The trouble with markets
What might a “free market” be? A fairly uncontroversial definition could go as follows – a free market happens wherever pairs of people can partake in mutual voluntary exchanges of their property. This is facilitated via a means of exchange – tokens known as “money” which have been put into circulation somehow. A buyer can exchange these tokens for the property of a seller.
How many tokens are exchanged for what product is agreed upon solely by the buyer and seller – they mutually enter into a contract to exchange X tokens for Y product. The buyer wants Y product more than he wants X tokens. The seller accepts the tokens on the understanding that they can be exchanged for another product in future, something the seller desires over Y.
It sounds like a fair enough system and there is something to be said for it. The tokens are a clever idea – various specialisms of production can develop and the system of exchange becomes much more efficient than direct barter. This is because the need for a “double coincidence of wants” is avoided. What does this mean? Under barter, somebody wishing to exchange X for Y has to find a person desiring Y in exchange for X – decidedly inconvenient! Whereas with tokens circulating they can instead sell X to anybody for an agreed amount of tokens, then later exchange some other agreed amount of tokens for Y – now with someone else who need not desire X.
The exchanges are undertaken voluntarily, the tokens are freely accepted because everybody recognises their convenience – how could anybody have a problem with this “free market” system?! Leaving aside my standard concern for this post – who gets to issue the tokens and for what purpose – I still have a number of problems with it, so here goes:
Property – recall my definition: “a free market happens wherever pairs can partake in mutual voluntary exchanges of their property”. How does something become “their property”? What if for example a homestead on the great plains of America is accqiured by massacring most of the indigenous population, then driving the few remaining survivors off the land? And the expropriation of land, accelerated during the industrial revolution, continues to this day in the developing world through land grabs. Can we talk about a “free market” when property is acquired by coercion, expropriation or violence?
Voluntary exchange – an exchange may be voluntary, but does this make it fair? Say I own all the water in town and agree to let you work for me, in exchange for tokens, which you can spend on water. The contract is mutually beneficial – I get workers and they get water – but is a highly exploitative one due to vast discrepancies in relative bargaining power; I can go without workers much more comfortably than workers can go without water!
Let’s put the two together – if property is acquired through violent expropriation then transferred through inheritance, some individuals rapidly amass vastly disproportionate bargaining power. They can then use this to bully others into accepting “voluntary exchanges” similar in character to my water-for-labour example . Such a “free market” is dressed up slavery.
Bargaining power: Maybe somebody had better intervene to stop some individuals building up disproportionate bargaining power? How much is “disproportionate” though? Markets can’t decide this – they simply say let everyone take what they can, based on what they are willing to give in exchange. Think again about what that really means – it is an economy of entrenched violence, coercion and the exploitation of the weak by the strong. Why entrenched violence? Consider the historical origins of property. Why coercion and exploitation? Well, somebody is always in a weaker position in terms of bargaining power – the “free market” says that the strong shall exploit the weak and in doing so become still stronger.
Externalities: The problems don’t stop there. As well as hurting the weaker party in the exchange, markets hurt society as a whole. This is because when buyer and seller arrive at prices they are mutually willing to accept, they do this in isolation from wider society. What if their exchange has a negative impact not on them as individuals, but on society as a whole – pollution for example? The value of the product set in the exchange cannot take this into account, in principle – it is an exchange between just them, society is not involved. What about positive impacts on society as a whole? The same – they are simply not reflected in the prices of goods, set by exchanges between pairs of buyers and sellers. Robin Hahnel gives a nice summary here.
What this means is the following: goods that hurt society as a whole are systematically over-valued through market exchanges. Goods that help society as a whole are systematically under-valued through market exchanges. In other words, the “free market” is a systematically anti-social method of allocating goods and services. One might even go as far as to call it a psychopathic method! And today it potentially endangers human survival, by excluding from consideration much of the environmental fallout of market exchange, such that the “economical” choice is to pollute our atmosphere and oceans and to exterminate many of the Earth’s vital ecosystems.
A Japanese journalist, responding to Paul R. Ehrlich about the whaling industry, put it like this:
“You are thinking of the whaling industry as an organisation that is interested in maintaining whales; actually it is better viewed as a huge quantity of capital attempting to earn the highest possible return. If it can exterminate whales in ten years to make a 15% profit, but it could only make a 10% profit with a sustainable harvest, then it will exterminate them in ten years. After that, the money will be moved to exterminating some other resource.”
I took the plots below from some sample exam questions about externalities for economics students. Clearly mainstream economists know about externalities – just as they know how the money supply is created. However (for reasons I leave the reader to contemplate) they pay scant attention to mediating the macro-economic fallout resulting from either.
For the time being we are stuck with markets. We should begin by more extensively regulating the markets we have – both to support the weak against the strong and to internalise market externalities. Without extensive regulation, all the exploitation and psychopathology inherent to market systems will play out to the absolute maximum extent, probably ending in the total decimation of the physical environment and the enslavement, in all but name, of most of humanity. As Karl Polanyi put it (and I agree):
“The self-adjusting market could not exist for any length of time without annihilating the human and natural substance of society. It would have physically destroyed man and transformed his surroundings into a wilderness.”
In the longer term markets could be abolished, to be replaced with systems of allocation, distribution and exchange that are not systematically violent, anti-social, exploitative and frankly suicidal. In short, unregulated market systems are pathological and for their own safety must wear a regulatory straight-jacket at all times.
What might such alternative systems be like? They need not be centrally planned, bureaucratic “socialism” as in the former USSR. A positive feature of market systems is that they feature, seriously flawed as it is, a means for feedback between producers and consumers. A well known drawback of centrally planned allocation is the weakness of such feedbacks. Alternatives to both markets and central planning, for example Parecon, can also have this feedback property – it could even be greatly improved in efficiency under such systems. And unlike markets, such systems could be designed to systematically promote solidarity, co-operation and compassion – rather than trampling all over such values when left to their own devices.