Monday, December 1, 2008

In Defense of the Free Market

With the current financial turmoil gripping the world here are many who are having their “I told you so moment”. Told us that the market can not possibly work, that deregulation is a moral crime. Unfortunately the truth is that the free market has nothing to do with the current crisis, neither is deregulation to blame, immoral behavior and misunderstanding the concept of the free market in order to justify greed and self preservation, as well as lack of more theory to allow us to understand the free market.

Knowledge economics allows us to see the mistakes that occurred that have led to this scary situation that is facing the world. One concept that is part of the foundation of the free market is the concept of free trade, that for greater human prosperity there must be trade. Some are dismissing this concept saying look it is trade that has led to Americans been heavily indebted and it is cheaper goods from Asia that have destroyed American industry. Mostly wrong, why?

America had a robust manufacturing sector in past decades, and in many sectors it still has a robust manufacturing base. But what has happened of recent can not be called trade. When something is manufactured in the USA, knowledge has gone into the creation of that product. American workers are paid money and they spend that money. If for example Japan makes a better product or Germany for that matter, one would rather spend their hard earned money on these better products. However, by spending their money on say Toyota rather than Ford, that is a clear signal to Ford that their product is not up to scratch, it needs to be made better. Ford is given a fighting chance, they can either make a better product or die. If they choose to fight and still not have the knowledge to make a product as good as Toyota, they will eventually die, but a slow death. This slow death will allow the economy to adjust, workers will move to more secure jobs or more secure industries, at the least there will not be revolutionary changes, the changes will be gradual and the economy will remain robust.

If Motorola on the other hand decides that is manufacturing costs are too high in the USA and moves manufacturing to Mexico and Thailand, then re exports those goods to America, this is no longer a natural phenomenon. It is not natural because Mexico and Thailand do not have the knowledge to create a Motorola, but Motorola goes there to cut costs. In so doing, American workers are laid off, or agree to wages below what they where getting, their standard of living must surely go down. However they will already have lines of credit reflecting their previous incomes, as humans naturally hey will want to maintain that lifestyle for as long as possible. When fifty percent of American manufacturers do the same thing, something must give, this is not free trade.

Free market requires that over and above natural products we exchange knowledge, a manufactured good is a symbol of knowledge, knowledge creates it. Free trade is about societies exchanging knowledge. That Motorola manufactures goods in Thailand is not an exchange of knowledge between Thailand and America. If Thailand made similar products to Motorola and is allowed to sell those goods in America and compete with Motorola that is an exchange of knowledge. But for the market to be tree Motorola would have equal access to Thailand’s market.

That so many goods are manufactured in China in partnership with American manufacturers is not an exchange of knowledge. That is why eventually something had to give. The root cause of the problem lies with the illogical decisions of the captains of industry in America, not the deregulated financial markets. By manufacturing in China and laying off American workers, the consumers the largest segment of the economy, where will they get money to sustain the economy?

Encourage the world to respect knowledge; all goods are the result of knowledge that is the only way now to gear for long term global sustainable growth. Compete with knowledge, and only the free market can guarantee that all our knowledge will reach the market. Do not fight the innocent market, it did not betray the American consumer, the American worker. It is all a circle, but unfortunately the captains of industry did not understand that, they reached an illogical conclusion that the lowly could suffer but they wouldn’t. A moral abstract like the free market will not allow immoral behavior to go unpunished, the immoral conclusion that they could win the world without competing, get a foothold in China rather than compete with China, afraid China would do what Japan did to the auto sector. But with the death of the auto sector, a natural death, American society had time to adjust to high tech industries, an evolution not revolution.

You can not for example help anybody by killing yourself, it is not practical, help somebody by letting them develop my own knowledge and exchange it with your knowledge.

I hope I make sense, one can not write articles that are too lengthy, you would get bored. But somebody has to speak for the market. You have to look at the root cause of a problem. You cannot talk of a global solution without discussing the issue of knowledge, trade is about exchange of knowledge, think about it.

Bhekuzulu Khumalo


Sombrero said...

Companies have been making investments in manufacturing projects outside of the United States since the mid 1960s. What people have a tendency to forget is that foreign companies have been doing the same INSIDE the United States during the same time as well. We are a beneficiary of the system of international investments. Companies from countries such as Japan, Germany, Italy, France, South Korea, et al have created tens, if not hundreds, of thousands of jobs inside of the U.S. Detractors of the free market must not be remiss in recognizing that there are two sides to this coin. The upside is as big as the downside.

Bhekuzulu Khumalo said...

Thanks Sombrero, we all must learn.

Bhekuzulu Khumalo

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Bhekuzulu Khumalo

I write about knowledge economics, information, liberty, and freedom