excerpts from BIONOMICS: Economy as Ecosystem
by Michael Rothschild

Chapter 24, "Rules vs. Prices"

     Whether a market is black, gray, or white is a matter of politics, not economics.  In deciding where to draw the lines separating these market types, every society faces the same basic questions:  When should rules replace prices?  Who should hold decision-making power -- buyers and sellers or government officials?  Where should economics end and politics begin?

     For most of the twentieth century, governments took control of an increasing share of economic activity.  In many countries, government bureaus set prices for all kinds of things.  The gold price was fixed.  Airfares were fixed.  Long-distance phone rates were fixed.  Interest rates were fixed.  Not long ago, the French government was still setting prices for bicycle-tire repairs.  In thousands of cases, white markets had become gray markets.  Fluctuating market prices were replaced by inflexible government rules.

     But, in the late 1970s, this historic trend was reversed.  China's abandonment of farm price controls, and the subsequent doubling of its food output, was the single most dramatic instance of this shift.  The West also experienced a revival of free-market policies.  In the United States, prices were deregulated throughout transportation, energy, and financial sectors.  In Western Europe, the privatization of nationalized firms returned large chunks of the economy to the market sector.  And throughout the Third World, governments began abandoning "command-and-control" methods.  As political control of the economy receded, gray markets began turning white again.

     Oddly enough, this worldwide trend did not spring from any impassioned popular outcry for free markets.  Instead, the shift simply reflected the public's frustration with the massive waste caused by the "command-and-control" approach.  ... In rent-controlled cities, apartment construction slowed and housing stock deteriorated.  Protected industries failed to invest in new technology or reduce costs.  Again and again, those protected by "gray"-market price rules extracted their gains by causing damage elsewhere in the system.

     Responding to the distortions caused by a fixed price, the adjacent feedback loops spontaneously adjust the economic network to its next most efficient solution.  But the adjustment -- millions of pounds of U.S. government cheese stacked in warehouses, or apartment buildings abandoned by their owners -- never yields a net economic gain.  Rules cannot create value.  Value is simply transferred from taxpayers to dairy farmers or from the owners of rent-controlled buildings to their tenants.

     Of course, if the economy were machinelike, social engineers could write laws that always achieved desired results.  Unwanted side effects would be unknown.  But because an economy is a fabulously complex web of feedback loops, simpleminded "solutions" ricochet through the network in unpredictable ways. ... 

-- excerpted from Chapter 24 of BIONOMICS: Economy as Ecosystem
by Michael Rothschild

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"...Even the simple act of trading adds value.  In and of itself, producing products is useless. 
Unless a product reaches the ultimate consumer, there is no point to all the effort.  Traders 
are the links between producers and consumers.  They add value by bearing the risks of
price volatility.  By arranging mutually beneficial exchanges among others, a trader
helps potential value become realized.  Price differentials tell traders where 
mutually beneficial exchanges can and cannot be made. ..."

"Fortunately, politicial freedom and economic progress are natural partners.  Despite
capitalism's lingering reputation as the source of all the world's evils, the fact remains 
that every single democracy is a capitalist country.  Half a century of economic 
experimentation proved beyond doubt that tyranny cannot yield prosperity. ... 
Socialism collapsed because it is a policy of unrestrained intervention.  It tries to fix
what is 'wrong' with the spontaneous, self-organizing phenomenon called capitalism.
But, of course, a natural process cannot be 'fixed.' ..."

"Socialism is an ideology. Capitalism is a natural phenomenon."

-- Michael Rothschild

"The market is not an invention of capitalism.  It has existed for centuries.  It is an invention 
of civilization." -- Mikhail Gorbachev, June 8, 1990



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