Published: 2012-10-26

A Market For Water

I just read an article about the creation of a commodities market for fresh water. I am deeply skeptical about the use (abuse, as I see it) of financial markets, especially for the provision of things that are absolutely necessary for life. But my skepticism is related to the implementation and management of these markets, not the theory behind them.

A market solution is a human solution. People decide how to structure their societies, of which economies are a part. They also decide how to structure their markets, when they choose to create them. You simply cannot extricate a market entirely from the people who use it. This is especially true for financial markets since they are highly formalized.

I should point out that when I say "markets", I mean as they generally exist in developed countries. There are plenty of markets in other parts of the world that most of us view as undesirable. The Soviet Union, for instance had a fully-functioning underground market economy that relied on smuggling and moonlighting. Most people prefer formalized markets, where participants have some sort of official (read: government and its monopoly on violence) recourse in cases of fraud and abuse.

The idea that such markets are naturally occurring and "spring forth" out of a vacuum really isn't well-supported. Russia certainly didn't end up with anything even approaching a theoretical free market despite the best efforts of American and European economists (laissez faire may apply to markets themselves, but not to building them and training people to use them).

In reality, markets are constructed and managed by people (hence the discussion around "creating" a market for water). Therefore, they can (and do) possess all the flaws and failures that go along with humanity in general (not speaking theoretically here, but practically).

The reality is that when you create an actual, existing market you introduce all sorts of inefficiencies and problems. These problems are not theoretical and their existence doesn't necessarily undermine the theory of markets. The problems are practical, in the same way that the problems associated with representative democracy or even Marxism (which would work swimmingly if only human psychology would cooperate) are practical.

I am comfortable with the theoretical performance of markets. I am extremely uncomfortable with many markets as they exist and are created and managed by deeply flawed humans.