Tuesday, 3 June 2008

The Best Book on the Market

At the Adam Smith's Lost Legacy blog, Gavin Kennedy offers us a review of the book by Eamonn Butler, The Best Book on the Market: how to stop worrying and love the free economy, 2008. Capstone Publishing (a Wiley company), Chichester, ISBN 978-1-906465-05-6.

Kennedy opens his review by noting
This is a 'lightweight'book – only 160 pages including the index – but it delivers a heavyweight message about markets.
Kennedy goes on to say that a number of economists don't actually understand how markets actually work. He writes
Partly, this is because many modern economists have never really studied what makes real markets work. They have won Nobel Prizes, professional acclaim and tenured appointments with publications galore in how markets work in their mathematical world that is devoid of human beings with all their foibles and ill-defined ‘laws of motion’. They should be early readers of the ‘Best Book on the Market'.

In fact, many of them do not believe in markets at all and spend considerable time castigating markets in their lectures, articles, media appearances and conferences, in between their assaults on the political systems they live under, joined by assorted refugees from the collapse of Marxism who have re-surfaced on the wilder shores of the environmental movements.
One only has to look at the likes of Joseph Stiglitz to get the point. Ronald Coase argued against such a view of economics. He has written
What is studied is a system which lives in the minds of economists but not on earth. I have called the result "blackboard economics". The firm and the market appear by name but they lack any substance. The firm in mainstream economic theory has often been described as a "black box". And so it is.
Coase, of course, won his Nobel Prize for pointing out that one thing missing from many of the models in the "mathematical world" is transaction costs.

Kennedy continues by pointing out that these economists need to get out more.
A visit to places where markets are not allowed to work would do wonders for their sense of priorities. Even memories of state-run Britain before Mrs Thatcher’s privatisation programmes (unfortunately blemished by transforming many of them into private monopolies) would stabilise their fantasies about their compulsion to regulate everything, and their passion for controlling the ‘commanding heights of an economy'.
He notes that
Eamonn Butler brings his book to life from the opening paragraphs and lets the reader soak up the vibrant culture of humans in their pursuit of what Adam Smith called their ‘propensity to truck, barter and exchange’.
And also that
Those who have been to China will recognise the ubiquitous street market and the people in it that he describes; he also returns to thoughts about future for the ‘black- haired Lanzhou seamstress’ who fixed his trousers and who probably was working long hours in ‘some sweatshop’ to raise money ‘to run her own business’, which would ‘raise her and hundreds of millions like her out of poverty’.

And it will be markets, not politicians who will bring the great transformation about.
This is a point with which, I'm sure, William Easterly would agree: see here and here, for example.

Kennedy writes that
Markets began in exchange, the division of labour and specialisation. Eamonn Butler develops this theme, using Adam Smith’s example of the manufacture of the common labourer’s woollen coat, to highlight the ‘great multitude’ of labourers, involved in spontaneous virtuous cycles that enhances the productive powers of labour, that reduces unit costs of inputs along the lengthening supply chains of output, and moves steadily to opulence as more workers are hired for rising real wages.

Butler notes how prices act as signals to self-interested individuals who learn to serve their own interests by serving the self-interests of others. Markets are not one-way streets, in which one gets all the benefits and the other gets what she gets. Market exchange is a two-way street, in which each gets something they value more than what they give to the other to get it. Otherwise they would not participate, which is the one great universal ‘law’ of markets.

Nobody does other than what they volunteer to do. The author shows how markets operate and why they are a superior and natural arrangement that is embedded deep in the psyche of all humans who participate in them from childhood onwards.
Overall Kennedy says
In nine short chapters or from 12 to 20 pages each, Eamonn Butler takes the reader on a tour de force around the realities of markets, providing practical guidance to markets, much of it excellent material for lecturers at all levels to students on all ages and politicians of all views, as well as those on the multitude of single-issue campaigns, Quangos, NGOs, regulatory bodies, and charities across Britain.
My copy of the book is on order and I'm looking forward to its arrival even more now.

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