And so dependent on accurate speculation. Efficiency……is hardly ever heard, and mostly what I need from you. (sorry Billy Joel)
Let Pharoah appoint commissioners over the land to take a fifth of the harvest of Egypt during the seven years of abundance. They should collect all the food of these good years that are coming and store up the grain under the authority of Pharoah, to be kept in the cities for food. This food should be held in reserve for the country, to be used during the seven years of famine that will come upon Egypt, so that the country may not be ruined by the famine. (Genesis 41:34-36)
The two great problems in Macroeconomics are unemployment and inflation. Microeconomics attempts to answer this question: “Is our output produced efficiently?” Whoa, not so fast! What do we mean by that? To an economist, efficiency simply means that market forces are in balance, that according to the market, we are not producing too much of one good and not enough of another. But surely, you ask, is unemployment not a major source of economic inefficiency? Yes, it is, and it’s important to remember that the neoliberal free market does not seek full employment as a fundamental objective. It is much easier to achieve “labour discipline” when you have uncertainty and fear in the job market; the results of high unemployment. But to look at efficiency in more detail, at a micoeconomic level, we have to assume away the problems of inflation and unemployment (isn’t it great to be an economist?). And we find that even when these two extremely favourable assumptions are realised, there are still reasons why we don’t make the most of our productive ability – especially now.
Firstly, efficiency in this microeconomic sense says nothing about income distribution. Because in classical economics, demand for a good depends on both desire for the product and the ability to pay. This is why, even when we have people starving in some countries, and obscene wealth in others, economists can still look at the markets and say that resources are being allocated efficiently. Efficient doesn’t mean equal, compassionate or fair, in economics. Sorry about that.
Secondly, we have what is called dynamic efficiency – when new technology is being developed and adopted at the best rate. We have to ask the question: “Does the competitive market do the best job of creating new technology in the first place?” Now a right-winger will answer yes to this question immediately, without stopping to think about it. So ask yourself this: “Is there any benefit to one farmer if he develops a new strain of wheat?” Surely not, as most of the benefit will go to his competitors. And then consider that the history of some of the greatest inventions, including, but not limited to, the telephone, the microchip and the internet, are all that of significant state support.
Thirdly, we have the ever-present Jekyll & Hyde phenomenon of speculation, in itself not technically a free-market activity. Speculation is the purchase of an item in the hope of making a profit from a rise in its price, or the sale of an item in the expectation that its price will fall. It’s important that we understand speculation in the context of neoliberalism, where such speculation bears no relation to the actual utility of the product, but is transaction for the sake of transaction. Speculation does have its place as a stabilising influence – the speculator’s purchase of a product when it is cheap prevents the price from falling even further. Later, when they sell at the higher price, the price begins to drop and is thus prevented from becoming too high. In this way it can be beneficial to society in general, as it irons out fluctuation in quantities, moving product from a year of glut to a year of scarcity. BUT…….speculators have to get it right. If they guess wrong, they lose and society loses too. Bidding up prices in expectation of a future shortage, and the shortage doesn’t materialise, you’ve effectively shifted supply from the period when it was needed to one when it is not. Prices drop, the demand is not there, and everybody loses. This is what happened with property in Ireland. The individual success of speculators and their potential benefit to society depends on their ability to predict the future correctly.
The Genesis quote above provides an early example of a government price stabilisation program. So the question arises: “Who does a better job of stabilising prices – the government or private speculators? I would argue that if the government can get it right, they do a better job than private speculation. The reason is that a government guarantee is the best way to induce the right production response. But Pharoah did have the advantage of divine guidance in the form of an inspired Joseph. Many doubt however, that politicians can predict as well as private speculators. Then again, considering recent events, they could hardly do any worse. Hell, I couldn’t do any worse – cross my paws with silver and I’ll tell you your fortune!