The Perfect Market

I’ve long been struck by a conundrum that I simply cannot square away. Perhaps you can help me.

It’s all to do with free market economics. A well established principle of economic thinking holds that a ‘perfect’ market is the best way to run an economy. This will create ‘perfect’ competition between businesses which will keep prices under control, stop excessive profits, but at the same time encourage entrepreneurialism and innovation. The Government’s job is to stay well out of it and let the market work its magic.

A  ‘perfect’ market has certain characteristics. Freedom of exit and entry into the market, for example – it must be easy for an inefficient company to be challenged by a new, more efficient company. The inefficient company should go bust and easily move aside so that the more efficient company can easily take its place .

Incidentally, an interesting side effect of regulation is to make setting up a new, small IFA firm very difficult indeed. The IFA market is not a very perfect one.

For maximum efficiency all companies in the market should be equal. The ones with the best ideas, who work hardest, who innovate and are most efficient, these are the companies that will thrive. And that means the economy will grow and everything will be wonderful.

Of course, this is only a concept, but it’s the principle that has driven our economy – and most of the world – for the last 35 years.

So if this is such a great idea, should this principle not also apply to the labour market? All have an equal chance, so that only the brightest and hard working succeed, which in itself creates aspiration for everyone else?

It therefore holds that in order for labour and business markets to work efficiently, inheritance tax should be set at 100%.

If person A inherits (to pick an arbitrary sum) £1m from their parents but person B – who has greater ability and works harder – inherits nothing, the inferior worker has a massive advantage. This distorts the labour market – person A may choose their job whereas person B may have to take any job just to put food on the table.

It also distorts the business market. Person A may decide to set up their own business and has funds for seed capital and money to live off while the business gets going, putting less pressure on profits in the early days. Person B has neither option and setting up a business for them will be considerably harder, if possible at all.

Of course, all this is theoretical and goes against the grain of personal choice – ‘It’s my money, I should be able to leave it to my kids’. Fair enough. But this means we also cannot have a free market economy. Which do you want?

Conservatives are pledging to reduce inheritance tax. UKIP say they’ll get rid of it all together (while also stating they believe in self reliance, a complete contradiction on one page). The Green Party want to overhaul inheritance tax, making it based on the recipient, not the donor (see section EC750).

The Lib Dems and Labour… well, after about ten minutes I couldn’t actually work out what they think, see if you can.

So, which do you want? Freedom to pass accumulated wealth on to our children, or a perfect market?