Political Concept of The Market

The alternative to some form of rational organization of economic life is to rely upon the spontaneous and unregulated workings of the market. A market, as everyone knows, is a place where goods are bought or sold, such as a fish market or a meat market. In economic theory, however, the term ‘market’ refers not so much to a geographical location as to the commercial activity which takes place therein. In that sense, a market is a system of commercial exchange in which buyers wishing to acquire a good or service are brought into contact with sellers offering the same for purchase. Although transactions can obviously take the form of barter, a system of good-for-good exchange, commercial activity more usually involves the use of money serving as a convenient means of exchange.

The market has usually been regarded as the central feature of a capitalist economy. Capitalism is, in Marx’s words, a ‘generalized system of commodity production’, a ‘commodity’ being a good or service produced for exchange, that is, possessed of a market value. The market is therefore the organizational principle which operates within capitalism, allocating resources, determining what is produced, setting price and wage levels and so forth. Indeed, many have regarded the market as the source of capitalism’s dynamism and success. This success has even converted a growing number of socialists who have come to advocate a form of regulated capitalism or even a system of market socialism. Nevertheless, although the market has achieved particular prominence since the late twentieth century, in the view of some having vanquished its principal rival, its attractions are by no means universally accepted.

The Market Mechanism

The earliest attempts to analyse the workings of the market was undertaken by the Scottish economist, Adam Smith, in The Wealth of Nations ([1776] 1930). Though significantly refined and elaborated by subsequent thinkers, Smith’s work still constitutes the basis for much academic economic theory. Smith attacked constraints upon economic activity, such as the survival of feudal guilds and mercantilist restrictions on trade, arguing that as far as possible the economy should function as a self-regulating market. He believed that market competition would act as an ‘invisible hand’, helping, as if by magic, to organize economic life without the need for external control. As he put it, ‘It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.’ Although Smith did not subscribe to the crude view that human beings are blindly self-interested, and indeed in The Theory of Moral Sentiments ([1759] 1976) developed a complex theory of motivation, he nevertheless emphasized that by pursuing our own ends we unintentionally achieve broader social goals. In this sense, he was a firm believer in the idea of natural order. This notion of unregulated social order, arising out of the pursuit of private interests, was also expressed in Bernard Mandeville’s The Fable of the Bees ([1714] 1924), which emphasizes that the success of the hive is based upon the bees giving in to their ‘vices’, that is, their passionate and egoistical natures.

Smith suggested that wealth is created through a process of market competition. Later economists have developed this idea into the model of ‘perfect competition’. This assumes that in the economy there are an infinite number of producers and an infinite number of consumers, each possessed of perfect knowledge about what is going on in every part of the economy. In such circumstances, the economy will be regulated by the price mechanism, responding as it does to ‘market forces’, usually referred to as the forces of demand and supply. ‘Demand’ is the willingness and ability to buy a particular good or service at a particular price; ‘supply’ refers to the quantity of a good or service that will be available for purchase at a particular price. Prices thus reflect the interaction between demand and supply. If, for example, the demand for motor-cars increases, more cars will be wanted for purchase than are available to be bought. When demand exceeds supply, the market price will rise, encouraging producers to step up their output. Similarly, new and cheaper methods of producing television sets will increase supply and allow prices to fall, thereby encouraging more people to buy televisions. Although decision-making in such an economy is highly decentralized, lying in the hands of an incalculable number of producers and consumers, these are not random decisions. An unseen force is at work within the market serving to ensure stability and balance – Adam Smith’s ‘invisible hand’. Ultimately, market competition tends towards equilibrium because demand and supply will tend to come into line with one another. The price of shoes will, for instance, settle at the level where the number of people willing and able to buy shoes equals the number of shoes available for sale, and will only change when the conditions of demand or supply alter.

A market economy is nothing more than a vast network of commercial relationships, in which both consumers and producers indicate their wishes through the price mechanism. The clear implication of this is that government is relieved of the need to regulate or plan economic activity; economic organization can simply be left to the market itself. Indeed, if government interferes with economic life, it runs the risk of upsetting the delicate balance of the market. In short, the economy works best when left alone by government. In its extreme form, this leads to the doctrine of laissez-faire, literally meaning ‘to leave to be’, suggesting that the economy should be entirely free from the influence of government. However, only anarcho-capitalists believe that the market can in all respects replace government. Most free-market economists follow Adam Smith in acknow-ledging that the government has a vital, if limited, role to play.

This, in almost all cases, involves the acceptance that only a sovereign state can provide a stable social context within which the economy can operate, specifically by deterring external aggression, maintaining public order and enforcing contracts. In this respect, free-market economics merely restates the need for a minimal or ‘nightwatchman’ state. Its proponents may also acknowledge, however, that government has a legitimate economic function, though one largely confined to the main-tenance of the market mechanism. For example, government must police the economy to prevent competition being restricted by unfair practices like price agreements and the emergence of ‘trusts’ or monopolies. More-over, government is responsible for ensuring stable prices. A market economy relies above all on ‘sound money’, in other words, a stable means of exchange. Government therefore controls the supply of money within the economy, thereby keeping inflation at bay.

Miracle of the Market

The dynamism and vigour of the market has been amply demonstrated by the worldwide dominance of Western capitalist states and by the emergence, since the 1980s, of a globalized capitalist economy. Although economic growth in industrialized capitalist states has been by no means consistent, these are the only countries that have come close to achieving the goal of general prosperity. This lesson was not lost on the former communist states of Eastern Europe which, once state socialism was overthrown, speedily introduced market reforms. Indeed, since the late twentieth century the market has achieved a renewed ascendancy and succeeded in converting some of its former critics. Many conservatives, for example, abandoned their pragmatic ‘middle way’ economic principles, and came instead to embrace the libertarian convictions of the New Right. A growing number of socialists, whose fundamentalist principles reject both private property and competition, came to acknowledge the market as the only reliable mechanism for creating wealth. As socialists sought a social-democratic accommodation with the capitalist market, they were forced to revise and modify their goals and, in some cases, to develop entirely new market-based economic models. Some have gone further and abandoned altogether the idea of a socialist alternative to market capitalism.

The principal attraction of the market has been as a mechanism for creating wealth. This is a task it accomplishes by generating an unrelenting thirst for enterprise, innovation and growth, and by ensuring that resources are put to their most efficient use. The market is a gigantic and highly sophisticated communication system, constantly sending mes-sages or ‘signals’ from consumers to producers, producers to consumers and so on. The price mechanism, in effect, acts as the central nervous system of the economy, transmitting signals in terms of fluctuating prices. For example, a rise in the price of saucepans conveys to consumers the message ‘buy fewer saucepans’, while producers receive the message ‘produce more saucepans’. The market is thus able to accomplish what no rational allocation system could possibly achieve because it places economic decision-making in the hands of individual producers and individual consumers.

As a result, a market economy can constantly adapt to changes in commercial behaviour and in economic circumstance. In particular, economic resources will be used efficiently not because of a blueprint drawn up by a committee of planners, but simply because resources are drawn to their most profitable use. New and expanding industries will, for instance, win out against old and inefficient ones, as healthy profit levels attract capital investment and labour is drawn by the prospect of high wages. In this way, producers are encouraged to calculate costs in terms of ‘opportunity costs’, that is in terms of the alternative uses to which each factor of production could be put. Only a market economy is therefore capable of meeting the criterion of economic efficiency proposed in the early twentieth century by Vilfredo Pareto (1848–1923), that resources are allocated in such a way that no possible change could make someone better off and no one worse off.

Efficiency also operates at the level of the individual firm, once again dictated by the profit motive. The market effectively decentralises econom-ic power by allowing vital decisions about what to produce, how much to produce, and at what price to sell, to be made separately by each business. However, capitalist enterprises operate in a market environment which rewards the efficient and punishes the inefficient. In order to compete in the marketplace, firms must keep their prices low and so are forced to keep costs down. Market disciplines therefore help to eradicate the waste, overmanning and low productivity which, by contrast, can be tolerated within a planning system. There is no doubt that in certain respects the market imposes harsh disciplines – the collapse of failed businesses and the decline of unprofitable industries – but in the long run this is the price that has to be paid for a vibrant and prosperous economy. This is precisely why viable forms of market socialism are so difficult to construct. As once practised in Yugoslavia and Hungary, market socialism tried to encourage self-managing enterprise to operate competitively in a market environ-ment. In theory, this offered the best of both worlds: market competition to promote hard work and efficiency, and common ownership to prevent exploitation and inequality. However, such enterprises were reluctant to accept market disciplines because self-management dictates that they respond first and foremost to the interests of the workforce. This is why free-market economists have usually argued that only hierarchically organized private businesses are capable of responding consistently to the dictates of the market.

Market economies are characterized not only by efficiency and high growth but also by responsiveness to the consumer. In a competitive market, the crucial output decisions – what to produce, and in what quantity – are taken in the light of what consumers are willing and able to buy. In other words, the consumer is sovereign. The market is thus a democratic mechanism, ultimately governed by the purchase decisions or ‘votes’ of individual consumers. This is reflected in the bewildering variety of consumer products available in capitalist economies and the range of choice confronting potential purchasers. Moreover, consumer sovereignty creates an unrelenting drive for technological innovation and advance by encouraging firms to develop new products and improved methods of production, so keeping ‘ahead of the market’. The market has been the dynamic force behind the most sustained period of technological progress in human history, from the emergence of the iron and steel industries in the nineteenth century to the development of plastics, electrical and electronic goods in the twentieth century.

Although the market has usually been defended on economic grounds, libertarian theorists insist that it can also be supported for moral and political reasons. For instance, the market can be seen as morally desirable in so far as it provides a mechanism through which people are able to satisfy their own desires. In this sense, market capitalism is justified in utilitarian terms: it leaves the definition of pleasure and pain, and therefore of ‘good’ and ‘bad’, firmly in the hands of the individual. This, in turn, is clearly linked to individual liberty. Within the market, individuals are able to exercise freedom of choice: they choose what to buy, they choose where to work, they may choose to set up in business, and if so, choose what to produce, who to employ and so on. Furthermore, market freedom is closely linked to equality. Quite simply, the market is no respecter of persons. In a market economy, people are evaluated on the basis of individual merit, their talent and ability to work hard; all other considera-tions – race, colour, religion, gender and so on – are simply irrelevant. In addition, it can be argued that far from being the enemy of morality the market tends to strengthen moral standards and, indeed, could not exist outside an ethical context. For example, successful employer–worker relations demand reliability and integrity from both parties, while business agreements and commercial transactions would be very difficult to conclude in the absence of honesty and trust.

Market Failures

The success of the market as a system for creating wealth has been widely accepted, even by Karl Marx (and Engels), who, in The Communist Manifesto, acknowledged that capitalism had brought about previously undreamed of technological progress. Nevertheless, the market system has also been severely criticized. Some critics, like Marx himself, have believed the market to be fundamentally flawed and in need of abolition. Others, however, recognize the strengths of the market but warn against its unregulated use. In short, they believe that the market is a good servant but a bad master.

Just as no planning system has ever been ‘pure’, impurities are present in all market economies. This is evident in individual firms which, though they respond to external market conditions, organize their own production on a rational or planned basis. This element of planning is all the more important when the size of modern, multinational corporations is taken into account, some of which have an annual turnover larger than the national income of many small countries. The most obvious impurity, however, takes the form of government economic intervention, found to some extent in all market-based economies. Indeed, through much of the twentieth century, the predominant economic trend in the capitalist West was for laissez-faire to be abandoned as government assumed ever wider responsibility for economic and social life. Welfare states were established that affected the workings of the labour market by providing a ‘social wage’; governments ‘managed’ their economies through fiscal and mone-tary policies; and, in a growing number of cases, government exerted direct influence upon the economy by taking industries into public ownership. Some have gone as far as to suggest that it was precisely this willingness by government to intervene and control, rather than leave the economy to the whim of the market, that explains the widespread prosperity enjoyed in advanced capitalist states.

A major failing of the market is that there are economic circumstances to which it does not, or cannot, respond. The market is not, for instance, able to take account of what economists call externalities or ‘social costs’. These are costs of productive activity which affect society in general but are disregarded by the firm that makes them because they are external, they do not show up on its balance sheet. An obvious example of a social cost is pollution. Market forces may encourage private business to pollute even though this damages the environment, threatens other industries and endangers the health of neighbouring communities. Global capitalism has thus been linked to a growing environmental crisis. Only government intervention can force businesses to take account of social costs, in this case either by prohibiting pollution or by ensuring that the polluter pays for the environmental damage they cause. In the same way, the market fails to deliver what economists refer to as ‘public goods’. These are goods which it is in everybody’s interest to produce but, because it is difficult or impossible to exclude people from their benefit, are not provided by the market. Lighthouses are a clear example of a public good. Ships coming within sight of a lighthouse are able to respond to its warning, but the owners of the lighthouse have no way of extracting payment for the service received. Because the service is available to all, ships thus have an incentive to act as ‘free-riders’. As the market cannot respond, public goods have to be provided by government. Indeed, this argument may justify extensive government intervention since sanitation, public health, transport, educa-tion and the major utilities could all be regarded as public goods.

Criticism has also been levelled at the consumer responsiveness of the market and, in particular, its ability to address genuine human needs. This occurs, in the first place, because of a powerful tendency towards monopoly. The internal logic of the market is, by contrast with normal expectations, to reward cooperative behaviour and punish competition. Just as individual workers gain power in relation to their employer by acting collectively, private businesses have an incentive to form cartels, make pricing agreements and exclude potential competitors. Most eco-nomic markets are therefore dominated by a small number of major corporations. Not only does this restrict the range of consumer choice, but it also gives corporations, through advertising, the ability to manip-ulate consumer appetites and desires. As economists such as J.K. Galbraith (1962) have warned, consumer sovereignty may be an illusion. Moreover, it is clear that the market responds not to human needs but to ‘effective demand’, demand backed up by the ability to pay. The market dictates that economic resources are drawn to what it is profitable to produce. This may, however, mean that vital resources are devoted to the production of expensive cars, high fashion and other luxuries for the rich, rather than to providing decent housing and an adequate diet for the mass of society. Quite simply, the poor have little market power.

Despite Adam Smith’s faith in natural order, the market may also be incapable of regulating itself. This was, in essence, the lesson the UK economist John Maynard Keynes (1883–1946) outlined in The General Theory of Employment, Interest and Money ([1936] 1965). Against the background of the Great Depression, Keynes argued that there were circumstances in which the capitalist market could spiral downwards into deepening unemployment, without having the capacity to reverse the trend. He suggested that the level of economic activity was geared to ‘aggregate demand’, the total level of demand in the economy. As unemployment grows, market forces dictate a cut in wages which, Keynes pointed out, merely reduces demand and so leads to the loss of yet more jobs. By no means did Keynes reject the market altogether, but what he did insist on was that a successful market economy has to be regulated by government. In particular, government must manage the level of demand, increasing it by higher public spending when economic activity falls, leading to a rise in unemployment, but reducing it when the economy is in danger of ‘overheating’. One of the first attempts to apply Keynesian techniques was undertaken by F.D. Roosevelt as part of his New Deal policies in the 1930s. Public-works programmes were introduced to reroute rivers, build roads, reclaim land and so forth, the most famous of which were supervised by the Tennessee Valley Authority (TVA). In the early post-1945 period, Keynesian policies were widely adopted by Western governments and were seen as the key to sustaining the ‘long boom’ of the 1950s and 1960s.

Finally, a moral and political case has been made out against the market. Neo-conservatives as well as socialists have, for instance, argued that the market is destructive of social values. By rewarding selfishness and greed, the market creates atomized and isolated individuals, who have little incentive to fulfil their social and civic responsibilities. Moral condemna-tion of the market, however, usually focuses upon its relationship with deep social inequality. Fundamentalist socialists, who seek the abolition and replacement of capitalism, link this to the institution of private property and the unequal economic power of those who own wealth and those who do not. Nevertheless, an unregulated market will also generate wide income differentials. It is a mistake to believe, for example, that the market is a level playing field on which each is judged according to individual merit. Rather, the distribution of both wealth and income is influenced by factors like inheritance, social background and education. Moreover, rewards reflect market value rather than any consideration of benefit to the larger society. This means, for instance, that sports stars and media personalities are substantially better paid than nurses, doctors, teachers and the like. Similarly, global capitalism has been associated with new patterns of global inequality. Any economic system that relies upon material incentives will inevitably generate inequalities. Many of those who praise the market as a means of creating wealth are nevertheless reluctant to endorse it as a mechanism for distributing wealth. The solution is therefore that the market be supplemented by some system of welfare provision, as discussed in Chapter 10.

In addition, the market has been seen as a threat to democracy. Socialists and anti-globalization theorists have pointed out that genuine democracy is impossible in a context of economic inequality. Such a view suggests that, far from standing apart from the political process, the market shapes political life in crucial ways. For example, party competition is unbalanced by the fact that pro-business parties are invariably better funded than pro-labour ones. Further, they can usually rely upon more sympathetic treatment from a largely privately owned media. Such biases may reach deep into the state system itself. As the principal source of investment and employment in the economy, private corporations will exert considerable sway over any government, regardless of its manifesto commitments or ideological leanings. This power, moreover, has been significantly enhanced in a globalized economy by the ease with which production and capital can be relocated. Governments are, finally, advised by state officials who, because of their educational and social background, are likely to favour capitalism and the interests of private property. In these various ways, the market serves to concentrate political power in the hands of the few and to counter democratic pressures.

Summary

1 Property is an established and enforceable right to an object or possession. Questions about property ownership have traditionally been fundamental to ideological debate, with liberals and conservatives, on the one hand, de-fending private property, while socialists and communists have upheld either common or state property, on the other.

2 Planning refers to a rational system of resource-allocation within the economy, which may be used either to supplement the market or, in the case of central planning, to replace it. Whereas its supporters have empha-sized that planning can address genuine needs and be orientated around long-term goals, it has also been associated with inefficiency, bureaucracy and centralization.

3 The market is a system of commercial exchange regulated by an ‘invisible hand’, the impersonal forces of demand and supply. Market theorists emphasize that, as a self-regulating mechanism which tends towards long-run equilibrium, the market works best when left alone by government.

4 Supporters of the market see it as the only reliable mechanism for creating wealth; its virtues are that it promotes efficiency, responds to consumer wishes and preserves both freedom of choice and political liberty. Oppo-nents, however, point out that the market needs to be regulated because it tends to generate social costs, fails to provide public goods, generates deep social inequalities and may, finally, corrupt the democratic process.