2 December 2012

Why Markets Aren’t Working

The free market, paragon of virtue, answer to all our problems, worshipped by all the major political parties and lauded endlessly by the press and economic commentators. How can we have got into the economic mess we are in right now when free markets have been given such unfettered control of our lives over the last thirty years?

Whisper it quietly – perhaps they don’t always work. Though it might be fairer to say they don’t necessarily work in the interests of the majority of people. There are those of course for whom free markets have worked wondrously well throughout this time and continue to do so even now.

A week ago I went to a discussion at the UEA where two economics professors discussed rational choice theory. This lies at the heart of conventional economic theory, simply stated it is the proposition that people will make choices in a rational manner favouring those goods which give them greater utility over those which give less. From this basis it follows that the decisions people make over what to buy indicate what provides the greatest benefit to them and collectively to society. So allowing a free choice of goods and services will maximise utility. (This is very simplistic, but I don’t want to bore you with too much theory). 

The trouble is that the world doesn’t actually work like that. Studies in the psychology field and on decision making, have shown that people are highly susceptible to framing – where something is put in a context that changes the way they think about it. The decisions they make often run counter to what rational choice/utility theory would suggest and are important to a newer branch of economics called behavioural economics. This recognises that social, cognitive and emotional factors all play their part in the way in which people act. For an in depth analysis of how people’s minds work I cannot recommend too highly a book called “Thinking Fast and Slow” by Daniel Kahneman.

What seems to me really significant here is that companies, PR agencies, Marketing organisations, the press and governments are all aware of this work and in one way or another seek to use it to their advantage. Our government (along with the Obama administration) for example has a “nudge unit” – or behavioural insight team, which is tasked with altering our behaviour in a positive manner. 

In the corporate sphere though the application of decision making theory represents a dramatic challenge to the idea that free markets reflect the will and interests of consumers. The reality is that advertising, brand placement, association, the press, magazines and a whole host of other intermediaries, to say nothing of peer pressure, drive our purchasing nowadays. 

Supermarkets spend millions monitoring the way people walk through their shops, analysing spending patterns, detailing the flows of people and traffic in and out of a city to determine where to position their convenience stores. They pump the smell of freshly baked bread into the shop and always have fresh produce at the entrance as it gives a positive impression. Products are carefully positioned at eye level if they want to push them, or near the floor if not. Own-brand packaging invariably closely (but not too closely to invite legal action) resembles the brand it is positioned against to trigger positive associations.

Manufacturers play the same mind games to create artificial wants and needs, driving our apparently insatiable desire for the latest gadgets and versions of things we already own. Sometimes we see the spin, but much of the time it will just subliminally enter our consciousness and lie there ready to subvert our judgement the next time we have to make a decision on something about which it is relevant. 

As such our free markets have mutated from being a bottom-up reflection of the wishes of consumers, into a top-down system where manufacturers and retailers manipulate us into buying what they want to sell to us. Which just coincidentally will be those things on which they make the greatest profit. So a modern free market serves to maximise the utility of the corporate interest rather than that of the individual.

Change may be slow in coming, but come it surely must as people increasingly realise that our current economic system and its adherence to free-market principles is working not for us but against us. But realising this is only the first step, now we need to change it.


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