On 10 March the FT published an editorial saying (in part):

Today’s disastrous outcome is testimony to those leaders’ intellectual failure. Most fundamentally to blame is their unwillingness to see (or their wilful ignorance of) what markets need in order to produce good outcomes for society.

Every first-year economics student learns the conditions for an unregulated market, in theory, to function efficiently. The most important are full information, enforceable property rights and contracts, and the absence of “externalities” — effects of economic transactions on third parties. These conditions are never fulfilled, but many markets come close enough that participants’ self-interested actions achieve good outcomes for all.

When these conditions are absent, markets malfunction; the way they do so is one of the great topics of economic theory. It tells those who care to listen that when a market is too opaque, or when the effects of market transactions are too inter-dependent, the pursuit of self-interest can make everyone worse off, or unfairly land some with the losses caused by others, or — in extremis — make markets disappear altogether.

People were not unaware of the risks, but both regulation and private risk management were based on the faulty premise that if each entity looks after its own risk, no one needs to worry about systemic risk. The great mistake was to rely merely on self-interest.

Those who sound the death knell of market capitalism are therefore mistaken. This was not a failure of markets; it was a failure to create proper markets. What is to blame is a certain mindset, embodied not least by Mr Greenspan. It ignored a capitalist economy’s inherent instabilities — and therefore relieved policymakers who could manage those instabilities of their responsibility to do so. This is not the bankruptcy of a social system, but the intellectual and moral failure of those who were in charge of it: a failure for which there is no excuse.

John Christensen of the Tax Justice Network and I agreed, but also noted the undue support the FT has been giving to tax havens / secrecy jurisdictions and sent the following letter, which it now seems unlikely will be printed:

Sir

We note your editorial comment “The consequence of bad economics” (10 March) in which you say that without full information, enforceable property rights and the limitation of externalities markets malfunction at cost to society at large.

We agree, but we also note that your pages are being used to argue that the G20 should not focus upon the issue of tax havens. Tax havens are used to create opacity. The regulation they promote is designed to undermine regulation elsewhere — it is an artificial externality that is intended to and does undermine markets. And without knowing about the true ownership, control and financial status of tax haven entities enforcing property rights against them is almost impossible.

You argue that an intellectual and moral failure of those who were in charge of the financial system allowed it to fail. We argue that the toleration of tax havens was an integral part of that intellectual and moral failure.

Using your own analysis we suggest you have a choice: you are either for sound markets and against tax havens, or for the continuation of failure and for tax havens. There is no in-between.

On which side are you?

Yours faithfully, etc

The point is simple: using the FT’s logic it is very obvious tax havens are a market failure.

Those who argue for their perpetuation argue for market failure, for the protectionism for monopoly power they provide, and for sub-optimal economic outcomes. No other interpretation of their actions is possible.

Odd then that they usually call themselves believers in markets. The fact is they are, but only so long as they are rigged in their favour. We do not accept that.

Which side are you on?