By Gagandeep Ghuman Published: Oct 17, 2016
THE recent provincial tax on foreigners buying property in Canada so that runaway housing prices could be checked and kept affordable reminds one of the famous opposition between two branches of economics, the one which advocates free play of market in which opposing forces naturally create a balance and another which advocates government intervention to create balance or entirely control the economic forces.
By and large, we have seen, the state control over economy has proved disastrous. Look at Cuba and what remains of the USSR. I won’t even talk of North Korea. The idea that market must be controlled and shaped by regulation is unnatural since demand and supply have an interfashioning that tends towards balancing sooner than later.
Adam Smith, the father of modern economics, proposed the idea of a rational market controlled by “an invisible hand”. The market itself finds a solution to its own problem. For example, unemployment makes market reduce wages to a level where employers start to hire people again.
Put a few greedy men into a free, uncontrolled market. Let them lustily follow their greed for profit. An invisible hand will guide them to produce the greatest good for all. That’s what Adam Smith said. A free market, because of inherent competition, always settles for the right price and right distribution of goods. He famously said, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” Self-interest in the market promotes competition, innovation and leads to better goods and services.
Put a few greedy men into a free, uncontrolled market. Let them lustily follow their greed for profit. An invisible hand will guide them to produce the greatest good for all. That’s what Adam Smith said. A free market, because of inherent competition, always settles for the right price and right distribution of goods. He famously said, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” Self-interest in the market promotes competition, innovation and leads to better goods and services.
However, the classical idea of a self-correcting, self-regulating free market and all its attendant axiomatic certainties is not always correct. After the Lehman Brothers’ crash in 2008 which triggered a long global financial crisis, the idea of unfettered markets took a beating. Markets were up to big mischief and no one knew. No force could prevent the meltdown.
But we have seen that the most successful economic model to emerge so far is capitalism, the free market. Governments can at best guide the market towards freedom when it seems to be bound by unnatural factors. The best we can do to keep housing affordable is not to discourage high-priced sales but to encourage building of cheaper houses. If the market has a dearth of stock, encouraging more stock is the solution.
David Lassmann says
There is a reason for referees and umpires in ball games and there is likewise a need for government and regulation in business. What society ever existed for any length of time without some sort of law and order? I have just finished reading Noam Chompsky’s book Failed States: the Abuse of Power and the Assault on Democracy. Many questions come to my mind.
Frank Manuel says
The "invisible hand" theory simply doesn't wash. What we are observing is the rise of a corporate police state run by bullies. SLAPP suits and "visiting" foreign workers require government intervention to keep protest alive, and to ensure that workers in this country can seek work with a living wage.
Wolfgang W says
Here is ‘The Economist’ quoting approvingly Yegor Gaidar, the architect of Russian economic reforms in the nineties, in its most recent issue:
“A market does not answer the key question of who is supposed to benefit from the results of economic production; it can serve different social structures. Everything depends on the distribution of property and political power.”
Precisely!
Frank Manuel says
Precisely, indeed. Paying employees a pittance while stuffing scads of money into tax havens certainly does not benefit many.
Frank
Charudutta Jena says
Hi Gagan,
I like your example of the government providing economically viable alternatives in housing, instead of controlling prices. Such measures do present a compelling case for the government being an equalizing force by being a player, itself, in a capitalist ecosystem. However, for a solution like this to become reality, governments need to become much more agile and accountable in the way they operate, and create truly profit-based business models, which can sustain themselves in a competitive environment, with minimal or no dependence on taxes.
Charu