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Predatory free markets make world a risky place

FOR the past couple of years, I have reviewed quite a few books on economics and management.

If I were asked what impressed me most, I would say their sheer volume, verbosity and lack of true insights.

The human condition would most likely improve without most of these volumes.

There are exceptions.

"The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too" by James K. Galbraith is one of them.

The book resists being bogged down in standardized, arcane economic concepts and seeks to explicate how these concepts play out in reality.

It does not provide answers, nor real solutions, but it has the potential to help you think on your own.

Galbraith wrote the book at the suggestion of his father, noted economist John Kenneth Galbraith.

The author accuses US liberals of adopting principles dropped by conservatives, and of genuflecting to market supremacy.

But the liberal-conservative debate has long been confusing, and distracting.

Etymologically, "liberal" means "befitting free men, noble, generous," but in the United States "liberalism" means, among other things, some regulation of business and other economic intervention, though "classical liberalism" espouses Adam Smith's faith in laissez-faire economics, which then gave rise to modern American conservatism.

US president Ronald Reagan, a self-proclaimed conservative, said, "I believe the very heart and soul of conservatism is libertarianism."

Only when we avoid the mind-boggling caviling at isms can we start really meaningful discussions.

The author debunks the myth of markets by pointing out that they aren't well-prepared for the future and they do not allow future generations a voice in present decisions.

This observation is important in that if we allow the voice of future generation to be heard, economists' fondest concepts - GDP growth and prosperity - would have to be recast in a very dubious light.

In characterizing the US housing market, the author says, "The housing finance system would eventually take on Ponzi characteristics, meaning that a continuing rise in home prices would become necessary ... to service the debt assumed following previous increases in the price of homes. Clearly, if it ever stopped, there would be trouble."

Can we say the same about the steady economic growth and expansion envisioned by politicians and economists?

Another inherent contradiction confronting us is increasing economic inequality in the US and the rest of the world, as wealth becomes more and more concentrated.

Increasingly, fabulously high pay is awarded to those engaged in arcane "engineering" (financial or otherwise), while those who actually have their hands soiled by work are generally paid subsistence wages.

These facts suffice to refute the belief that the market arranges the optimal definition of values and the best allocation of scarce resources.

China has recently abandoned its market-orientated health care system by reasserting its public service mission. But since important components of the sector have already been privatized, it is a serious challenge to prevent public resources from being diverted into private interests.

Another important observation from the author concerns free trade and comparative advantage.

David Ricardo entertains the notion that if countries specialized in producing the goods to which they are best suited and traded them freely, everyone would benefit.

This is wrong, because determining which countries are best positioned for any particular kind of production is impossible.

It also fails to take into account the structural imbalances induced.

For instance, cheap imports into the US results in a long period of low inflation, easy credit, and disastrous bank loans.

Cheap exports from China also force mass migration of Chinese peasants to the manufacturing deltas on the coast.

For the time being, the tremendous socials costs - social dislocation, family disintegration, lack of social welfare, a deteriorating environment - all contribute to China's competitive advantages.

It is a pity that the current crisis does not heighten our awareness of these costs.

Instead the whole Earth is resonating with clamors for bailouts and stimulus.


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