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The Market System

Updated on July 24, 2014
Adam Smith, erstwhile defender of the market system.
Adam Smith, erstwhile defender of the market system.

What is the Market in the "Market System?"

In this ideologically laden phrase, the "market" is a distribution mechanism. Interestingly, it may come as a surprise that this is not the only available mechanism for rendering decisions about how goods and services are to be distributed under scarcity. When the market seems "natural" or inevitable or as the only feasible or effective distributive mechanism, something has gone wrong: alternatives may have been squashed for political or ideological reasons, for instance. Even if it is true that the market is the "best" mechanism under certain conditions, what "best" means is far from clear: what criteria should we apply to determine how goods, in the broad sense, are to be distributed under certain conditions like scarcity?

The question that inevitably arises when distributive challenges are posited (who gets what?), is a normative one: what is the right or fair mechanism for distributing the scarce goods? Unless one subscribes to a naturalist moral theory, the supposed naturalness of the market, even if true, would not help the discussion. The background for any justification of the market is indeed normative: among many rival or competing mechanisms of distribution, the one to be promoted or adopted and institutionalized is the one that presumably has certain advantages over the other mechanisms: such advantages may be prudential (efficiency, etc.) but even then the ultimate issue is whether prudential mattters ought to override concerns over relative fairness. The normative dimension is integral to this issue - even if one were to smash the chessboard, as it were, the opint is that "might makes right" which is again a normative claim. The word "distribution" as used in language is connotatively entwined with normative meaning. All this is important because it shows that a market ideology requires a normative justification. If this justification is not produced, something is sorely lacking.

Alongside the connotations of "distribution" we have meanings associated with words like "claim (to the goods to be distributed)" and "merit" in the broad sense (which makes it synonymous with "claim", although in a narrower sense "merit" is not synonymous with "claim.") Even throwing the dice to determine who gets what is a distributive mechanism - it is not abdication of the decision as to what mechanism is to be used. A moment's reflection will show that, in an overarching theoretical sense, this latter mechanism is actually the arcetypal democratic (in the sense of strictly egalitarian) mechanism. The principle that distributes according to need is famously socialistic - again in a broad theoretical sense. A meritocratic mechanism distributes in accordance with merit: this can be merit determined on the basis of some criterion across the board or it can be merit that is relative to what is being distributed.

If we suppose that a rarely excellent flute is to be distributed - to paraphrase an old example from Aristotle - it is reasonable actually to pose a relevant-merit criterion. While the market would distribute to the highest bidder in an institutionalized contest between those who supply and those who request, it seems more reasonable to give the flute to the best flute player insofar as this merit can be determined. Even in the midst of a reverential devotion to the market as the ultimate institution for distributions, culturally sanctioned moral pressures are in evidence working against the market: in most environments, members of a family and friends would be insulted if the other members or friends were to insist on implementation of the market model for transactions. Certain areas of human needs also seem to dramatize a case against rather than in favor of the market: such a narrative might have a child starves because its parents lack market power while others wield their market power to waste precious food; it is not immediately obvious that scarce cadaveric transplantable organs should go to those who can afford them rather than to those who need them with extreme and present urgency. Organized societies do not relegate to the market such goods as police protection.

Karl Marx and Friedrich Engels dedicated their lives to pillorying capitalism.
Karl Marx and Friedrich Engels dedicated their lives to pillorying capitalism.

Defenses and Critiques of the Market

Adam Smith's celebrated classic The Wealth of Nations tries to carry the justificatory burden on behalf of the market system by arguing that what is at work in the market system is an "invisible hand" that promotes the good hand in spite of the given empirical fact that the inputs into the system are rationally self-regarding. This is a metaphor, of course, the point being that the logic of the system's operation is such that, notwithstanding the self-interested bahavior of the individual players, emerging outcomes at the collective level are such that everyone benefits more or less: the vagueness as to what "more or less" may mean here can be removed by using such standards as "optimality." An example may shed light on how this distillation of interested behavior through the system promotes the common good: in an ideal market (where it is to be assumed that entering and exiting any market activity is not restricted either by laws or by a prohibitive economic cost), there is a self-interested inclination on the part of sellers to charge as much as possible and on the part of buyers to pay as little as possible. This will result in an equilibrium point at which any lower price would harm the interests of the buyers without advancing the interests of the sellers (the supplied quantity would drop at lower prices as a disincentive to be in this business takes hold); and any higher price would harm the interests of the buyers without advancing the interests of the sellers (demand would drop at higher prices and redound against the sellers themselves.)

Clearly, the above view of the market is idealized - although this is not sufficient for a critique since we need to model for the sake of understanding how things work before we can have a more finegrained assessment. Rationality on the part of both buyers and sellers is assumed. Alternatives are presupposed - no cartels or oligopolistic structures that are rendered inevitable when the cost of entering certain sectors is prohibitively high. The market is also supposed to weed out such "vices" as cheating - the rational consumer would switch to those who don't cheat and, so, cheating will be prevented as a matter of rational decisionmaking on the part of the seller even without cooperation by "human nature." It is clear that the moral view that lies at the foundations of this theory is actually sympathetic to the "common good" and it shows a proto-Calvinistic pessimism about the natural abilty of post-lapsarian, "sinful," human beings to be morally "good." This is the spirit - regardless as to whether Smith himself is motivated by any such doctrine. More broadly, this is the view that appealed to the framers of the American system of government. The desideratum is to find mindless mechanisms which, working automatically, can take in as inputs vices and, in spite of that, churn out fair outputs in the sense that the common good, rightly understood, is promoted.

Later refinements to the theory emphasize the epistemic or knowledge- and information-related contributions of the market. The Austrian School of Economics, increasingly popular today after it had been severely criticized by the mainstream of Economic theory in the past, made contributions in the area of "opportunity cost" - accepted universally - and "the calculation problem of Socialist or planned economies." Opportunity cost refers to the most valuable alternative market-benefit (what can be earned in the market) that is excluded, and thus forfeited, when a certain activity is pursued. It is understood, of course, throughout this cursory analysis, that human labor too is to be expressed and become active through the market - a labor market is itself a systemic institution like a goods and services market is... The "calculation problem" - more controversial - argues that planned economies inevitably result in inefficiencies and ultimate collapse insofar as they lack the information about relative market-values - and, it is argued, about the underpinning preferences - which, information, only markets can provide.

Historically the most famous critique of the market system is in the work of Karl Marx who accepted as foundational in his analysis the so-called labor theory of value. While praising John Locke for his insight that the ultimate source of value is labor, Marx, from his early writings, insisted that the market system alienates this labor by making its employment contingent on the profit-motivated decisions of those who own the means of employment. Because productive activity is the quintessence of what a human being is, the market system is, at its core, dehumanizing by wresting productive activity (the essence of being human) and making it a separate, alien, thing that, instead of fulfilling the person, confronts the individual from outside. Not surprisingly, the capitalist system generates situations which, viewed appropriately, are absurd: instead of being one's productive activity one now owns productive adctivity and may actually find himself-herself as not being able to put this ability to work (which is like saying that one may fail to be human while presumed human!). In the market, it is the competition of sellers and consumers that determines the prices of things which cannot, in this way, be guaranteed to correspond to the proper human priorities that attach to values: even though, for instance, smoking is ultimately fatal, its urgent lack of value cannot be represented through the price structure; in fact, adding insult to injury, the seller of the product, acting rationally as "rationality" works in the market, adds such costs as advertisement into the cost of the product and, insofar as there is sufficient demand for it, he rolls the added cost onto the hapless consumer: this means that the victim of smoking is actually paying for the misleading advertisements that cultivate this deleterious habit in the first place. This is typical of the market system because bargaining capacity is not based on qualitative assessments of human needs and abilities but on the dispositions and gain-motivated actions of sellers and buyers. For labor, which makes value all the way down, this means that the reign of eradicated individuals dawns: if a whole Mexican village is to be included in the bargain, the cost of labor would go up: it is in the interest of the "owner of the means of production" to receive laborers as insular, uprooted individuals so that he can set the wages as low as possible: whoever doesn't accept the low wage can make himself scarce since someone else is surely behing him in the line (this is what Marx calls the "reserve army of labor.") Those who offer employment opportunities, being rational by the rules of this game, will be paying the laborers only what is needed to guarantee that the labor force, with the requisite reserve, is available: this means reproduction costs broadly understood. The rest of the value produced by labor - an awful lot - is what Marx calls "surplus value" and it is pocketed as profit by the owners of the means of production (the "employers" so to speak.)

In his later work, Marx took a deterministic turn; less interested in stirring up the pathos with which he was attacking the dehumanizing effects of the system, he took the view that there is an inherent tendency in capitalism, given its game-rules and the logic of action prescribed in the system, for profits to fall and crashes (recessions and ultimately depression periods) to erupt. Although the system recovers, the overall trend toward collapse persists overall and the ultimate destruction of the system, as a consequence of its own inner logic, is inevitable. A later Marxist thinker, better known for his revolutionary activities, Vladimir Lenin, added to the mix certain reflections about the opportunities capitalist systems have to fend off collapse: wars and destruction of material and structures (so "we can rebuild"), expansion and exploitation of resources through imperialist and colonialist and related enterprises, and so on. Yet, this being a planet of finite prospects, Lenin also thought that the deterministic propensity of capitalism toward its own collapse is given. To make sure this happens, Lenin advocated vanguard action - to provide revolutionary education and action since the masses are deluded by the glitzy propaganda of capitalism and by the ready allure of trinkets and frivolous pleasures which the market makes available.

The critique underestimated the flexibility of the market system: creation of new needs, for instance, can skyrocket as a result of advertisement (consider, for instance, products like Coca Cola and Pepsi which do not correspond to genuine human needs and are downright harmful to health, generated by sheer advertising persuasion - with cigarettes being an even deadlier example); technology strides have, in our times, provided myriad new gadgets and the end is not in sight in that respect; outsourcing of jobs in a globalized era has undercut the cost of labor and boosted profits. The periodic economic downturns have persisted, as Marx predicted. A problem with Marxist theory in this regard is that it is non-falsifiable, as the philosopher of science Karl Popper pointed out: it doesn't matter if the collapse of the system does not happen, again and again seeing the system recovering, the Marxist can always insist that this does not prove her predictive theory wrong; capitalism does have remedies,as pointed out above, and it is those temporary remedies that do the trick - but they will not work forever. The problem is that we are not told what it would take for the Marxist theory to BE proven wrong: it may or may not be wrong but we have to know in order to be able to check and non-falsifiability means that we are not given this checking-option (the "falsifier.")

What about the savaging moral criticism inflicted by Marxist analysis? Think of moral-political theories of liberty as a response. Such theories are moral theories since they offer justification as to what makes the system "fair," "just," and "legitimate." These are normative terms. The point is that the highest value in the order of things is autonomous individual development: the person, as an individual, ought to be allowed to decide freely, within a privacy sphere, how to write her life: this presumably requires unhampered access to a marketplace of ideas, lifeplans, lifestyles, activities, and so on. That results are not guaranteed is the price we are supposedly to be willing to pay for the sake of realizing the ultimate value - which is the autonomous development of a lifeplan as depending solely on the person. The guarantee is an opportunity to so develop ("pursuit of happiness" rather than the preconditions for human activity.) Defenders of the market system have to show, of course, why it is rational to accept this trade-off (between the distinct possibility of failure, immiseration, crushed human lives and aborted potential, on the one hand, and the non-interference principle covering the private life within which liberty is exercised for development.) A critique that can be thrown on this whole way of thinking is that this bargaining rationality (thinking in terms of costs and benefits) is itself a reflection of the market system's distinct logic that subordinates human needs under competitive price-tags and replaces the essential human quest for values under a profit-seeking motive.

The Market System

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© 2014 Odysseus Makridis

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