Free Markets vs Market Interventionists

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To investors,

There are various schools of thought in business, finance, and politics. Some people believe in free markets as a self-correcting mechanism, while others believe that market intervention is a better pursuit. Each of these ideas can be taken to the extreme — free market believers become anarchists and market interventionists become communists.

Extremism in either direction has historically led to magnified problems in a society, so we’ll refrain from including those in this analysis. If we simply evaluate market intervention vs free markets, I believe we are beginning to see a recurring theme in the digital economy.

First, the federal minimum wage in the United States is $7.25 and hasn’t changed since July 2009. Each state has their own minimum wage requirements as well, which range from no minimum wage (Mississippi, South Carolina, Tennessee, Louisiana) to $5.15 (Georgia) to $15 an hour (California and New York). Barring California and New York, which only require $15 an hour for a small selection of businesses in their state, there are no states that have successfully achieved the $15 per hour minimum wage that is constantly floated by politicians on the campaign trail.

This is noteworthy because numerous studies highlight that approximately 80% of American workers are now paid at least $15 an hour. Andrew Van Dam and Heather Long from the Washington Post explained last August:

“The U.S. labor market hit a new milestone recently: For the first time, average pay in restaurants and supermarkets climbed above $15 an hour. Wages have been rising rapidly as the economy reopens and businesses struggle to hire enough workers. Some of the biggest gains have gone to workers in some of the lowest-paying industries.

Overall, nearly 80 percent of U.S. workers now earn at least $15 an hour, up from 60 percent in 2014. Job sites and recruiting firms say many job seekers won’t even consider jobs that pay less than $15 anymore. For years, low-paid workers fought to make at least that much. Now it has effectively become the new baseline.”

So the politicians and regulators, who are acting as market interventionists, have been unsuccessful in achieving a $15 minimum wage at the federal or state level. At the same time, the free market has already driven the effective minimum wage for workers past that milestone. This is a classic example of the free market driving results while the market interventionists are bogged down in bureaucracy and politics.

Another example of this comparison is in the accredited investor rules within the United States. Currently, only investors that meet specific wealth and income milestones are eligible to invest in private market opportunities. These opportunities traditionally fall in the private equity or venture capital bucket, but can include real estate or debt offerings in certain instances as well.

Many people in positions of power and influence have discussed evolving these rules to allow more individuals to participate in these investment opportunities. Ideas have ranged from a knowledge-based test to lower wealth and income level requirements.

While the regulatory and political apparatus continues to discuss potential solutions, the free market has found a unique solution. Bitcoin was launched as a decentralized asset that was rooted in open source software. There was no need to adhere to securities law because there was no team or individual that personally benefitted from the creation, launch, and scaling of the asset.

While the asset failed to meet the securities framework, it provided the single best investment return over the last decade. These venture capital style returns meant that anyone in the world with an internet connection, regardless of wealth or income, finally had the opportunity to capture private market returns. The free market figured out how to democratize access to investment opportunities without the need to wait for the market interventionists to create the solution.

It would be difficult for every asset in the private market to become a decentralized, open source software solution, so there are still challenges in the market, especially when you evaluate this solution for its ability to be replicated. With that said, the free market still was able to create a solution that addressed one of the hardest problems to solve in financial markets.

These two examples show that the free market has the potential to create solutions before the market interventionists. It isn’t a guarantee and there are still questions about which approach can create the solution faster, but it is hard to ignore the efficacy of free markets in the digital economy. When you overlay the complexity across jurisdictions and geographies, the free market may actually be a better governor of the various aspects in this new world.

Humans always want to feel like they’re doing something. They are solving problems. They are addressing bad situations. They are constantly in control. But the truth is that sometimes the free market outperforms humans, which is worth celebrating.

Hope each of you has a great day. I’ll talk to everyone tomorrow.

-Pomp

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Jeff Richards is a Managing Partner at GGV Capital

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