The Free Market It’s just an idea, but it changed the world forever

Some markets we can see But most are a mystery

How markets work “A market” – one good/service “The market” – all markets in economy Market forces - Demand and Supply Price – moves automatically Price is a signal distributing resources

Before free markets - Intervention is normal Market intervention existed as long as trade Wealth of nations: – Conquest – Land and gold – “wise rulers” Wealth of men: know the chief (or become chief)

The idea: “The free market” First detailed theory of how markets work Central idea: Free market optimal way to allocate resources, (i.e. free markets grow faster) Changes the whole discussion of how to run a country. “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.” – Adam Smith, The Wealth of Nations, 1776

The idea: We can measure market freedom empirically Which goods can be traded? How many regulations/taxes, how much government intervention/supply Measure speed of growth, gains from trade and market failures (more later) Freer markets do grow faster

The idea: Paradigm Shift of political thinking Classical liberal: all markets free Social liberal: most markets free Conservative: don’t change Socialist: most markets controlled Communist: all markets controlled Developed as reaction against free markets

The reality: How free markets took over countries Freer markets grew faster – Competition – Learning – Complexity Increased business influence – Push for free markets to extend further. Cut regulations, allow markets for land, capital etc.

The free market countries got rich – Start with UK, Holland – Some copied and caught up (Germany, USA, Japan) – Others were taken over (colonialism, CIA) – Internal collapse of communism (1980s+) Free market countries are more stable – Democracy – Peace The reality: How free markets took over the world

Heritage foundation Includes Size of government, legal economic security, access to finance, freedom to trade, regulation of credit and labour, Map of ‘Global Economic Freedom’

Three features of free markets 1.Grow fastest 2.Need strong institutions – Like a vacuum, the free market needs support to exist – Minimum: keep law and order, enforce contracts, property rights – Further: Deal with market failure 3.Market failure

This is not market failure Business cycles“Creative Destruction” Source: google search…..

This is market failure Public goods – Infrastructure – Information “Externalities” – Mispriced resources – Education/health – Environmental destruction Monopolies Inequality?

The free market in Guyana Socialism 60s/70s Jagan and Burnham both socialists Did not grow economy sucessfully Liberalisation 80s/90s Privatize Reduce trade barriers Simplify tax and regulations (e.g. VAT reform) New institutions (e.g. Competition Authority)

The free market in Guyana (1) 1.Free markets grow faster: Growth can improve many things in society Growth is learning: hard work, risk-taking, innovation We can’t predict the future engine of the economy (but it’s not sugar!) Source: Calculations from Bank of Guyana 2013 annual report

The free market in Guyana (2) 2. Free markets need institutions: - Strong Guyanese institutions for Guyanese markets - Some reforms to boost growth are simple - Engage World Trade Organization (WTO), CARICOM Sources: Global Competitiveness Index , World Bank Doing Business Index 2014

The free market in Guyana (3) 3. Free markets fail: - Crime/pollution, education/healthcare - same problems as everywhere - “Resource curse”: Guyana specific - Global market failures: LCDS is visionary

Questions for the global future Market design Market access Market failure Limits to markets Co-operatives Global institutions

Economics is for everyone… Top Popular Economics Books The Undercover Economist (Tim Harford) Naked Economics (Charles Wheelan) Also Why Nations Fail (Daron Acemoglu, political economy) Small is Beautiful (E.F. Schumacher, environmental economics) Economics: The User’s Guide (Ha Joon Chang, “heterodox” economics)