Free Markets

Following the financial crash, there is much bloviation on the subject of free markets. While markets are clearly better than the alternatives, they suffer from defects even though far too many right wing politicians seem to suffer from the delusion of market perfection.

For markets to work effectively, honesty and transparency are essential. Whether those conditions can actually be achieved without government regulation is doubtful given the market power of large corporations. Then, too, there is the very human tendency to feel little obligation to engage in ethical and honest behavior when a stranger, specially one with little ability to take effective revenge after being wronged, is the other party to a transaction.

Given the imperfections of markets, some level of government regulation is essential but it should be light and, to the maximum extent possible, based on principles rather than detailed rules. Penalties for those proven to be doing the wrong thing should be draconian: starting with jail without parole for executives and dissolution for corporations

The principal objective of government regulation must be to keep market participants honest and the playing field level. Keeping the players honest includes insistence on full disclosure in order to avoid excessive asymmetries of information. Much of the reason for the contempt in which we hold old style used car salesmen is because of their reliance on such asymmetries for a large part of their income.

Regardless of the government's skill in creating and enforcing regulations without inflicting excessive costs or reducing the benefits of free markets, there is a major imperfection that will never resolved: that is the all too human tendency to refuse to read the instructions or the fine print. Effective government regulation is not a good reason to believe that fools will be protected from crooks and con men. Although government can, to some extent, deter fraudulent and dishonest behavior, there are no guarantees.

Unfortunately, the increase in rules based regulation has often made it possible for the unethical and dishonest to follow the letter of the law while making it hard, even for a sophisticated market participant, to detect the wrongdoing. Those who refrain from caution and vigilance will soon relearn, the hard way, that a fool and his money are soon parted and that if something seems to be too good to be true, it probably is.

Free markets are good but participants must always keep in mind the old adage: caveat emptor (buyer beware).