The banks’ decision to extend the term of the house loans and reduce interest rates benefited developers rather than buyers. Photo: Chris Sant Fournier

There are many who believe that governments should intervene as little as possible in the operation of the market, as the market is capable to find its own equilibrium. Interventions create inefficiencies that would eventually be a burden on the taxpayer. I tend to subscribe to such an idea with at least two very important caveats.

First it needs to be accepted that there are goods and services for which the market mechanism cannot be applied. One example is education. Governments around the world provide free education. Private provision of education is allowed; but it is strictly controlled.

Second, government intervention in the market is required when there is market failure. Market failure is a term which students of economics are very familiar with. It essentially reflects a situation where the price mechanism does not lead to an efficient result, as theoretically it expected to do. Thus governments intervene to adopt a price correction, as we have had in Malta in the case of the price of medicines.

When there is a situation of market failure, one party (either the demand side or the supply side) is better off at the expense of the other party.

However, if the price mechanism were to operate as it should, neither party is worse off or better off than the other party. This is why government intervention is required in the case of market failure.

Property market

In the United Kingdom the government (note that this is a Conservative government, the champion of the free market), decided to intervene in the property market because building developers have increasingly been selling houses as leaseholds rather than freeholds. This practice that has been adopted by building developers has been considered as abusive and regulation is being prepared to put a stop to it.

So we have a government, which clearly believes in and promotes the free market, that has decided to intervene in the market not to allow any abuse by one party at the expense of the other party.

I believe that the property market in Malta is also an example of market failure.

The situation has been with us for several years. It started when banks decided to extend the term of the house loans and reduced interest rates. These actions were meant to be of benefit for borrowers, especially first time buyers of their residential property. The idea of the banks was to have borrowers pay significantly less money in mortgage payments but for a longer period of time.

Instead it was the property developers that have benefitted from all this, as the price of property went up, much higher than the rate of inflation, and borrowers ended up paying mortgages, similar to what there was before, but for a longer period of time. First time buyers know how difficult it is to get on the property ladder. The fact that this has happened indicates quote clearly that there has been market failure in the property market in this country.

I strongly believe that there needs to be government intervention in order to correct this situation.

The answer cannot be subsidies to first time buyers but a measure that would serve as a disincentive to property developers from abusing of the market.

Is economic liberalism dead?

A book published recently entitled, The Grave New World: The End of Globalisation, The Return of History, and authored by Stephen D. King, argues that with the break up of the Soviet Union between 1989 and 1991, many thought that communism was dead and that its antithesis, economic liberalism, was here to stay.

However, the international financial crisis, caused by the property bubble in the United States and elsewhere, soon brought such people down to earth. The effects of globalisation (which was really envisaged as creating one big free market made up of the whole world) started to hit home.

As businesses moved to lower cost locations and paid peanuts for the production of hoods that cost the earth to the consumer, large segments of society in the Western world that economic liberalism and globalisation were not such good ideas after all. The market could not be allowed to operate without any form of control as the only beneficiaries of such a situation were investors and the general population felt it was a loser.

Mr King’s book requires a much more detailed analysis than this. However, his basic tenet is that economic liberalism did not deliver the results it was expected to.

It created its own problems as much as other economic systems did. The fundamental reason for that is that markets do not always know how to look after themselves and sometimes fail; thereby requiring government’s corrective intervention.

On the other hand the market economy is the model that has produced the most benefits for societies across the world.

So the moral of the lesson is that we cannot have an absolute trust in the market economy, no matter how good it is seen to be, and we should accept, that at the first sign of market failure, governments need to intervene to protect the common good and not protect the interests of the few.