Why are we are where we are today. Some answers from Alfred Marshall, David Ricardo and Charles Dickens

Philosophers define our contemporary society as post modern, but economics remains apart as it belongs to what those philosophers disparaging call the modernist tradition. A science of humanity that believes its analysis and truths are true for all societies and their economies, whereas post modernists believe the truths of economics are only relative, rooted in a particular society at a particular time. Philosophy and other post modern sciences seem to have passed economics by, left it in some historical lay-by. Unlike other human sciences the truths enunciated by Alfred Marshall are held to be valid today as when he first enunciated them in the 19th century. Teachers of economics such as myself taught generations of students Marshall’s theory of the market. They copied us in replicating Marshall scissors diagram of demand and supply not realising that they were doing the same as their 19th century peers. Today after many minor modifications Alfred Marshall’s theory of the market forms the central core of contemporary economics. It is this theory that I shall take as my starting point for my new perspective on economics.

Economists believe that in the free market they have discovered the fairest way of allocating resources, one that can be rivalled nowhere in the efficiency of its distribution mechanism. According to economists this how the market works. All goods and services are sold by price and if consumers want them they are free to buy them. There are no restrictions to the freedom to buy and sell, it’s the key economic freedom. This is the only economic system that maximises consumer satisfaction and gives sovereignty to the consumer. Price is the key factor that enables consumers and suppliers to get the best deal in the market. The market is incredibly flexible as both consumers and suppliers constantly responding and responding again and again to the signals given off by changing prices in the market. The market for smart phones illustrates how the free market works.

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Initially all mobile (or cell phones) were relatively simple devices that allowed users to make phone calls, store a list of contacts and enable the user to send text messages. Further improvements were made to the phones and a revolution occurred in the phone market when Blackberry and Apple introduced their smart phones. Now people wanted smart phones because of all the extra facilities they offered, emailing services, instant messaging (BBM), cameras and the millions of apps on Apple’s and Samsung’s phones. Consumers saw these phones as being so desirable that they were willing to pay up to £400 for them, whereas the best of the old models Blackberry phones had sold for les than £200. The bottom dropped out of the market and simple mobile phones can now be bought for less than £20. Producers reacted by cutting down on their manufacture of these simple phones as there was little profit in making them and increasing their manufacture of up market phones as they were so profitable. Firms such as Apple and Samsung are constantly innovating and improving their phones so they retain their position of market leaders and earn a premium price for their products. This strategy has been so successful that Apple has an income greater than that of many countries. Those companies that can read the market correctly and anticipate consumer demand can make fortune. This is a win win situation as these profitable companies are those companies making what people want.

Nokia the firm that originally dominated the mobile phone market saw sales plummet as consumers did not want its old fashioned phones. It had to cut back on phone set production to match its shrinking share of the market. Declining sales and loss of income would probably forced it to close, if it had not been purchased by Microsoft. The market is a harsh master towards those companies that don’t read the signals correctly. Those signals are simple to read if Nokia was having to cut the prices of its phones it failed to understand the message which was nobody wanted their phones now. Another term for this is consumer sovereignty, the market is the only mechanism which enables manufactures are other producers to keep up with the ever changing needs of the consumer. There are in history many examples of economies that are not run on the free market model collapsing because of the discontent of their people. East Germans living in a communist society were discontented with the limited variety of goods available in their country and once they had the chance they opted to join free market economy of West Germany.

Having demonstrated the superiority of the free market I must now point out the flaws in what seems to be the perfect economy. In fact economists frequently refer to perfect competition, which demonstrates all the perfections of a competitive market, an ideal to which all economies should strive. Unfortunately in real economies there are imperfections in the market which can result in the minimising of consumer satisfaction and sovereignty.

One of the best ways of explaining the fault line that runs through the market is to look back at the work of another nineteenth century economist, David Ricardo, on the price of labour. He distinguishes between two prices paid for labour, the first is the natural price and the second is the exchange or market price. Natural price is that price which is sufficient to cover all the necessities of life, while the exchange price is that paid for labour in the market. Throughout most of the latter part of the twentieth century the exchange price of labour was higher than its natural price. This was an era associated with rising living standards. However increasingly since the early 21st century for many people the exchange price of labour has fallen below its natural price. Increasing numbers of people are classified as the working poor, relying on food banks and social security payments to feed, clothe and house their families. The current debate about the living wage is about the failure of the market to pay increasing numbers of people an income that is equal to their natural wage. Britain as with many other developed European countries is reverting to an older historical pattern in which increasing numbers of people experience poverty and want.

This can be clearly demonstrated by one example. When I was teaching in London in the 1970’s the exchange price paid for my labour exceeded my natural price; I could if I had wished bought a house as did many of my colleagues. Today the exchange price of a teachers salary is so far below its natural price, that it only yields enough income to pay for one room in a shared house.

There is another fault line running through the market and that is that for many the much valued economic freedom does not exist. Free market economists when they use the term effective demand acknowledge this. We may all want to live in an idyllic country cottage in rural Berkshire but only those who have sufficiently large income may do so. However it is not just about pointing out the impossibility of achieving our dreams. There are obstacles in the market that prevent many even making the most minimal of choices. Dominant market players such as landlords abuse their market power. They charge such exorbitant rents that many are only able to afford the poorest of accommodation and the cost of that accommodation may be so high that other choices are denied to the individual. Stories frequently appear in the media about tenants having to choose between a whole variety of necessaries, paying rent, buying food or clothes or paying heating bills. Economists will never admit it but for many the so called freedoms of the market are illusory, in reality the necessity of survival means they have no choice.

What economists and our political leaders educated in the Neo-Liberal tradition need to recognise is that the free market that they worship does not work. What is needed instead is a MODIFIED MARKET a market that delivers all the benefits of the free market but one from which intervention by the state has removed the most pernicious of abuses associated with the free market. If only everybody who participated in the market could earn the natural price for their labour those abuses would disappear. There is no reason why a country as rich as Britain could not achieve this end. After the much poorer Britain of the 1950’s achieved that end.

Readers such as myself of 19th century novelists will realise that destitution was an ever present fear. Charles Dickens due to his father’s mismanagement of the families finances ended up working in a shoe blacking factory, while his father sent to debtors prison. The memory of which haunted the adult Dickens. Unfortunately the circle of history is turning and a run of bad luck could result in many a contemporary Dickens suffering a similar fate.

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