Wednesday, March 27, 2013

86. What market?

In the previous six items in this blog I discussed art, and there are six more to come. For the sake of variety, however, as an intermezzo I insert this item on markets. In the intense debate on markets following the present financial and economic crises there is a conceptual problem: when critics and supporters of markets quarrel, are they talking about the same thing?

In the widest sense, Markets are processes of supply and demand on the basis of private choice and initiative that yield selection of success by competition and institutions. Market places are places where supply and demand meet. A meeting of supply and demand is needed to enable division of labour, needed as a source of prosperity.

A much narrower notion of markets is the economist’s idealized model of perfect competition, where a mere mechanism of prices, without any government intervention, in laissez faire, yields an optimal allocation of scarce resources. It was an intellectual challenge to prove that analytically Adam Smith’s idea of the invisible hand could work. However, it has little, if anything, to do with reality. It is a fairy tale. I call it the mythmarket. Yet it has mesmerized generations of economists and policy makers influenced by them, who pursued it as an ideal, and a universal panacea, in spite of its obvious clash with reality, driven by the underlying political dream of laissez faire.

An alternative is to see markets more widely and to recognize their imperfections. They require a host of institutions to work. Competition is imperfect in many ways and requires a variety of government interventions. Markets do not satisfy all social goals and seriously damage a number of them. Many economists recognize this. Behind supply and demand there are social and psychological processes of choice and processes of production and innovation. Much of that requires collaboration, next to competition. Some economists recognize this. However, here collaboration is still driven entirely by self-interest. There is no room, economists think, for altruism or normativity that may be detrimental to material self-interest. In markets, altruistic firms would not survive. 

I disagree. As I argue elsewhere in this blog (items 46, 54), I think that the human being has an instinct for both self-interest for the sake of survival, and altruism for the sake of social legitimacy and cohesion, with a corresponding sense of normativity next to self-interest. Also, due to imperfect competition there is some room to make allowances for social responsibility.

There is more. In supply and demand there is not only trade, in transactions, but also interaction, in relations. Those not only have extrinsic value in generating material welfare but also intrinsic value. Labour also not only has extrinsic, instrumental value for the sake of income but also intrinsic value as part of the good life. Here, I adopt an ethic not only of utility but a wider virtue ethic of the good life, adopted from Aristotle, as argued earlier in this blog (item 39).

In sum, I propose a categorization of markets that is summarized in the scheme below.

                                     idealized market   cooperative market   social market   humane market
                        (the mythmarket)
competition                   yes                    yes                               yes                   yes
collaboration                 no                     yes                               yes                   yes
altruism/normativity       no                      no                                yes                   yes
intrinsic value                no                      no                                no                    yes

Still crucial in this wider notion of markets is the idea of maximum freedom, and hence variety, of choice and initiative. That is what makes it different from central planning. That element of ideology remains.

I plead for the humane market, not recognized by economists. Next to competition it includes collaboration, with a certain amount of altruism and normativity next to self-interest, and recognition of intrinsic value of labour and economic relations.