Tag Archives: Adam Smith

Are Markets Free?

Smith FriedmanMilton Friedman in his book “Capitalism and Freedom” suggests that the central problem of economics is how to ensure the cooperation of free individuals without compulsion. Scottish economist Adam Smith saw that, in the absence of external coercion, two parties enter into exchanges because it will be mutually beneficial for them to do so provided the transaction is bi-laterally voluntarily and informed. No exchange will take place unless both parties benefit. This seems to be the conventional definition of the free-market economy.

However the market is not as free as one would think and the power of the business strategy prevails. Marketing is a significant cost for most businesses but the majority of contemporary marketing is based not on providing information but on associating products with evocative images and themes not directly related to the product itself. Goods that cannot be ‘commodified’, such as self-esteem, love, friendship and success, for example, are associated with products that bear little or no relationship to those goods.

Marketers intensify the desire for such goods by calling into question the acceptability of the consumer, which General Motors’ research division once called “the organised creation of dissatisfaction”.

Another concentration of power is in the enormous transnational corporations through mergers and acquisitions. Over the last two decades there has been a significant rise in mergers and acquisitions as large corporations seek to outdo their rivals through the increase in size that ultimately leads to economies of scale and market power. For instance the meat packaging industry in the United States is dominated by four companies that handle the 80% of beef production that leaves small farmers with limited power in the pricing of their cattle. Independent bookshops and department stores worldwide have struggled with the size of the competition in the market and the onset of the online medium. Consumers have preferred the bigger firms as they are more efficient and can provide the product at a cheaper price. However paradoxically the consumer has used his/her freedom to restrict their freedom, since now there are fewer choices available, and they are increasingly faced with the prospect of frequenting the same few chains stores whether they like it or not.

A much more publicised view of asymmetrical power is the exchange between employer and employee. Executive pay in the last two decades has increased dramatically – in 1980 the average CEO earned 42 times that of the average worker but by 1999 it had reached 475:1 and today approximately 600:1. Union membership has declined considerably since the 1980s when is it was well over 20%. In 2012 only 11.1% of workers were members of unions.

__________________________________________________

The above is a brief extract from an article published in this month’s econoMAX – click below to subscribe to econoMAX the online magazine of Tutor2u. Each month there are 8 articles of around 600 words on current economic issues.

econoMAX

Open University – 60 second adventures in economics

Here is a series of 6 cartoons from the Open University about economic concepts – I got this link from Mo Tanweer of Oundle School in the UK. They are very well done and make for good revision with the forthcoming exams. Below is one on The Invisible Hand. To view all 6 click on the link –
Open University 60 second adventures in economics.

Economics and Alienation

A recent article in the New Zealand Herald, by Susan Guthrie and Gareth Morgan, attacks the lack of comprehension of why we tax and why we distribute the proceeds via state transfer payments. During the industrial revolution the disparities of wealth amongst the population led economist philosophers of the “enlightenment period’ to conclude the purpose of taxation was to “favour the diffusion rather than the concentration of wealth”John Stuart Mill. The founder of capitalist system, Adam Smith, was critical of teh inequality it brought to society and acknowldeged that tax progressivity was desirable.

Ever since moral philosophy and economics parted ways and mathematical advances reduced the subject of economics to answering “what if” questions, we’ve suffered from a vacuum of understanding of why we tax and why we distribute the proceeds via state transfer payments.

Indeed we are so preoccupied with determining how big a budget deficit or size of government we can get away with, how we can cut the cost of welfare, how next year’s outlook compares with last year’s, that the rationale for why we redistribute has, to all intents and purposes, been forgotten.

In 1948 the United Nations supported the morals of the classical economists – Adam Smith, John Stuart Mill, Thomas Malthus etc. Its Declaration of Humand Rights stated: “Everyone has the right to a standard of living adequate for the health and wellbeing of himself and his family including food, clothing, housing and medical care and necessary social services, and the right to security in the event of unemployment, sickness, disability, widowhood, old age or other lack of livelihood in circumstances beyond his control.”

Gutherie and Morgan argued that modern economics is still too focused on GDP and it doesn’t recognise the contribution of people in society that perform unpaid work or voluntary work for their communities. However once you start to exclude people from the capitalist system they become polarised and public disorder breaks out. For so long UK policies have been devoid of moral or ethical justification and this has acted as a catalyst to the riots in London and other centres.

Our tax and welfare policy is in urgent need of reconstruction so it ensures equal opportunity for all to participate and fully realise their potential in society in its widest sense – whether it be the paid or the unpaid workforce.

The chauvinism in policies that disparage unpaid work – whether it be care of the elderly, juveniles or of the community – has run way too far and will alienate more and more.