At the moment in Britain you can get a mortgage, in pounds, at a fixed rate of 5% for five years. If the government wants to borrow money then they have to pay 5.3% for five years.
This does not just imply, it insists that Mr and Mrs Smith, just down the road in 22A, are a better credit risk than the British government. This could be true, it could be that prices are a little out of step with each other.
But that this is happening is setting off a large amount of shrieking about the “bond vigilantes.” From one side this is being applauded -- “the markets” are restricting the ability of the government to borrow and spend so much money.
From the other side, this is being whined about, that the markets are restricting the ability of the government to borrow and spend so much money.
We can take whichever side we'd like there, a welcome insistence upon economic reality or that denial of democratic choices.
But to understand economics a little more, we need to understand that there are no such bond vigilantes. Nor is “the market” anything other than a useful shorthand. There is no controlling intelligence here. There are no central orders being handed out to make these prices move as they do.
To think that there is that centre is to fall prey to “reification.” This is more normally used in Marxism and means “to make a thing of.” There they complain about -- ah, who cares what the Marxist misunderstand. The concept is still a useful thought. We must be careful not to allow simple phrasing to mislead us into thinking a thing exists.
Yes, we talk about the markets. But they're not a single thing at all. They're just the interactions of the actions of millions, tens of millions, of individuals. Yes, it's possible to talk about bond vigilantes. It's a useful little shorthand, possibly even an imagery. But they're not a thing at all.
The final prices in a market are simply the average at which all of those millions of interactions have happened at. That’s all they are too. There is no centre controlling them. There most certainly is no one investing, or not investing, in government debt because they want to teach them to be reasonable.
Or not spend so much. Or for any political reason at all. There are simply people making their own individual decision of where to put their money. So, the price of government debt changes until enough buyers are found for the amount to be sold.
If you don’t like those market prices then it’s those considered opinions that need to be changed
That really is it -- no vigilantes and no single unified market. Just that aggregation of all of the individual decisions about prices, quantities, and so on.
Now when we write up the reporting pages on this, or even just sit and think about it, those images and phrases are fine. When the distinction becomes important is when we start to think of what to do next.
If we believe there's something, that reification, responsible for our problems, then we'll think that we can change that one thing and all will be well. Control the markets, do something to the bond vigilantes.
But when we properly understand this, we then realize that in order to change the outcome then, we have got to change the individual decisions of millions of people. That's something rather more difficult to do centrally, by the law, or press releases, or shouting at people.
In order to change all those millions of decisions we've got to change what we're actually doing.
Say, borrow less money. Which we could do by spending less or even taxing more. Or we could agree to pay the higher price for the borrowing if that's what we want to do. But because there is no single actor changing prices against us, there is no single person, or reification, that we can blame.
This is true of this specific example but it's also true more generally. “The market” isn't a thing. It's the considered opinion, expressed by their actions, of everyone else out there.
If you don’t like those market prices then it’s those considered opinions that need to be changed. Or, of course, you just have to put up with those prices that result from the accumulated wisdom of everyone else out there.
Tim Worstall is a senior fellow at the Adam Smith Institute in London.
