“[T]he academic models that are supposed to explain how, and under what circumstances the ideal system of human interaction in markets is supposed to work as well as the prerequisites for the existence of such a system to actually work not only ignore the essential role of government in our economic, social and political lives, but the assumptions on which these models depend – the most important being that no economic actor has the power to influence a market price, to influence the political process, to manipulate consumers, that information is free and therefore all market participants have perfect information about the determination of market prices, that there are no external costs or benefits associated with the production or consumption of goods, that an individual’s choices are unaffected by the choices of others, and that people behave rationally as ‘rationally’ is defined within the discipline of economics – are impossible to achieve in the real world…”
Taken from a recent review in the journal Contributions to Political Economy, 38, p.96-98, by George H. Blackford of John Komlos, The Foundations of Real-World Economics: What Every Student Needs to Know. Routledge: Abingdon, 2019.
“[Karl Polanyi] identified a tension between what he considered to be the two organising principles of modern market society: “economic liberalism” and “social interventionism”, each with their own objectives and policies as well as support from the groups within society whose interests they are seen to serve. The aim of economic liberalism is to establish or restore the self-regulation of the system by eliminating interventionist policies that obstruct the freedom of markets for land, labour and capital. Through laissez-faire and free trade, social relationships are embedded within the economic system and subjected to unregulated market forces with support from the propertied classes, finance and industry. By contrast, the aim of social interventionism is to embed the economy within social relationships, thereby safeguarding human beings and nature through market regulation, with support from those adversely affected by the destabilising consequences of economic liberalisation and the self-regulating market – notably the working classes.
Polanyi argued that there is a conflict between the interest of capital in freeing itself from the constraints of society – and society’s interest in protecting itself from the social dislocation of the market (particularly that of finance). This generates a “double-movement” of counter-reactions by both capital and society, mediated by politics and the legal process. Without compensating social intervention, Polanyi contended that the pressure on vulnerable individuals and groups within society, arising from attempts at market self-regulation, would generate resistance in the form of labour, civic, social and political movements. If these become widespread – and discontent with the damaging effects of the self-regulating market intensifies – social order becomes more difficult to maintain; and in an effort to safeguard the existing system, political leaders may attempt to deflect dissatisfaction by scapegoating. However, at some point, the state is likely to be put in the position of having to decide whether to intervene on behalf of those affected or to risk social breakdown. In turn, the impairment of market forces associated with protective regulatory measures could set into motion a counter-movement on the part of capital to attempt to protect its own interests by freeing itself from social and political constraints. In response, the state would have to decide the degree to which laissez-faire should be restored and social protections and market regulations relaxed.”
Suzanne J. Konzelmann, Simon Deakin, Marc Fovargue-Davies and Frank Wilkinson (2018), Labour, Finance and Inequality, p.5-6
Another extract in this occasional series from Michael Hudson’s J is for Junk Economics (p.128-129). It defines a well-known term in economics, co-opted by the right, often misleadingly, in order to provide support for ‘free’ markets:
“Invisible Hand: The term dates back to Adam Smith’s Theory of Moral Sentiments (1759) postulating that the world is organized in a way that leads individuals to increase overall prosperity by seeking their own self-interest. But by the time he wrote The Wealth of Nations in 1776, he described hereditary land ownership, monopolies and kindred rent-seeking as being incompatible with such balance. He pointed to another kind of invisible hand (without naming it as such): insider dealing and conspiracy against the commonweal occurs when businessmen get together and conspire against the public good by seeking monopoly power. Today they get together to extract favors, privatization giveaways and special subsidies from government.
Special interests usually work most effectively when unseen, so we are brought back to the quip from the poet Baudelaire: “The devil wins at the point he convinces people that he doesn’t exist.” This is especially true of the financial reins of control. Financial wealth long was called “invisible,” in contrast to “visible” landed property. Operating on the principle that what is not seen will not be taxed or regulated, real estate interests have blocked government attempts to collect and publish statistics on property values. Britain has not conducted a land census since 1872. Landlords “reaping where they have not sown” have sought to make their rent-seeking invisible to economic statisticians. Mainstream orthodoxy averts its eyes from land, and also from monopolies, conflating them with “capital” in general, despite the fact that their income takes the form of (unearned) rent rather than profit as generally understood.
Having wrapped a cloak of invisibility around rent extraction as the favored vehicle for debt creation and what passes for investment, the Chicago School promotes “rational markets” theory, as if market prices (their version of Adam Smith’s theological Deism) reflect true intrinsic value at any moment of time – assuming no deception, parasitism or fraud such as characterize today’s largest economic spheres.”
Following videos on Marx, Keynes, Adam Smith and Capitalism, and in the interests of some kind of balance, here is a brief video introduction from The School of Life on Austrian School economist Friedrich Hayek. His thinking influenced the political programmes of Reagan and Thatcher in the 1980s and, many years before, he was involved in some great intellectual debates with Keynes.
I found the video useful, as I have not read any of Hayek’s work, though I have read other writer’s critiques of him. One of the points in the video that stood out for me was Keynes’ questioning of Hayek as to where the line should be drawn between government intervention and the private sector, given the inevitability of some state planning. Of course, private firms make plans as much as governments, but the balance between the public and private will surely vary over time in any country depending on a range of factors.
I would also make the point that Thatcherism has been described by one academic as ‘the free economy and the strong state’. If this is an accurate characterisation, it illustrates the inevitable and shifting relationship between the market and the state, and a range of other institutions. Like it or not, modern capitalist economies are all mixed economies with interventionist states. There will always be room for debate over the balance between the various and evolving institutions that comprise such a system.
In this short video, Cambridge University’s Ha-Joon Chang, a particularly thoughtful economist whose work I find both interesting and inspiring, discusses the boundaries of the market and the state in modern economies.
He also argues that economic change is inevitably political and makes a strong case against the imposition of ostensibly scientifically derived economic policies on democratic states by unelected technocrats. This happened in nation-states from Greece to Italy in the wake of the eurozone crisis.
This post is one of an occasional series inspired by Ha-Joon Chang’s iconoclastic and very readable book 23 Things They Don’t Tell You About Capitalism. The quote below is from ‘Thing 16’.
“People do not necessarily know what they are doing, because our ability to comprehend even matters that concern us directly is limited – or, in the jargon, we have ‘bounded rationality’. The world is very complex and our ability to deal with it is severely limited. Therefore, we need to, and usually do, deliberately restrict our freedom of choice in order to reduce the complexity of problems we have to face. Often, government regulation works, especially in complex areas like the modern financial market, not because the government has superior knowledge but because it restricts choices and thus the complexity of the problems at hand, thereby reducing the possibility that things may go wrong.”
Ha-Joon Chang (2012), 23 Things They Don’t Tell You About Capitalism, p.168
The argument that humans have ‘bounded rationality’ and experience uncertainty (as opposed to calculable risk), in which they simply do not know what is going to happen in the future, illustrates the importance of a range of institutions in modern society. These both constrain and enable human activity. The market is an institution, but one of many, even in what is often called a market economy. Continue reading
This short extract of a talk by the thoroughly engaging Marxist economist Richard Wolff makes a useful point: that the domain of markets is and should be limited, even under capitalism. This is realized in the fact that all so-called market economies are in fact mixed economies, with a range of non-market institutions such as the state, the legal system, public services etc. which both support the functioning of markets, and help to temper their excesses.
You may or may not take Wolff’s viewpoint to its logical conclusion: the case for some form of socialism. But it is important to recognize from this that markets are political, cannot really be ‘free’, and that the mixed economy, while it may evolve and change, is what we live in for now. Pure market or planned economies remain unachievable utopias.