Saturday, May 18, 2013

Markets and Wages (1)

Free markets are good, and a great system for encouraging economic development. Prices are information carriers, that help producers and consumers make decisions. By studying prices, producers can decide which products are best to produce. Relative prices help producers decide how to combine together the various inputs to a production process in the most efficient way. Consumers use prices to compare the value of different products. Without the information carried by prices, many of these decisions could not be made effectively.

The problem with free markets and prices arises when they are applied to the labour market, because wages and salaries determine the ability of a person to live. Market wages and push some people into poverty.

The Instructions for Economic Life support operation of free markets, but they place limits on them to protect people.

“Do not steal” is one of the Ten Words given to Moses. The implications of this command are spelt out in the rest of Exodus and Deuteronomy. Stealing is a crime, and the penalty for theft is four or fivefold restitution to the person who property has been stolen.

By establishing crime as theft, the God’s law protects private property. If someone wants something that I have produced, they cannot take it without my permission. Taking something that belongs to someone else is theft. This protection is important for economic development. People will only invest in capital and develop efficient production processes, if they know they can sell their product. If someone powerful can steal everything that has been produced, they will not bother. They will produce what they can consume or hide, and do nothing more. This would make everyone in the economy worse off.

The law against theft means that there is only two ways that someone can get something that belongs to me.

  1. If I am generous, I might decide to give it to them. This will happen sometimes, but it will not be that common, unless they are family or a friend.

  2. They can swap what I have for something they have, including money. Free exchange for payment at the market price will be the most common way that people get access to goods and services for someone else.

The law against stealing encourages the development of free markets and free markets function effectively when stealing is prohibited. If people can just steal anything that they want, free markets will stop functioning and the economy will become productive, because anything that cannot be hidden will be lost.

The instructions for economic life endorse free markets, but they also place limits on them. Freedom to sell or buy at the market price, does not apply in every situation.

1 comment:

Eli Chitaka said...

look forward to the series. your article on instructions for economic life is challenging and insightful.
thank you.