458. Markets: What to make of them
In debates concerning markets, in the wake of the recent financial and economic crises, there is considerable confusion among policy makers and the general public, and even among economists, on what markets are, how they function, how they fail, what they contribute to society, and what the alternatives are. Related confusion arises in debates concerning deregulation and privatization of public or semi-public services, such as utilities (gas, water, electricity, telecommunication), transport (train, bus), infrastructure (road, rail, waterways), health services (care and cure), education and schooling, safety and security, prisons, etc. State bureaucracies are not attractive, but markets are taken to promise beneficial effects that are often not achieved or are overruled by negative effects.
Here I start a series of items to contribute to insight in markets that may help people to form an opinion. I derive it from a book on markets that was published by Edward Elgar in 2014.. The title is the same as of this item. This is complementary to a series on economics that also appeared in a bundle posted on my website bartnooteboom.nl. The present series is on markets more specifically.
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 narrow notion of markets is the economist’s traditional, 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.
When one criticizes market ideology, targeting the myth, the idealized fairy tale, the answer from economists is that in modern economics the market is seen more broadly, and with more nuance, in a wider notion of markets. In fact, surreptitiously they still pursue the fairy tale that has been lodged in their minds in economics classes. In other words, the narrow view is taken as a guide (theory in use) but the broad view is wielded as an excuse (espoused theory).
In valid criticism of market ideology, radical critics, on the other hand, make the mistake of also throwing away a wider notion of markets that I think we cannot do without. So I need a new terminology to denote a variety of wider notions of markets while making it clear that I reject the fairy tale.
Earlier, in item 86 of this blog, I already discussed several wider notions of markets, in which there is collaboration next to competition, and competition is imperfect, yielding room for ethical conduct, a certain amount of altruism next to egotism, and a wider ethics, going beyond the utilitarianism of traditional economic theory, in a virtue ethics that also accords intrinsic value to economic activities and virtues.
The already existing notion of regulated market indicates that markets require institutions and government intervention to work and to redress perverse effects. That applies to all the markets indicated above, except the mythmarket. Competition is imperfect in many ways and requires a variety of government intervention. Markets do not satisfy all social goals and seriously damage a number of them. Most 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, and they limit each other. Many economists recognize this (e.g. in transaction cost economics).
Still crucial, also in the wider notions 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.
In the present series I will first specify in more detail the mythmarket of perfect competition, and criticism of it. Next, I will go more deeply into the philosophical roots of markets and market ideology, and I will consider alternative roots for alternative views. I will also go a little more deeply in to the question how markets work and fail. I will show that in practice there are mixes of markets and government regulation, and I will give some examples. Finally, I will look at newer developments, and at possible alternatives to markets, in communities.