What color is your market?

13 December 2011

Tuesday


Walter Gould (1829 – 1893) Stall At The Arms Bazaar At Constantinople

The black market and the gray market

I will assume that everyone reading this has heard of the “black market” and the “gray market” (or, if you prefer, “grey market”). How exactly are we to define these terms. When I went looking for specialized economics dictionaries I didn’t find any that defined both terms in a way that they could be readily contrasted. I found a lot of specialized definitions of “gray market” that were specific to particular industries, but none that really captured the intuitively obvious sense of being quasi-legal (or, if you prefer, quasi-illegal).

One way to define the two terms would be a say that, in a black market, the commodities themselves are illegal, whereas in a gray market the commodities available are not illegal, but they the channels by which they came to market are questionable at best. This definition is far from perfect, so I will simple appeal to an intuitive sense of a black market being illegal in every, or almost every respect, while a gray market is a market of questionable legality. Buyers and sellers at a gray market retain their “plausible deniability,” whereas purchases on the black market are known by all to be illegal, and, if you are caught, you are caught in flagrante delicto.

The white market

The ideas of a black market and a gray market suggest the possibility of a white market. Presumably, in a white market everything is legal, and everyone knows that their transaction is legal. The commodities are legal in themselves, their sale is legal, their purchase is legal, and the channels by which they came to market is legal. It will be immediately obvious that a white market is an economic ideal, rarely if ever attained in practice, but approximated. All transactions aspire to be white market transactions, and sometimes considerable efforts are made to forge the documentation of commodities the provenance of which is significant in order for them to pass white market muster.

The red market

Today I would like to introduce another color of markets, and that is the red market. As I understand it, the red market is that sector of the economy that has been exempted from market competition by governmental fiat, and therefore chronically loses money, but the political stature of the market is so great that the financial losses are accepted in order to maintain politically sensitive jobs, industries, commodities, and so forth. An obvious example of the red market is comprised of state owned enterprises (SOE). In many parts of the world, major state owned enterprises are maintained at great government expense; they receive preferential loans from the public purse that are never paid back, and they are immune not only from competition, but also from innovation.

The red market is a very politically sensitive topic — a real sore spot — because industries in receipt of indirect government subsidies often put themselves through considerable contortions in the attempt to prove that they are real profit-making entities that are a benefit to the public, rather than the financial black holes that they are in fact. I have described in another post (Circumventing Consent: Nuclear Risk and Self-Deception) how the insurance exemption for the nuclear industry maintains the industry in existence. Without this state intervention in the markets, nuclear power would disappear from the US, and any other nation-state that has legislated a limit to nuclear liability, which includes almost all industrialized nation-states.

The red market is much more common that most supposed, and it is not difficult to understand why this is the case. This week the Financial Times is running a week-long series of articles, Is American working?, which is concerned with, “examining the jobs crisis that currently blights the US.”

When there is talk of a “jobs crisis” there is enormous political pressure for governments to spend public money to keep industries operating merely because they employ people. Under situations like this, economists sometimes calculate how much government money must be spent in order to maintain each job, and sometimes these figures are so ridiculous that people are skeptical of the numbers. But it happens. The nationalized coal industry in the UK operated many unprofitable mines that the Thatcher government shut down. This led to the 1984-1985 coal miners’ strike, which more or less failed, and more or less broke the once-powerful miners’ union.

When large sectors of the electorate, worried about losing their jobs, put pressure on their representatives to maintain jobs and industries in situ, the economic damage is enormous, but it is a creeping enormity that can go unnoticed, while the stagnation it effects is blamed on every other conceivable cause. There is a slippery slope here which, when extrapolated far enough, easily demonstrates the absurdity of attempting to politically maintain particular industries, but since the slope is so gradual, it can go unnoticed for a long time.

For example, if a political decision is made to support, say, vacuum manufacturers in the US, a whole train of additional decisions have to be made, such as whether imported vacuums will be banned outright, or if they will be hit with import tariffs to make them too expensive to buy. And then you must decide what to do if someone comes up with a great invention that renders vacuum cleaners obsolete. Do you ban the invention? Do you try to find a way to transition the market from one commodity to another? If the latter, how do you decide which commodity, which alternative, the government will back? And even if vacuum cleaners aren’t replaced outright by another invention, what about steady incremental improvements? Are these to be made illegal because they disrupt the industry? What if an improved vacuum dispenses with a particular part and thus puts workers out of their jobs? Do we ban innovations that reduce established forms of employment? If so, do we freeze established patterns of employment exactly as they are now, in the present, or do we make our legislation a little retroactive, and try to “bring back” a few jobs? How far are we to turn back the clock on industry? Shall we get rid of the internet to save the market for music CDs? Should we get rid of CDs to save the market for vinyl records? Should we get rid of electric record players in order to save the market for wind-up Victrolas?

The questions never stop, once we set out on the slippery slope of attempting to control the market through legislation. If one industry is to be saved, why not other industries? Why not every industry?

The pink market

Since I have taken the trouble to define a “red market,” the next obvious step would be to make a distinction between a red market and a pink market. Given a distinction like this, a red market would be a flagrantly supported market, in which public funds are directly invested in failing industries in an attempt to keep them in business so that they will continue to employ workers. A pink market would be an indirect support to an industry, like the legislated insurance exemption for the nuclear power industry. As with black and gray markets, red and pink markets aspire to be white markets, and industry shills will tie themselves in knots arguing either for, 1) the beneficial effects of supporting a given industry, or 2) that the public money flowing into a particular industry doesn’t really constitute a subsidy.

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Grand Strategy Annex

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