Faith and Markets

Those brought up, like me, with the classical model of liberal economics often attribute to the "Market" the three qualities which those in less secular times attibuted to God.

Markets were omnipotent (all powerful), omniscient (all knowing), and omnibenevolent (all good).

(Those on the left often attributed the very same qualities to that other deity, the "State".)

The ongoing economic crisis is a good moment to test this faith in the Market deity.

The Market is certainly all powerful; that is if one takes the view that the credit crunch is the Market's corrective response to unsustainable finanicial and banking practices.

As the late Sir Alan Walters often pointed out, one cannot buck the market.

(I must admit, however, that to say that the Market is always correct in the long-term is to make almost a circular statement: how would one actually tell the difference?)

The Market also remains a generally efficient way of allocating resources and setting prices according to diffused information. In that way, the Market is - by this aggregation of knowedge held by each market participant - all-knowing, though this is perhaps not to say very much.

But where one's faith can be most tested, is whether the Market is for the greater good. Here on cannot ignore the dictum of Adam Smith:

"Every individual...generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it...and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention." [Emphasis added.]

That Smith's "invisible hand" would ensure that each individual's pursuit of their own self-interest would, by necessary implication, lead to the greater good is what makes the otherwise terrifyingly powerful Market diety into a rather nice god.

However, the individual banks and financial institutions which adopted extreme practices for their own interests have, when taken altogether, put at severe risk the very framework in which a capitalist market economy can operate.

It is as if the invisible hand has let us all go and started slapping us instead.

One really must now have doubts that the Market is omnibenevolent, even if it retains the other two usual attributes.

This is not to mean that that other diety, the State, should now be worshipped. The last few decades have seen enough public sector and regulatory failures to deter one from that other old religion.

Perhaps we should instead move on from being beholden to either diety? For neither, by themselves, seem able to achieve the public good.