Market Impeders and Market Inefficiencies
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Even the most devout proponents of free marketry and hidden
hand theories acknowledge the existence of market failures, market imperfections
and inefficiencies in the allocation of economic resources. Some of these
are the results of structural problems, others of an accumulation of historical
liabilities. But, strikingly, some of the inefficiencies are the direct
outcomes of the activities of “non bona fide” market participants. These
“players” (individuals, corporations, even larger economic bodies, such
as states) act either irrationally or egotistically (too rationally).
What characterizes all those “market impeders” is that
they are value subtractors rather than value adders. Their activities generate
a reduction, rather than an increase, in the total benefits (utilities)
of all the other market players (themselves included). Some of them do
it because they are after a self interest which is not economic (or, more
strictly, financial). They sacrifice some economic benefits in order to
satisfy that self interest (or, else, they could never have attained these
benefits, in the first place). Others refuse to accept the self interest
of other players as their limit. They try to maximize their benefits at
any cost, as long as it is a cost to others. Some do so legally and some
adopt shadier varieties of behaviour. And there is a group of parasites
– participants in the market who feed off its very inefficiencies and imperfections
and, by their very actions, enhance them. A vicious cycle ensues : the
body economic gives rise to parasitic agents who thrive on its imperfections
and lead to the amplification of the very impurities that they prosper
We can distinguish six classes of market impeders :
What could anyone do about these inefficiencies ? The world
goes in circles of increasing and decreasing free marketry. The globe was
a more open, competitive and, in certain respects, efficient place at the
beginning of the 20th century than it is now. Capital flowed
more freely and so did labour. Foreign Direct Investment was bigger. The
more efficient, “friction free” the dissemination of information (the ultimate
resource) – the less waste and the smaller the lebensraum for parasites.
The more adherence to market, price driven, open auction based, meritocratic
mechanisms – the less middlemen, speculators, bribers, monopolies, cartels
and trusts. The less political involvement in the workings of the market
and, in general, in what consenting adults conspire to do that is not harmful
to others – the more efficient and flowing the economic ambience is likely
Crooks and other illegal operators. These take
advantage of ignorance, superstition, greed, avarice, emotional states
of mind of their victims – to strike. They re-allocate resources from (potentially
or actually) productive agents to themselves. Because they reduce the level
of trust in the marketplace – they create negative added value. (See :
Shadowy World of International Finance” and “The
Fabric of Economic Trust”).
Illegitimate operators include those treading
the thin line between legally permissible and ethically inadmissible. They
engage in petty cheating through misrepresentations, half-truths, semi-rumours
and the like. They are full of pretensions to the point of becoming impostors.
They are wheeler-dealers, sharp-cookies, Daymon Ranyon characters, lurking
in the shadows cast by the sun of the market. Their impact is to slow down
the economic process through disinformation and the resulting misallocation
of resources. They are the sand in the wheels of the economic machine.
The “not serious” operators. These are people
too hesitant, or phobic to commit themselves to the assumption of any kind
of risk. Risk is the coal in the various locomotives of the economy, whether
local, national, or global. Risk is being assumed, traded, diversified
out of, avoided, insured against. It gives rise to visions and hopes and
it is the most efficient “economic natural selection” mechanism. To be
a market participant one must assume risk, it in an inseparable part of
economic activity. Without it the wheels of commerce and finance, investments
and technological innovation will immediately grind to a halt. But many
operators are so risk averse that, in effect, they increase the inefficiency
of the market in order to avoid it. They act as though they are resolute,
risk assuming operators. They make all the right moves, utter all the right
sentences and emit the perfect noises. But when push comes to shove – they
recoil, retreat, defeated before staging a fight. Thus, they waste the
collective resources of all that the operators that they get involved with.
They are known to endlessly review projects, often change their minds,
act in fits and starts, have the wrong priorities (for an efficient economic
functioning, that is), behave in a self defeating manner, be horrified
by any hint of risk, saddled and surrounded by every conceivable consultant,
glutted by information. They are the stick in the spinning wheel of the
The former kind of operators obviously has a character problem.
Yet, there is a more problematic species : those suffering from serious
psychological problems, personality disorders, clinical phobias,
psychoneuroses and the like. This human aspect of the economic realm has,
to the best of my knowledge, been neglected before. Enormous amounts of
time, efforts, money and energy are expended by the more “normal” – because
of the “less normal” and the “eccentric”. These operators are likely to
regard the maintaining of their internal emotional balance as paramount,
far over-riding economic considerations. They will sacrifice economic advantages
and benefits and adversely affect their utility outcome in the name of
principles, to quell psychological tensions and pressures, as part of obsessive-compulsive
rituals, to maintain a false grandiose image, to go on living in a land
of fantasy, to resolve a psychodynamic conflict and, generally, to cope
with personal problems which have nothing to do with the idealized rational
economic player of the theories. If quantified, the amounts of resources
wasted in these coping manoeuvres is, probably, mind numbing. Many deals
clinched are revoked, many businesses started end, many detrimental policy
decisions adopted and many potentially beneficial situations avoided because
of these personal upheavals.
Speculators and middlemen are yet another species
of parasites. In a theoretically totally efficient marketplace – there
would have been no niche for them. They both thrive on information failures.
The first kind engages in arbitrage (differences in pricing in two markets
of an identical good – the result of inefficient dissemination of information)
and in gambling. These are important and blessed functions in an imperfect
world because they make it more perfect. The speculative activity equates
prices and, therefore, sends the right signals to market operators as to
how and where to most efficiently allocate their resources. But this is
the passive speculator. The “active” speculator is really a market rigger.
He corners the market by the dubious virtue of his reputation and size.
He influences the market (even creates it) rather than merely exploit its
imperfections. Soros and Buffet have such an influence though their effect
is likely to be considered beneficial by unbiased observers. Middlemen
are a different story because most of them belong to the active subcategory.
This means that they, on purpose, generate market inconsistencies, inefficiencies
and problems – only to solve them later at a cost extracted and paid to
them, the perpetrators of the problem. Leaving ethical questions aside,
this is a highly wasteful process. Middlemen use privileged information
and access – whereas speculators use information of a more public nature.
Speculators normally work within closely monitored, full disclosure, transparent
markets. Middlemen thrive of disinformation, misinformation and lack of
information. Middlemen monopolize their information – speculators share
it, willingly or not. The more information becomes available to more users
– the greater the deterioration in the resources consumed by brokers of
information. The same process will likely apply to middlemen of goods and
services. We are likely to witness the death of the car dealer, the classical
retail outlet, the music records shop. For that matter, inventions like
the internet is likely to short-circuit the whole distribution process
in a matter of a few years.
The last type of market impeders is well known and is the
only one to have been tackled – with varying degrees of success by governments
and by legislators worldwide. These are the trade restricting arrangements
: monopolies, cartels, trusts and other illegal organizations. Rivers of
inks were spilled over forests of paper to explain the pernicious effects
of these anti-competitive practices (see : “Competition
Laws”). The short and the long of it is that competition enhances and
increases efficiency and that, therefore, anything that restricts competition,
weakens and lessens efficiency.
This picture of “laissez faire, laissez aller” should
be complimented by even stricter legislation coupled with effective and
draconian law enforcement agents and measures. The illegal and the illegitimate
should be stamped out, cruelly. Freedom to all – is also freedom from being
conned or hassled. Only when the righteous freely prosper and the less
righteous excessively suffer – only then will we have entered the efficient
kingdom of the free market.
This still does not deal with the “not serious” and the
“personality disordered”. What about the inefficient havoc that they wreak
? This, after all, is part of what is known, in legal parlance as : “force
There is a raging debate between the "rational expectations"
theory and the "prospect theory". The former - the cornerstone of rational
economics - assumes that economic (human) players are rational and out
to maximize their utility (see "The
Happiness of Others", "The
Egotistic Friend" and "The
Distributive Justice of the Market"). Even ignoring the fuzzy logic
behind the ill-defined philosophical term "utility" - rational economics
has very little to do with real human being and a lot to do with sterile
(though mildly useful) abstractions. Prospect theory builds on behavioural
research in modern psychology which demonstrates that people are more loss
averse than gain seekers (utility maximizers). Other economists have succeeded
to demonstrate irrational behaviours of economic actors (heuristics, dissonances,
biases, magical thinking and so on).
The apparent chasm between the rational theories (efficient
markets, hidden hands and so on) and behavioural economics is the result
of two philosophical fallacies which, in turn, are based on the misapplication
and misinterpretation of philosophical terms.
The first fallacy is to assume that all forms of utility
are reducible to one another or to money terms. Thus, the values attached
to all utilities are expressed in monetary terms. This is wrong. Some people
prefer leisure, or freedom, or predictability to expected money. This is
the very essence of risk aversion: a trade off between the utility of predictability
(absence or minimization of risk) and the expected utility of money. In
other words, people have many utility functions running simultaneously
- or, at best, one utility function with many variables and coefficients.
This is why taxi drivers in New York cease working in a busy day, having
reached a pre-determined income target: the utility function of their money
equals the utility function of their leisure.
How can these coefficients (and the values of these variables)
be determined? Only by engaging in extensive empirical research. There
is no way for any theory or "explanation" to predict these values. We have
yet to reach the stage of being able to quantify, measure and numerically
predict human behaviour and personality (=the set of adaptive traits and
their interactions with changing circumstances). That economics is a branch
of psychology is becoming more evident by the day. It would do well to
lose its mathematical pretensions and adopt the statistical methods of
its humbler relative.
The second fallacy is the assumption underlying both rational
and behavioural economics that human nature is an "object" to be analysed
and "studied", that it is static and unchanged. But, of course, humans
change inexorably. This is the only fixed feature of being human: change.
Some changes are unpredictable, even in deterministic principle. Other
changes are well documented. An example of the latter class of changes
in the learning curve. Humans learn and the more they learn the more they
alter their behaviour. So, to obtain any meaningful data, one has to observe
behaviour in time, to obtain a sequence of reactions and actions. To isolate,
observe and manipulate environmental variables and study human interactions.
No snapshot can approximate a video sequence where humans are concerned.