• Tuesday, Aug 20, 2019
  • Last Update : 01:11 am

No wonder producers hate free markets

  • Published at 12:58 am December 9th, 2018
The price drop is a self-correcting mechanism BIgstock

They don’t want to endure the healthy competition that could lower their profits

The rice crop is good this Aman harvest up in Hili, so the farmers must be looking forward to a good income, right? On the other hand, prices for paddy from the Aman harvest up in Hili are lower than last year, so farmers are unhappy about lower incomes, right? 

The thing is -- both of these things are entirely correct, which is the reason that people really hate market economies so much. At least when they’re the producers of things that is. You work hard, the weather and universe conspire in your favour, and yet you make less money? Pah!

Yet this is true, we’re told of how the yield is high, the weather was good this season, the pests stayed away, farmers have plenty of paddy to sell. Further, that the price is lower than last year so incomes will be down. In fact, prices are below operating costs for most to many farmers, meaning they’ll be making a loss from their labour and land this season.

As I say, no wonder producers of things hate free markets. For the small scale farming of a commodity like rice is about the closest any of us will ever come to observing a true free market in operation. There’s an Australian economist called Steve Keen who insists that no such free market has ever existed and he’s right. 

Yet, he misses the point that we get close enough to that perfect model at times. Like when we’ve tens of thousands to millions of small scale -- a hectare, maybe two -- farmers all growing the same crop. One the other side, we’ve tens of millions of households all looking to consume that same commodity crop. This is about as close as we’re ever going to get to the model’s conditions of perfect competition.

Yes, obviously, there are dealers and brokers in the middle here, those who store, transport, mill, package, and so on, but there’s really little to no market power attributable to them. A near unlimited number of producers, a near unlimited number of consumers, we’re as close as we’re going to get to the infinite numbers the academic model assumes.

What happens in such markets being obviously what makes so many people like them. For us consumers out here they work just fine of course. We get things cheaper and in more variety than any other system would ever produce. 

But producers? Look what has happened here. The farmers have worked hard, as always, had good luck, as always doesn’t happen, and yet their incomes are going down! In fact, the price drop has been such that it looks like they’ll be making a loss on their crops. 

This being exactly what makes the market such a great system for us consumers of course. No, not that farmers make a loss, but that we’ve a self-correcting mechanism here. If that supply glut causing prices to fall continues then some people will just stop producing. Which is exactly what we want to happen anyway. 

We’ve too much of whatever thus we want less produced; markets perform that activity for us.

Equally, if prices are high enough to produce good profits, then more people will chase those profits by producing and prices come down again. Hey, the system works.

But, there’s always that but, isn’t there? The people having to do the producing really don’t like it, which is where much of the opposition to free markets comes from -- the people who don’t want to be exposed to these vagaries.

This is why we should always be looking very closely at demands that markets be curtailed, closed, managed. When we observe properly, we can find who it is that hopes to benefit from those restrictions. 

For example, there’s a government scheme to purchase paddy. This means that the farmers do get higher prices. But who pays? We do. Either we have to pay more when the government sells the rice, or if we don’t we’ve got to pay the taxes to fund the government scheme -- and any losses it might make as well.

There are more subtle versions as well. Say, the idea that there should be regulations on who can drive a taxi. OK, seems fair, we’d like people to be safe after all. But such regulations almost always include a limit to the number who may drive a taxi or rickshaw, meaning prices to us consumers are higher than they would be without the regulations.

Or the Americans have the Jones Act -- this says that cargo between American ports must be carried by American owned, American built, and American crewed ships. The idea is to make sure that there are some American ships if war breaks out. The effect is to make all shipping between American ports very much more expensive and yes, of course, it’s consumers who pay.

The underlying point here is that it is producers who tend to undermine free markets. Their aim is try to ensure that they don’t have to endure the competition which pushes down profits, thereby making sure that their profits remain nice and high. 

For us consumers it’s the other way around, we positively desire that competition which benefits us so much. Thus, when we’re offered a restriction upon markets, our first question needs to be, well, which producer is trying to benefit from this?

Sometimes it’s even worth having the restriction, but that’s a rare, rare, occurrence.  

Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.