Fear of the Market-Place

The Doomsday Myth:  10,000 years of Economic Crises
by Charles Maurice and Charles W. Smithson,
Stanford University, Hoover Institution Press.

Agoraphobia -- in the original Greek meaning of the word, fear of the market-place, rather than its modern usage to describe a species of neurosis -- takes two distinct forms.  One is a fastidious distaste for the market and all it represents.  This distaste may be occasioned by the presumed money-grubbing motives of practitioners in the market-place, by the vulgarity of the hucksters and their appeal to human cupidity, or by the inequality of incomes and wealth which are seen as the result of giving full rein to market forces.  Criticism of markets on these grounds is as old as human history and, based as it is on value judgements, will no doubt be levelled for as many years again.

The other assault on markets comes from those who question their efficacy.  Admittedly many of those who doubt whether markets work are encouraged in their scepticism by a dislike of the very idea of leaving economic decisions to the whims of individual producers and consumers.  Such scepticism is thus often a rationalisation for dirigisme.  At least, however, where the ostensible argument is over effectiveness economists can make a useful contribution.

Two economists who have recently made just such a contribution are the authors of The Doomsday Myth, Charles Maurice and Charles Smithson.  In a slim volume they manage to cover what the subtitle calls "10,000 years of economic crises" in order to make the point that the market has proved itself capable of defusing even the most threatening of resource shortages.  Doomsday is thus for ever being delayed.

The latest such crisis they discuss is, hardly surprisingly, the supposed shortage of energy from which the world was seen to be suffering for much of the decade subsequent to 1973.  Earlier shortages identified by the authors as giving rise to much unnecessary anxiety include rubber, timber, whale oil, labour (post the Black Death) and land.  Each was resolved by allowing the price of the resource in short supply to rise and/ or the application of new technology to economise in the resource in question.  Thus the dearth of wood which so exercised the British in the late Middle Ages was overcome by the exploitation of coal, while the US, facing a similar dilemma at the beginning of this century, responded by the use of substitute materials, e.g. steel and concrete, on the railroads, by redesigned wooden bridges, by preserving timber to extend its life etc.  In both cases the price mechanism solved the problem with minimal assistance from government.

Maurice and Smithson rightly take doomsayers like the Club of Rome to task for naively extrapolating past trends into the future without paying sufficient regard to the impact which the impending shortages have on prices and the effect of rising prices on the behaviour of producers and consumers.  In this regard they see the Club of Rome as latter-day Malthusians after the English economist cum cleric who predicted that population would outrun food production and thereby earned the economists' profession the stigma of the dismal science.  It would, as they observe, be nearer the truth to describe the profession, or at least those among it who believe in the power of free markets to dispel shortages, as optimists.  Economists, as they also might have observed, tend to be more impressed by supply and demand elasticities than the layman while agoraphobia is particularly prevalent in government circles, among environmentalists and others of a paternalistic bent, it is by no means unknown in commerce itself.  There will always be self-serving business people who will see benefit from having the government ration limited supplies rather than having the rationing done by price.  Export controls are often promoted by downstream industries which would prefer not to have to outbid foreigners to obtain access to their inputs.  They call in government to prevent a supposed shortage, but in reality are complaining about having to pay a price which would obviate any shortage.

The worst offenders, however, tend to be those industries most under the control of government.  Maurice and Smithson mention the unhelpful role of the US Forest Service in the so-called timber crisis.  Nearer home it is only necessary to mention the absurdity of the SECV busily promoting the virtues of energy saving, while holding down prices to artificially low levels i.e. levels which cover only a minimal proportion.

Having surveyed 10,000 years of economic history Maurice and Smithson try to anticipate where the next resource crisis might arise.  They believe it could well concern the American water supply and suggest ways in which market forces could pre-empt it.  They make the familiar but nevertheless valid point that many apparent shortages arise from the absence of property rights in the resource in question e.g. the depletion of whales.

Water has also occasioned much agoraphobia in Australia.  In the last Victorian drought bans on usage were combined with a system of pricing which encouraged wasteful consumption.  Australia's water authorities have shown themselves wholly incompetent in the marketing of their product and yet not even the driest of Liberals seem to want to recommend them for privatisation.

It's a funny world, but at least, the doom merchants notwithstanding, it shows no signs of coming to an end because of scarcity of essential resources.  Human ingenuity will see to that -- provided the market is allowed to work.  The problem with markets is not that they can't eliminate shortages, but that they sometimes do the job too well and turn shortages into glut.  Again The Doomsday Myth contains examples of this phenomenon.  This overreaction often results from government intervention, the present glut of oil being a case in point.  Even without the helping hand of government, however, markets do have a tendency to over-react if only because investors tend to respond to present prices or at least recent price trends without taking full heed of what their decisions and those of other investors will do to future prices.

The trend-is-my-friend mentality is a real problem.  Perhaps agoraphobes would be more usefully engaged in addressing it than by flagellating themselves unnecesarily over imaginary shortages of so-called finite resources.  For a start they could stop talking about finite resources, a term which is not only economically meaningless but helps encourage over-investment.