People Must Stop Believing in the Free Market Fairies

Even now, with the world economy swirling down the S-bend, we hear some hardy souls claiming that ‘the free market will fix it’.

Sadly for us, the free market fairies are unlikely to flit along and clean up our mess while we sleep. Why not? Well, I hate to break it to you, but they don’t exist.

That’s not, as the free market fundamentalists like to claim, because we regulate too much. It’s because the free market theory is based on some wacky assumptions – if those assumptions aren’t true, then the whole theory crashes to the ground.

Two of these assumptions are that:

  • People have perfect knowledge of the value of what they’re buying or selling
  • People never base buying or selling decisions based on what other people are doing.

If I ever find a trader working like that, I’ll notify the media. Clearly, if this were true, there’d be no such thing as bubbles or stock runs. In fact, the financial system is more like soccer – someone makes up the rules, only one team ever wins, and occasionally someone gets kicked in the head. The only difference is that financiers rarely wear very short shorts. And not many get sent off the field for bad behavior.

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