IN a perfect world, fast-food hamburgers would look the same in real life as in the advertisements. In a perfect world, 90 percent of the global production of vitamin C would not come from one source—China. In a perfect world, scientific research would be independently objective and not funded by corporations and governments.
In a perfect world, the free market would be allowed to function without interference.
Since price inflation is on everyone’s mind, it might be enlightening to look at history. The British have always been exceptional at keeping records and preserving common but important documents. Using deeds of sale for land and goods, receipts of purchase, and local tax registers, we have accurate data about price inflation going back to the 13th century.
It was an exciting time in England between the years 1209 and 1709. The Magna Carta was signed. The Black plague arrived in England. There was the English victory over France in the Hundred Years’ War. Jamestown was founded in the Virginia Colony and was the first permanent English colony in the Americas. The Bank of England was founded.
Price inflation between 1209 and 1709 averaged 0.5 percent per year. Years of high price increases were usually times of famine or war. But money kept a stable value against goods and services based on the free market of buyers and sellers determining prices.
The next 200 years between 1709 and 1909 saw average yearly inflation fall to 0.2 percent. The Kingdom of Great Britain came into being and the American colonies fought a war for independence. England once again beat France—and Napoleon—in a major war and the first peacetime income tax was introduced. There was also that economic life-changing event called the Industrial Revolution between about 1760 and 1840. Big technological changes have a positive effect on prices.
However, the greatest technological advancements occurred in the past 100 years. Inflation in England between 1900 and 1990 averaged 4.5 percent per year.
Governments have increasingly controlled interest rates, which is the “price” for buying and selling money. Governments control foreign-exchange rates, which is a major part of the price of goods and services traded between nations. Consumer and business buying is significantly controlled through the price manipulation of government subsidies, “fiscal incentives,” and preferential treatment of certain industries.
There is no such animal as the “free market” when the control of pricing is directly or indirectly set by the government and not by the participants—buyers and sellers.
The greatest manipulation by the government is through taxation. Political divisions used to separate the people from the government are simple. A little over one-half of Americans are net payers of tax. The other 47 percent receive cash or in-kind payments and effectively do not pay national income tax.
Backroom deals and trade-offs are made between governments. The $50-billion Three Gorges Dam project saw millions of dollars of contracts go to US companies. Hundreds of millions of dollars in contract went to German firms. The US would not wave income tax on US companies to participate in building the dam—in spite of warming US/China relations—because of the 1989 Tiananmen Square Massacre. German companies had a 40 percent cost advantage because Germany did not have taxes on foreign income.
Anyone who speaks of the “economic evils” of the free market—usually using the term “capitalism”—is a fool or an agenda-driven liar. The 20th century and now the 21st is not the Age of Capitalism. It is the Age of Economic Manipulation by governments.
E-mail me at mangun@gmail.com. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.