Heather Roy's Diary

This week's guest columnist is Rick Marshall, a Wellington based public relations consultant.

A couple of years ago I attended a libertarian conference where Labour MP Tim Barnett was a guest speaker.

On first appearance it seemed like an odd match - one of the key MPs on Labour's left fronting up to a room full of small (or no) government groupies. However Tim was there to talk about civil unions, invited on the basis of the common ground he shared with many libertarians who also supported the civil union legislation.

Discussion moved on from civil unions to the question of choice, and how those advocating choice in personal relationships should also support choice in other areas of life. While acknowledging some common goals with the libertarian crowd, Tim described a distinction which I think is quite widespread in New Zealand. It's a distinction which makes it difficult for political parties which understand and support the market to get their message across.

Tim drew a division between the social and the economic, saying he favoured expansion of social freedom but supported government control of economic freedom. In separating the social and the economic, Tim presented a world-view which puts economic activity outside the realm of other aspects of life.

Such a distinction is wrongheaded. Economic activity is inherently social; no economic activity takes place outside of society.

Added to the view of economics as an asocial science is the notion that economics operates for the benefit of an elite, and exploits rather than benefits the average person. Try extolling the benefits of markets and trade, and in many circles you'll soon hear about the supposed evils of McDonalds, Microsoft and Nike.

An allergy to economics and suspicion of markets can make it difficult for a party like ACT which derives many of its policies from economic principles. Argue for the importance of economics in the formation of public policy and many people will quickly write you off as a heartless, uncaring brute only concerned with money.

So how can ACT supporters explain ACT policy and the importance of economics and the market in public policy without being afraid of mentioning words and concepts which will immediately bring down the shutters on many voters' eyes?

The phenomenal success of Sam Morgan's Trade Me provides a case study of the benefits and underlying principles involved in market exchanges.

Although the principles underpinning Trade Me are no different from those which operate in countless other markets - it was conceived as an electronic garage sale after all - its popularity with New Zealanders and the strength of its brand provide a unique opportunity to demonstrate the real world workings and benefits of markets.

What can Trade Me tell us about the way economics and free markets operate?

It all came from entrepreneurs

The site grew out of a bunch of smart guys sitting around thinking how they could build a better mousetrap. They identified a need, took the risk and convinced others to stump up with the investment. What appears so familiar today didn't exist until entrepreneurs created it.

A market is fundamentally about people

No people, no market. Trade Me's success lies in the novel way it connects buyers and sellers. The relationships people form in the process of their exchanges are undeniably social in nature.

Competition is good We often hear that competition leads to wasteful duplication. Trade Me came into an environment where other marketplaces already existed - classified ads, trade magazines, E Bay. Imagine if someone had decided there were already enough marketplaces; consumers would've been denied the real benefits Trade Me has delivered.

Don't lock in technologies A common argument against change is that it will lead to job losses or mean the end of certain ways of doing things. Attempting to limit or slow change can prevent finding better ways of working. The gales of creative destruction accompanying the arrival of Trade Me have been genuinely beneficial for a large number of people.

The wisdom of crowds Allowing competition between different marketplaces has seen people voting with their feet and moving to Trade Me. The best model has emerged through thousands of people making individual decisions as opposed to a central kingmaker sitting on high picking a particular winner.

All based on voluntary exchange Nobody is forced to buy or sell. A transaction only occurs when both buyer and seller are happy. When a trade is made, both parties are better off.

Concern for yourself can benefit others The people producing and selling on Trade Me are not motivated by their concern for others but rather by their concern for themselves. However in seeking to make a profit they meet the wants of others and improve others' lives in the process. Gareth Morgan's decision to give away his slice of the cake is a remarkable extension of this principle, and who can doubt that the $47m he will give to charity will be spent more effectively than if government distributed the same amount of money.

Minimal role for government Apart from the consumer law, government is largely absent from the Trade Me market. People make thousands of successful exchanges without the need for regulation. Government is present but well in the background.

Trust is paramount Trade Me operates on trust. You send off $75 to some guy in Kaikohe whom you've never met and three days later a clock arrives in the mail. He could take your money and run but he knows he can only trade in future if he's trusted so he has to deal with you honestly and promptly. The community sorts out miscreants.

Trade is good for the environment Along with other marketplaces like the real estate and used cars markets, Trade Me provides a highly effective means of recycling goods. Unwanted items are passed on and new uses are found for scarce resources. The Greens should nominate Sam Morgan for environmentalist of the year.

Wealth creation is not a zero sum game With Fairfax paying $700m for the site, nobody is $700m poorer. Fairfax have gained an asset of that value and Trade Me's owners have exchanged their asset for cash.

Trade Me provides a living example of the market in action, and over 1.2 million users have enthusiastically embraced it as a medium of exchange. The challenge for ACT supporters is to lift the party's popularity, in part by demonstrating the widespread benefits of policies based on market principles. The real world lessons about the benefits of markets to be found through this remarkable website could be used to encourage people to think about the market, and ACT's ideas, in new ways.

ENDS

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