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Monday, November 13, 2017

Who Is the Real Market Fundamentalist?

Contrary to the popular wisdom, the sticker “market fundamentalist” better fits opponents of the market system, not its defenders.

Calling names nowadays is very common. It is much easier to categorize someone, to put him or her in the imagined intellectual box, rather than engage in meaningful discussion and honest rational exchange. This mode of action is even more widespread if it allows for mild insults, suggesting lack of vision and critical thinking. Such is the case with a famous label of a “market fundamentalist.” Apparently, one supporting market solutions is a “fundamentalist,” because one is not interested in sensible reasoning but only in blindly following trivial suggestions of the apparent market “religion.”

Yet, think about it for a second. What really constitutes being a market fundamentalist? Surely any fan of such a label would tell you: that is a person who believes the market can take care of virtually everything. That there is no reason to worry about any real-world problems on the administrative level because somehow things would take care of themselves spontaneously without government interference. Fair enough.

Now in contraposition to this, consider some of the strongest statist propositions in different fields: monetary policy, fiscal policy, and labor policy.

Who’s Being Fundamentalist?

Unfortunately, the market is not that powerful, despite statist faith. Contemplate fiscal policy based on taxing capital in various forms. Proponents of levying taxes believe they are not a big burden to the economy. Who cares if high taxes are shrinking the amount of available funding? Market theory will tell you that with levied taxes, retained earnings are shrinking and there is less money for the company. To the proponent of high taxes, that should be no problem. Somehow the business will still manage to support high levels of economic growth. It can still take care of itself, and the potential consequences of lower social wealth and overall production can be avoided. Is that not a strong belief in an amazing potential of the market? Is treating the economy as tax-proof not putting too much faith in the market mechanism?

Unfortunately, the market is not that powerful, despite statist faith. Taxes do have economic consequences and significant adverse effects.

Regulation of the labor market is not a different case, either. Minimum wage laws, according to their defenders, cannot really shake up the labor market. Somewhat miraculously placing an additional cost burden on the employees should not lead to drastic changes in the employment rates. Higher prices will not affect the demand for labor at all. The companies will go on with their business as usual and merely shrug over the regulated minimum wages without any amusement. Who cares about increased costs? The market is so strong and resistant that it can survive such obstacles. Not much should change, then.

Unfortunately, business profitability is sensitive to such changes also. Overestimation of the market strength lies in this case also on the side of statists.

Furthermore, take the third case of central banking as it works similarly. The main purpose of monetary policy is to manipulate the price of capital and interest rates in order to achieve specific macroeconomic index goals (such as targeting the inflation rate). The monetary tools used in the process are changing the interbank market, affecting not only short-term interest rates but also long-term investment processes. Credit expansion is affected, so are banks’ portfolios, investments, debt levels, and the real estate and stock market prices. There is nothing really controversial about this since it is part of the widely accepted theory. Henceforth, anyone advocating active monetary policy on the part of the central bank is actually believing that such government meddling cannot lead to serious problems such as financial bubbles or business cycles. Apparently, the market can handle with comfort deep manipulations of the most important financial variable.

Who believes that government meddling, no matter how huge, cannot really threaten the efficiency of the market process? Forget Fundamentalism

Who are the real market fundamentalists then? Who believes that government meddling, no matter how huge, cannot really threaten the efficiency of the market process? Who believes that minimum wages, high taxes, and inflationary policies cannot significantly burden market efficiency and high levels of growth? Paradoxically, it is the statists themselves who may be seen as market fundamentalists. In any case, on both sides, why not just forget the sticker altogether and focus on what is really relevant: the content of an argument, not its attire? Sticker calling very often happens to be an excuse for lazy minds in order not to be engaged in building up sensible counterarguments.

  • Mateusz Machaj is an assistant professor of economics at the University of Wroclaw (Poland). He is the author of Money, Interest, and the Structure of Production. Resolving Some Puzzles in the Theory of Capital.