Commonwealth Bank [ASX: CBA] released its full year results this morning. We’ll take a look at the numbers today and comment tomorrow. The one thing we did notice is the increase in total provisions for loan impairment is “large.”
That’s CBAs way of expressing it on their balance sheet. They’re right. But if you use percentages as most people do, then bad debt provisions have increased by 187% since the same period last year!
We’ll have more on that tomorrow.
Anyway, by now you may have gathered that your editor is in favour of a free market economy.
We believe that a free market economic system is the only viable solution for any economy. Amongst other things, it provides individuals with freedom of choice, it eliminates the influence of vested interests, and it offers fairness and equality of opportunity to all.
All those things are impossible in a command or mixed economy.
However, despite a free market being the truest form of liberty, there are many misconceptions about what it is. For instance, your editor receives a number of emails such as this one that came into the Money Morning mailbag yesterday:
“Dear Sir,
“I’m sick and tired of your fanatical right wing tripe. If you clowns ran the show, we really would have a DEPRESSION. It was your gurus, George W, along with suckhole Johnny and his cronies that lead us down this path. Please remove my details from your mailing list. REGARDS Gary”
It’s often claimed by many that the whole problem, the whole reason, why the economy went through a meltdown is due to the ‘free market.’ This is not true.
In fact, we actually agree with those commentators and individuals who blame the excesses of the last twenty years for the meltdown. The problem we have is the label that’s been attached to those excesses.
Let’s get this clear, the last twenty years under various Australian Prime Ministers and US presidents has not been a free market. It has been – in broad terms – a mixed economy.
John Howard, Paul Keating, and George W. Bush did not believe in free markets. They all believed in promoting their own vested interests and those of their buddies.
But the fact there is no fixed ideological label should tell you that ‘mixed’ is the wrong word. It should be ‘mixed-up’, or perhaps, a ‘messed-up’ economy.
Before we offer a brief and by no means thorough analysis of what a free market is, let’s just lay out the type of economy we have at the moment. Well, for a start, it’s the same economy we’ve had for the last twenty or thirty years.
And in some ways it’s little different from the economy of seventy or eighty years ago – just with more leverage!
It’s an economy where the average wage earner pays about 21% of their salary in direct income taxes – that’s the average ‘Aussie battler.’
It’s an economy where the average wage earner pays at least another 10% of their salary in indirect taxes such as GST, fuel excise, vehicle registration, etc.
It’s an economy where monopolies and duopolies are rampant, and where competition regulation actually encourages monopoly behaviour.
And it’s an economy where vested interests are rewarded at the expense of the individual.
Look, I’m not just having a crack at the Australian market here. You can take those four points, change the numbers slightly and then apply it to the US, UK, Europe, Venezuela, Zimbabwe, China, almost anywhere.
But what about the idea of a free economy? Isn’t that where it’s all Gordon Gecko types? Isn’t a free market about the “winner takes all” and “dog-eat-dog” mentality?
Actually, it’s not. You see, it is actually in a mixed or command economy where the “winner takes all.” And it is definitely in a mixed or command economy where a “dog-eat-dog” mentality prevails.
“Oh, well, that’s just not true” some may argue, “without rules and regulations and taxation, people would be on the streets or thrown to the wolves. It would be mayhem.”
Again, that’s another common misconception about the free market – that it would be a lawless society of gun-toting pinstriped executives ripping off pensioners and kicking away their walking frames.
So let me address that first before we take a look at the “winner takes all” myth.
We won’t go into any depth on the application of the law here, but to put it simply, a free market and free society just requires a simple set of laws that protect the rights of the individual, that protects private property, and ensures that the state is unable to legislate to persecute an individual or groups of individuals.
You only have to look at that basic list and then glance at any mainstream newspaper or look at the legislative programme of governments or even just walk down the street to see daily occurrences of these rights being impinged.
The plain fact is that a truly free market society is the only way to uphold fair laws.
So, now we’ve got that out of the way, what about those “winner take all” free marketeers?
Again, this is another fallacy. And it’s easy to disprove.
In a truly free market the “winner” would be unlikely to “take all” to begin with. With no meddling or interference from the government, and no power for vested interests to influence legislators, there would always be competition in the market.
New businesses would be able to quickly and easily bring new innovations to the market that would pose competition to established players. This would naturally ensure that price pressures are forced down – it would be price deflation, you know, that dreaded economic phenomena where somehow cheaper prices are bad for you!
Of course, price deflation at the retail end would have price deflationary impacts on the supplier end too, until an equilibrium price is reached. Importantly, it would not lead to prices going to zero, as deflation worry-warts claim.
Think about it. If prices went to zero then no-one would produce anything, yet demand would be infinite, therefore the price would have to rise again to encourage businesses to produce.
Anyway, this means the winner doesn’t take all the spoils in a free economy. Even if it did reach a point at which there was a private monopoly, two things would happen. Either the monopoly would be so fearful of losing their market driven monopoly that they would have to keep prices low in order to keep out competition, or…
The monopoly would try to take advantage of their position by raising prices. In which case another entrepreneurial business would identify the opportunity to undercut the monopoly and charge lower prices to attract customers.
It is much harder for this to happen in a mixed or command economy. The way it stands now is that the “winner” does take all the spoils. Or even worse, a duopoly is formed that gives the appearance of competition.
A duopoly in a mixed economy simply allows two companies to corner the market. They are much less likely to cut prices in case they trigger a ‘price war’ – surely you’ve heard that phrase.
Even when they do cut prices it only provides a short term benefit to the consumer. In reality, all it does is shuffle the customer base. That’s because of the barriers to entry. Regulations and red tape helps prevent new competition from entering the market.
And therefore a duopoly is maintained. But even higher prices rarely help competition as new entrants are still burdened by red tape, plus the higher prices encourage those with a higher cost base to enter the market which again limits the opportunity for price deflation.
In a nutshell, if you’re outraged at the excesses and incompetence of politicians and business people over the last twenty years then that’s fine – we are too.
But it’s important the blame is pointed in the right direction, and that is towards the corrupt and ideologically vacuous ‘mixed economy.’
It is not a free market that has caused the current problems, and neither will the free market be the cause of the next wave of problems to strike the banking and property sectors.
Other Stuff on the Markets
The S&P/ASX200 added 0.65% yesterday, while overnight on Wall Street the Dow Jones Industrial Average slipped 96 points. In Europe the FTSE100 dropped 1.08% and the CAC40 lost 1.38%.
The price of gold in Australian dollars is trading at $1,141.55, while in US Dollars it is trading at $946.68.
The Aussie dollar weakened versus the US dollar and Japanese Yen, trading at USD$0.8288, and JPY79.62.
Crude oil closed weaker overnight at USD$69.45.
For the biggest movers on the market yesterday click here…
{ 1 comment… read it below or add one }
You say “a free market and free society just requires a simple set of laws”. What are these laws? Where can I read them?
As an example could you tell me what would be the age of consent and legal age for prostitution under the free market. Currently government sets these at age 16 and age 18. This seems rather arbitrary and restrictive to me. What would they be in your free market and free society?