Free market myth

August 08, 2019


The writer is a chartered accountant based in Islamabad.
The writer is a chartered accountant based in Islamabad.

THE realisation that conventional economic wisdom, seeped in the myth of the free market, will be extremely antagonistic towards any solution based on protectionism and planned industrialisation, stipulates a bit of digression.

Scope limitation: the discussion hereunder is based on pure common sense sans any political bearing, with the simple objective of discussing alternative options for economic growth; those who know it all already need not read any further.

Whilst conspiracy theories may explain the ‘why’, it is indeed mind-boggling ‘how’ the world was sold an idea, ie free markets, which has nothing to do with reality. Essentially, you need the long arm of the government to even enforce the rules of the market, including breaking cartels for countering undesirable social outcomes.

My personal favourite from the net is, “You’ll find a unicorn before you find a free market”!

Perfect competition in free markets, even in theory, inevitably eventually results in an oligopoly or monopoly, as in the case of Coke and Pepsi.

‘You’ll find a unicorn before you find a free market.’

More to the point, how many genuinely believe that any domestic cola manufacturer has any chance of ever taking market share from Coke and Pepsi in Pakistan; and this has nothing to do with quality or free markets!

Capturing the market for coloured aerated water has only to do with deep pockets!

This example is easily applicable to our case study, the imported can opener. To recap my observations in another article, because of free markets, Pakistan had started importing can openers which were cheaper and shinier than the domestically manufactured can opener. However, with the rupee depreciating, the Pakistani can opener might have become cheaper, but the domestic facilities have closed down and we probably have lost the skills to manufacture a can opener during this time.

At this point, foreign manufacturers will go to any lengths to scuttle any new initiative for the domestic manufacturing of can openers; dumping and price war are just the tip of the iceberg. The home country of our foreign manufacturer of can openers may probably even oppose Pakistan in the UN Security Council, just to apply pressure to protect their manufacturer’s interests!

Is that voluntary trade?

Here the free market proponents argue that voluntary trade is beneficial for both parties. They argue that purchasing, say, a Coke, demonstrates that the purchaser values a fizzy drink more than the money in his pocket, and hence should have the right, and the choice, to spend his money as he wants.

There is nothing wrong with that statement. However, no person, with even a tiny bit of common sense, is expected to borrow every day to drink a Coke, if he cannot afford to pay back that debt.

In the case of a nation, government is the repository of common sense of the populace; so how does borrowing in dollars to pay for Cokes every day for 207 million people make any sense? How is getting burdened with external debt mutually beneficial trade?

And here we come to comparative advantage theory which basically argues that nations should only produce and export items where they have a comparative advantage. Notwithstanding that most developing nations can only have a comparative advantage in raw materials or basic manufacture, let us for a minute be practical.

Under this fantastic ‘all else being held constant two-nation-two-products comparative advantage’ theory, Portuguese winemakers would be re­­quired to stop making wine, since London’s winemakers have some sort of advantage over them. But why would Portuguese winemakers, who can still make cheaper wine, and perhaps better tasting wine, stop producing wine, which they can easily sell in Portugal, and start making cloth when they are clueless about the cloth trade ab initio?

The Portuguese government could force them out of the wine business, but then we really are not talking about a free market, are we? And where is the guarantee that after a few years, when the last of the Portuguese winemaker has passed away, London winemakers will not suddenly start charging double? After all it is a free market. Portugal both now pays double and borrows to drink wine, or it does not drink wine since it cannot afford it. What in your opinion should Portugal do?

Here the free trade theory argues that free floating currency will increase the competitiveness of Portuguese wine; but the last winemaker is already dead!

As in our can opener example, we have forgotten how to make can openers; the problem is that if all our food is in cans, then we will be forced to borrow and buy more expensive can openers.

But the music will eventually stop! It always does. So where do we get the can openers from?

The writer is a chartered accountant based in Islamabad.

Published in Dawn, August 8th, 2019