The Free Market
It’s just an idea, but it changed the
world forever
Some markets we can see
But most are a mystery
How markets work
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“A market” – one good/service
“The market” – all markets in economy
Market forces - Demand and Supply
Price – moves automatically
Price is a signal distributing resources
Before free markets - Intervention is
normal
• Market intervention existed as long as trade
• Wealth of nations:
– Conquest
– Land and gold
– “wise rulers”
• Wealth of men: know the chief (or become
chief)
The idea: “The free market”
• First detailed theory of how markets work
• Central idea: Free market optimal way to allocate
resources, (i.e. free markets grow faster)
• Changes the whole discussion of
how to run a country.
“It is not from the benevolence of the butcher, the
brewer, or the baker, that we expect our dinner, but from
their regard to their own interest.” – Adam Smith, The
Wealth of Nations, 1776
The idea: We can measure market freedom
empirically
• Which goods can be traded?
• How many regulations/taxes, how much government
intervention/supply
• Measure speed of growth, gains from trade and
market failures (more later)
• Freer markets do grow faster
The idea: Paradigm Shift of political
thinking
Classical liberal: all markets free
Social liberal: most markets free
Conservative: don’t change
Developed
as reaction
against free
markets
Socialist: most markets controlled
Communist: all markets controlled
The reality: How free markets took
over countries
• Freer markets grew faster
– Competition
– Learning
– Complexity
• Increased business influence
– Push for free markets to extend further. Cut
regulations, allow markets for land, capital etc.
The reality: How free markets took
over the world
• The free market countries got rich
– Start with UK, Holland
– Some copied and caught up (Germany, USA,
Japan)
– Others were taken over (colonialism, CIA)
– Internal collapse of communism (1980s+)
• Free market countries are more stable
– Democracy
– Peace
Map of ‘Global Economic Freedom’
Heritage foundation 2013. Includes Size of government, legal
economic security, access to finance, freedom to trade, regulation
of credit and labour,
Three features of free markets
1. Grow fastest
2. Need strong institutions
– Like a vacuum, the free market needs support to
exist
– Minimum: keep law and order, enforce contracts,
property rights
– Further: Deal with market failure
3. Market failure
This is not market failure
“Creative Destruction”
Business cycles
Source: google search…..
This is market failure
• Public goods
– Infrastructure
– Information
• “Externalities”
– Mispriced resources
– Education/health
– Environmental destruction
• Monopolies
• Inequality?
The free market in Guyana
Socialism 60s/70s
• Jagan and Burnham both
socialists
• Did not grow economy
sucessfully
GDP GY$m 1988 prices, (Bureua of Statistics)
Guyana GDP 1990-2009
7,000
6,000
Liberalisation 80s/90s
• Privatize
• Reduce trade barriers
• Simplify tax and regulations
(e.g. VAT reform)
• New institutions (e.g.
Competition Authority)
5,000
4,000
3,000
Services
Manufacturing
Agriculture and mining
2,000
1,000
0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
The free market in Guyana (1)
1. Free markets grow faster:
• Growth can improve many things in society
• Growth is learning: hard work, risk-taking, innovation
• We can’t predict the future Contribution to Guyana's growth 2009-2013
1 Gold
19.1%
engine of the economy
(but it’s not sugar!)
2 Wholesale and retail
3 Transportation and storage
4 Information and communication
5 Construction
6 Financial and insurance activities
7 Other services
8 Rice paddy
… Processed sugar
… Forestry
… Other mining and quarrying
… Sugarcane
Source: Calculations from Bank of Guyana 2013 annual report
17.5%
14.1%
11.1%
9.9%
8.6%
5.4%
5.2%
-1.2%
-1.7%
-4.1%
-4.4%
The free market in Guyana (2)
2. Free markets need institutions:
- Strong Guyanese institutions for Guyanese markets
- Some reforms to boost growth are simple
- Engage World Trade Organization
(WTO), CARICOM
Sources: Global Competitiveness Index 2014-15, World Bank Doing Business Index 2014
The free market in Guyana (3)
3. Free markets fail:
- Crime/pollution, education/healthcare - same
problems as everywhere
- “Resource curse”: Guyana specific
- Global market failures: LCDS is visionary
Questions for the global future
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Market design
Market access
Market failure
Limits to markets
Co-operatives
Global institutions
Economics is for everyone…
Top Popular Economics Books
• The Undercover Economist (Tim Harford)
• Naked Economics (Charles Wheelan)
Also
• Why Nations Fail (Daron Acemoglu, political economy)
• Small is Beautiful (E.F. Schumacher, environmental
economics)
• Economics: The User’s Guide (Ha Joon Chang,
“heterodox” economics)