Jake's View

Recession, high property prices not signs of market failure

A pause in growth is the market's self-correcting mechanism that points economic efforts into new directions when binge investing has failed

PUBLISHED : Thursday, 28 February, 2013, 12:00am
UPDATED : Thursday, 28 February, 2013, 5:02am

In fact, the government has been playing a pivotal role in the market economy, especially in times of market failure, when it takes steps to restore the market balance to ensure that the community can share the fruits of economic growth … As I see it, government participation and market operation are complementary concepts. What matters is how to make the two work together and how to strike a balance between social costs and benefits.

Financial Secretary John Tsang Chun-wah
2013 budget speech

Live and learn. When I was in school, I learned in physics that there can only be one pivot in any pivotal operation, and I learned in economics that the pivot of market operations is price.

But new advances in knowledge are made every day these days, and our financial secretary has just pioneered two new fields of scientific discovery - multi-pivot physics and non-price-pivot economics. Clear the way to Stockholm, folks. We have a double winner coming in this year's Nobel prizes.

As part of the peer review process before he gets there, however, let's examine some of the premises set out in this budget theme statement by a man whose education in public policy consisted of licking stamps for Kennedy family campaigns in the United States many years ago.

Just how does one define market failure? It won't do to say that an economic recession represents a breakdown in the workings of the market. Recession is a natural phenomenon that serves the vital role of pointing economic effort into new directions after binge investing has failed.

To trammel recessions by trying to prop up an economy that has grown tired and wants a rest, as the European Union is doing, is to invite decades-long periods of stagnation or even a depression. Recession is a sign of a market working, not of one failing.

It also won't do to say that our high property prices are an indication of market failure. The property market doesn't stand on its own. The reason that prices are unusually high at present is that interest rates are unusually low.

They are low because they are low in the United States, where they have been pushed down to get around the effects of a subprime-mortgage crisis caused largely by earlier overstimulation by the government of mortgage financing.

And low in the US means low here, because we had to link our currency to the US dollar 30 years ago when our government's monetary mismanagement caused the Hong Kong dollar to collapse.

To pretend that high property prices represent an isolated market failure without any underlying causes is to stick your head in the sand. The property market has reacted very efficiently to the pressures placed on it. There is no market failure here. There are only public-policy failures that have had unwelcome consequences on the market.

But trying to force property prices down by stopping people from buying and selling, as Tsang is attempting to do, is like trying to stop an accident by putting your hands in front of your eyes so you won't see it.

The words "market failure" are in fact rarely more than a convenient excuse for intervention by bureaucrats who don't understand how markets work and who can hardly be deemed judges of failure when they never admit any of their own.

The only fix they know of, in any case, is a public relations band-aid, which does exactly nothing for deep-rooted systemic faults of which market gyrations are only the symptoms.

And as to Tsang's talk of striking a balance between social costs and benefits, this is exactly what a market does without any input from government. A market is a mechanism by which society directs limited resources to its most pressing needs.

Give it a proper framework of contract and criminal law, properly enforced, and no one need ever endure lectures on social costs and benefits by bureaucrats who have first made very sure that all their personal wants and needs on that score have been satisfied.

I must confess that I just couldn't make it all the way through the budget speech. There came a point when my eyes just glazed over.