The free market fallacy

Saturday, 22 December 2012 23:20

I came across this the other day.

"It is really very simple. Capital can be allocated by markets or by central planning committees. Despite the booms and busts, markets do it better. It may be that that the booms and busts are just inevitable."

 alt Why is there a refusal to recognise that there is more to it than this? Capital is in most circumstances best allocated by markets, but there are important exceptions. Capital needs to be supported and protected by infrastructure. No major commercial centre could function without efficient networks of transport and utilities, whose value extends far beyond their capacity to make profits for those who build and operate them. Capitalists need, for example, to be confident that their investment will not be washed away when the weather turns bad. That may call for investment by a body able to take account of wider considerations, to construct and maintain flood defence works.

Those who invest in this public capital cannot charge the beneficiaries directly for the benefits they provide, and thus the investment gives little or no return to those doing the investing.

The beneficiaries of this infrastructure are ultimately those who own the land, and this gives rise to the second difficulty - the elephant in the room. Capital needs to be distinguished from land. Capital investment requires not just a secure plot of land to park itself on. The plot needs to be in a well-located situation. Conspicuous in most commercial centres in the UK are vacant sites and buildings with "For Sale" and "To Let" boards attached to them.

Free market theory predicts that rents and land values would drop to market-clearing levels. It is obvious that in practice this does not happen. The result is a loss in productive opportunities no less damaging than those caused by central planning committees. They are literally locked out of use. This is the failure of the market.

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