Managed markets

By Tim Worstall | 8 June 2005

The Economist ran a piece on the challenges that face Paul Wolfowitz as the new President of the World Bank (unfortunately behind the subscription wall).

One snippet that interested me was an National Bureau of Economic Research report on past findings about development:

Likewise, they argue, Ghana's wildly overvalued exchange rate in its post-independence decades was not a monetary blunder. It was a political strategy designed to redistribute resources from the country's coca exporters, who received artifically low prices for their exports, to the import-buying city dwellers, on whose support the regime depended.

A reminder of one of the problems facing any form of governmental intervention into free markets. It is always possible to make a case (not necessarily a robust or true one, admittedly) for there being a market failure or imperfection that could be corrected by judicious action. Sometimes it might even be a good case, as in when action is required to cure or correct a Tragedy of the Commons. Yet whenever such is proposed we need to remember the basic injunction, cui bono? In more formal terms this has entered economics as Public Choice Theory (James Buchanan received his Nobel for his work in the field). Put simply, those in power are motivated by the same self-interest as the rest of us and so will (often) take decisions that benefit themselves rather than the country or economy at large.

It might seem excessively cynical but one of the arguments in favour of free markets is precisely that those who make the rules for managed markets will make them for their rather than everyone's benefit.