Now, what's the problem with this new model?

Well, none, if you happen to be on the right end of the game. For some (a growing majority) on the wrong side, things have progressively been getting worse, and for them there are one or two inconvenient problems. We'll get to that later.

First, who invented this fantastic free market system? I honestly don't know, some of the prophets of this new branch of the economy religion were Milton Friedman and Friedrich Hayek, but I can't tell much more about them and the others. But, to me, there's nothing remarkably new about it. Free markets, where the government regulation and taxation are minimized and Offer miraculously matches Demand have always existed. They used to be called Black Markets. And they used to appear everywhere where there was a chance to do some business which was not well seen by the rest of society, or where there was a chance to do it without paying taxes. In Europe there are still black markets for Polish plumbers or Portuguese brick layers, or more frightening, black market for foreign women as sexual slaves.

Take the drugs market, do you know of a drugs dealer that pays taxes on his profit? Do you know any law that regulates how this dealer should sell his stuff, how to pack it, and at what price? Maybe the drugs dealers have some sort of code of conduct that I'm not aware, but traditionally it's a very Free market, very black market (no pun intended). The dealer is free to trade the product with the consumer without strong regulation and taxation. Now is it an efficient free market? Will the consumer  get a reasonable price for what he or she gets? Traditionally not. This market is often dominated by cartels, which means they have a monopoly and charge more because of that, competition which could bring down the price is strongly discouraged often with violence, plus restrictions on importing and the risk of police crack down puts the product at a premium. 

Now let's look at another innovative aspect of these free markets, the possibility, via free financial markets, where capital flows globally, to invest in goods anywhere in the world. You can actually put your money on a fund, which will use it to buy tons of rice in say Vietnam, because a big tsunami destroyed all the rice fields in Thailand, and you believe the price of the rice will go up, and therefore these tons will be worth double when sold, and by keeping them stored somewhere you actually contribute for the shortage of rice which will also ultimately make that rice price climb (now for the sake of this example, never mind the indians who'd love having that rice at least one bowl a day, who'll be hearing strange noises in their stomachs). Now what did you normally call it when you put your money on something you believe has a good chance of returning you a profit, without you needing to actually make an effort to earn it? Gambling? I don't know, I mean gambling is for example when you bet (invest?) on a horse who has a chance to double your money... does it sound familiar? What do you call it when you bet on a horse, which you know has been given a nice doses of steroids to win? 

Now, having said that, I have nothing particularly strong against black markets and gambling. I mean, apart from the slaves and drugs and such, in other black markets you can get some really good deals (my mother used to take us to the gipsy market in Carcavelos, close to where we lived, all the time to buy clothes, there was so much competition there, and so little regulation, that you could get some really attractive Levi's look alike pants or fake Lacoste shirt for peanuts), and nobody really gets hurt. And gambling, I mean, if you do it at your own risk and don't bother others with your debts who am I to judge you... but gambling with food? go gamble on gold, who cares if the rich can't afford it, but food? Doesn't it sound just a little bit more distasteful than a horse race addicted person.

So we basically legalized some concepts which were already there, but were considered distasteful, because some economists realized that these often worked more efficiently than what we had, and now we consider it very tasteful indeed. Keep in mind that Efficiency does not relate directly to Fairness.

So are these new bla... pardon me, free markets really that efficient? According to Tim Harford, in The Undecover Economist, a market is efficient when you can't make somebody better off, without making someone else worse off. What does this mean?

It means this, if I'm a drug dealer and I'm charging an enormous premium on my cocaine, and ripping the hell off of a regular junky, and then i decide to lower it a bit, I'm not making my position any worse off because at that new lower price I may even sell it to the poorest of all the junkies who couldn't afford it before, and make some additional income,  but I will certainly make both those junkies better off (worse in terms of health of course). That means my market was not efficient in the first place, and by lowering the price I made it more efficient. Now if by lowering more I cannot cover my importing cost, then I'll be worse off and the market was already efficient before. Or if instead I raise the price and my regular junky cannot afford it anymore, then I don't sell it and he doesn't consume it and I've wasted a selling opportunity, then the market was again already efficient before. This potential of reaching an efficient point is what makes free markets so interesting, they are like self-control mechanisms. If the government had interfered and fixed the price of cocaine, then the market would not be free and could not adjust in such a situation.

According to that same economist there are 3 factors which reduce the efficiency of free markets, and they are:

1. Scarcity power - being the only one that can deliver the product, the boss of the drugs cartel
   
2. Asymmetry of information - when I know more about the cocaine ingredients, namely the amount of flower in it, than the junky
   
3. Externalities - the impact that the junky stealing money from people on the street to buy my cocaine will have on those people
   

Such a market plagued by all these factors is inefficient, not to mention highly unfair. If you were the government how do you fight these issues (I mean how do you improve the market, not how you arrest the dealers)?

1. Allow markets to be highly competitive to reduce scarcity power - let all the gangsters in on the game
   
2. Allow access to information to all parties to reduce asymmetry - force them to put a label on the cocaine bag
   
3. Identify and charge taxes on each market's externalities - apply fines on junkies who steal or their dealers and give that money to the victims.
   

So the problem with the new free market model, is basically this: The economists would love that the free markets were highly efficient distributing benefits to all in it, low prices for consumers and enough profit for the producers to stay in business, so they keep coming up with new recipes involving any combination of some of the medicine above, but most of these markets not only are highly inefficient but are highly unfair, and what's more they don't want to be efficient. And who's to blame? Well, that I hope will be the topic of the next post.