This first in a series of articles on topical issues that have a bearing both on financial markets and on daily life suggests some alternative views on these subjects.
Free Markets
With the invisible hand of competition among many pursuing their own self-interest, the free market, it is argued, maximises the common good. This, of course, is generally accepted, and is the reason why, as the freest economy in the world, Hong Kong has been so successful. But behind this argument there are important assumptions and these are not always met in the real world. One assumption is that both the supply and the demand sides of the free market comprise a large number of individuals who are price takers and are unable, acting in isolation, to influence the price level in the market. Another assumption is that there is free availability of information that affects the market. There are other assumptions, such as the instantaneous reaction of the supply and demand sides to a change in the price level, and the homogeneous nature of the product traded in that market. In reality these assumptions are met in various markets to a different degree. It is in fact hard to find an example of a market that meets all the assumptions. And so in practice there are anomalies specific to each market. For example, it takes about two years for the supply of residential flats to catch up with demand, even if the land is available instantaneously. The economies of scale in the production of residential flats have also led to an oligopoly on the supply side, with developers having greater influence on the price of residential property than would otherwise be the case. These factors, among others, contribute to a pronounced cycle in that market, and it is doubtful whether that maximises the common good. In financial markets, there is the concern of market concentration and therefore market manipulation. Those who wave the free market banner should also have answers to market anomalies.
Government Intervention
Government intervention is not necessarily bad, although it has been generally accepted that the best government policy for the growth of a nation's wealth is that policy which governs least. There are some essential services that simply will not be provided by the market without the support of government: either the services are financially not viable, or the charges for the services are too high for the less well-off to bear. There are examples of government intervention everywhere. The physical infrastructure - roads, tunnels and bridges - to allow the safe movement of people and products, and the financial infrastructure - payment, settlement and clearing systems - to enable the safe mobility of money are essential to economic wellbeing. The upholding of law and order, taking care of those members of the community who are less able to take care of themselves, education and housing all involve government intervention to varying degrees. Whether or not government intervention is desirable in a particular case is always debatable. It is tempting, particularly when bureaucrats do not wish to take on responsibilities, to argue against intervention. It is equally tempting, when particular sectors of the economy are experiencing difficulties, to argue for government intervention, even if that means committing taxpayers' money to sustaining activities that are destined to fail. Politics and vested interests often come in, and emotions may run high. It is for those responsible in government to weigh the pros and cons of government intervention and those of leaving things alone. This is never easy. The community may not have the time and patience for the philosophical justifications to be articulated in each and every case. This makes it all the more important to have these articulated within a well-established framework and for that framework to be continually debated and publicised. We used to have that - the philosophy of positive non-interventionism, and it has served Hong Kong well.
Joseph Yam
17 February 2005
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