Markets are not free, despite what the text books tell us. In mathematics, we verify the validity of equations by considering asymptotic or limiting cases. Let’s try the same trick on the statement about the markets being free.
If commodity markets were free, we would have no tariff restrictions, agricultural subsidies and other market skewing mechanisms at play. Heck, cocaine and heroine would be freely available. After all, there are willing buyers and sellers for those drugs. Indeed, drug lords would be respectable citizens belonging in country clubs rather than gun-totting cartels.
If labor markets were free, nobody would need a visa to go and work anywhere in the world. And, “equal pay for equal work” would be a true ideal across the globe, and nobody would whine about jobs being exported to third world countries.
Capital markets, at the receiving end of all the market turmoil of late, are highly regulated with capital adequacy and other Basel II requirements.
Derivatives markets, our neck of the woods, are a strange beast. It steps in and out of the capital markets as convenient and muddles up everything so that they will need us quants to explain it to them. We will get back to it in future columns.
So what exactly is free about the free market economy? It is free — as long as you deal in authorized commodities and products, operate within prescribed geographies, set aside as much capital as directed, and do not employ those you are not supposed to. By such creative redefinitions of terms like “free,” we can call even a high security prison free!
Don’t get me wrong. I wouldn’t advocate making all markets totally free. After all, opening the flood gates to the formidable Indian and Chinese talent can only adversely affect my salary levels. Nor am I suggesting that we deregulate everything and hope for the best. Far from it. All I am saying is that we need to be honest about what we mean by “free” in free markets, and understand and implement its meaning in a transparent way. I don’t know if it will help avoid a future financial meltdown, but it certainly can’t hurt.
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- Quant Culprits
- Free Market Hypocrisy
- House of Cards