At present the financial climate of the world is very fragile. Things keep getting from bad to worse in Europe. The US economy is not showing sign of recovery as yet. The fortunes of Japan today are no better than it was a decade ago (still in a recession). The India Shining story is losing its luster as stories of a new scam replace the story of an old one. And there are even signs of a significant slow-down taking place in China.

A question that is asked often is around how this happened? The usual answers assign the blame to human greed and unbridled free-markets. Hence there are calls for regulation and reform in financial and labour markets, education, taxes, infrastructure, healthcare, about protecting those who are vulnerable… and just about everything that free market capitalism failed at.

However there is a fallacy. You think that we have free markets? But that is wrong. Under free market capitalism people are free to do business as they wish with whom they choose – as long as they do not initiate force on other people or their property. In a true capitalism society no group should get any special treatment or privilege over the other. Finally, free markets are exactly what the name suggests i.e. market forces operate freely in the absence of any external interference.

However the fact of reality is that what we have is the opposite of what a free market should be. We don’t have free markets… we have highly manipulated markets.

You think businesses can run freely? There are thousands and thousands of rules that dictate what businesses can be set-up and what cannot. There are regulations around how businesses should be run, what prices can be charged and what workers can be paid. Then there are approvals, registrations and licenses that need to be taken for each type of business. Just about every country in the world has a large public sector. Not only does the government participate in the market process, it also interferes with the functioning of the private sector. Often governments grant a monopoly to one firm or the other. Governments also subsidize favoured producers and uses tariffs and quotas to reduce imports with the view of protecting the interests of domestic producers.

You think everyone is treated equally? On one extreme you have the welfare ideal under which it is supposed to be the duty of the government to look after those who are underprivileged (the vote bank). This entails grants, subsidies and special privileges to preferred group at the benefit of others. On the other extreme you have many cases where government directly manipulates prices and production and provides privileges to one (politically favoured) group over the other. In certain cases it has bailed out unprofitable private enterprises. In this sense people in similar situations are treated differently. This is not a hallmark of capitalism… in fact this is what is called crony capitalism.

You think free market forces run in the absence of any external interference? The government intrudes into almost all the financial affairs of its citizens through interventionism. A pre-requisite of free market capitalism is sound money. However also every economy has a Central Bank which regulates the money supply. Every time a central bank prints a new bank note, it reduces the value of all bank notes floating around in the economy causing inflation. Printing of money out of thin air is the only cause of inflation in the economy. Economist David Hume first put forward this theory in 1752 – and even today this relationship has stood undisputed by all economists. Not only does continuous printing create inflation, it also interferes with the interest rate mechanism presenting a distorted picture of economic reality to businesses and individuals resulting in economic bubbles.

And ironically people still believe that financial problems are caused because of free markets. Actually the person who summarizes it the best is economist Jeffrey Tucker who states:
“So you can take a market and beat it, tax it, regulate it, subsidize it, flood it with fake money, punish its performers and reward its losers, hobble its capital sector, strangle consumers, nationalize stuff at will, and erect every barrier to trade and cooperation, and STILL call it a market. When the scheme fails, it’s the free market that failed, so clearly we need the totalitarian state to sweep into action”.
This is where the problem starts. It is only with sound economic thinking can you make sense of what is really going on in the world. If fact if you were to put in the time and effort to learn and understand how markets work there is no way in which you would cast your vote for anything other than free market capitalism.

This is what I have done. I urge you to do the same…

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