some operators who might have to pay the same level of ordinary local taxes might leave us. Shock horror, that the bonuses these people pay each other and decide amongst themselves might suffer a reduction in income in the same proportion that the old and disabled are already suffering. Shock horror that they might have to provide the sort of information that the economists and philosophers of the past supposed was vital to any market that was truly free.

The Tax Justice Network on 27 August covering a report in “The Guardian” on Lord Turner’s suggestion that most of the operations of the City of London were socially useless, quotes a comment that I could not beat for accuracy or brevity.:

"If you will permit me to speak frankly, the answer to the question "why does a financial exec pay himself so much?" is the same answer to the question "why does a dog lick its private parts?" Because it can."

As for Free Market Information, there has been a procession of lawyers to the London libel court representing a very rum set of coves who have been exposed to criticism. The weird judge made laws relating to the odder clauses of Human Rights legislation (protect the rich at all costs and sod the poor) have unfailingly given them the right not only to secrecy but to be protected from any form of criticism or questioning under any circumstances. So academic mathematicians who query or suggest flaws in the formulae and models used by major finance corporations are silenced and cannot publish their work because they and perhaps their universities would be ruined by even the costs of a successful defence. That is difficult given in these cases the requirement for absolute proof, the presumption of guilt, and the restrictions on evidence. If knowledge is silenced and debate forbidden, then there is no Free Market in international finance, and the City of London and its back offices in Edinburgh, Dublin, and the British Administered Authorities are havens for all those who do not want questions asked.

In an historical article on the Ludwig von Mises Institute web site “The School Of Salamanca Saw This Coming” it is said that the Theologians at that university 500 years ago came to the view that how prices were determined involved so many complexities that only God could know. Those deeply religious thinkers were members of the Dominican and Jesuit orders. It is a mind boggling idea that the Dominicans, who were key to the Inquisition in Spain, seemingly knew the truth about free markets much better than our politicians, bankers and financiers of today. But then the Dominicans of the Priory of the Holy Cross in Leicester in modern times bought their food at the Leicester Market. If a trader tried to put one across them, it would not be regulation he would have to worry about, it was spending eternity in hell fire.

Perhaps if Auto de Fe events in Smithfield and Parliament Square were held to ensure that those in the City and Westminster who were in grievous error over the Doctrine of Just Prices and the concomitant Free Markets were called to the ultimate regulator, the world might be a happier place. Certainly I would be, especially if I had a front seat.

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