Does The Free Market Need An Intervention?


The article discussed in my previous post, The great unraveling of globalization, has some interesting things to say about emerging markets.

“Growth in consumer spending in 2014 hit multiyear lows in many countries,” said Unilever CEO Paul Polman, analyzing his company’s results. “In South Africa, it is half to less than 2 percent, and in Brazil it had fallen to just 1 percent. There was no volume growth in these markets.”

There are myriad reasons why these markets have lagged, some of them unique to specific countries or regions. For instance, China’s one-child policy has produced a penurious generation of young adults who are the sole support for aging family members. And in parts of Southeast Asia and Africa the infrastructure in rural areas, where much of the population lives, is too primitive to support extensive retail activities. But equally problematic is that the growth of the middle class in China and most other developing economies has been slow. And these newly minted consumers face volatile, often expensive prices for housing, food and other staples.

Perhaps the race to the bottom to produce goods at the cheapest prices is also affecting consumers in the emerging markets.

The paradox is that what companies need to do to employees to get the most out of them for the least cost is to minimize wages and benefits.  What consumers need to spur their buying is large enough incomes and less risk in their economic environment.  The paradox is that the workers and the consumers are just two different roles of the same people.

The competition of the free market does not make it easy for an individual corporation to decide that it wants to pay high wages to spur consumption among its customers.  There is no way to assure that the workers whose wages are raised will spend all of that raise with the company that is giving the raise.

One way out of that paradox is for some entity to take a more global approach to a solution.  The global approach would have all companies raise wages to all workers which would cover all consumers.  The increased consumption would be spread across all companies so that the companies raising the wages would be assured of getting some of the benefit of not only their own wage increase, but the wage increases of their competitors.

Sort of reminds me of the situation of an addict, whether that be drugs, alcohol, tobacco, or food.  The addict cannot stop the self destructive behavior without some help from an external source.

I leave it as an exercise for the reader to figure out what external sources are available and powerful enough to provide this economic intervention.

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