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Utopia and markets

from David Ruccio

Maarten-Vanden-Eynde-The-Invisible-Hand-Art-Brussels2

Maarten Vanden Eynde, The Invisible Hand (2015)*

We hear it all the time. On a regular basis. Having to do with pretty much everything.

Why is the price of gasoline so high? Mainstream economists respond, “it’s the market.” Or if you think you deserve a pay raise, the answer again is, “go get another offer and we’ll see if you’re worth it according to ‘the market’.”

Alternatively, if you want to solve a particularly pressing problem—such as climate change, widespread unemployment, or Third World poverty—mainstream economists’ usual answer is “let markets handle it.”**

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Markets have a magical, quasi-mystical status within mainstream economics. They are both the original starting-point and far-reaching conclusion of mainstream economic theory. What I mean, first, is markets are there at the very beginning, without any explanation of where they come from or how they are formed—although there may be an occasional nod to Adam Smith (who famously invoked a natural “propensity to truck, barter, and exchange one thing for another”) or Robinson Crusoe (which presents, on one reading of Daniel Defoe’s novel, the model of two individuals who trade to their mutual benefit under conditions of equality, reciprocity, and freedom).*** Otherwise, markets are just there, with the requisite price and quantity axes and supply and demand schedules, as the starting point for economic analysis. Then, after a great deal of theoretical work (concerning the underlying determinants and the final consequences), markets are declared to be the best solution to the problem of scarcity (in finding a perfect balance between limited means and unlimited desires).

After min. wage

The “proof” of the superiority of markets often occurs in two steps (although today, in the usual sloppy teaching of mainstream economics, the second step is left out). At the level of individual markets, mainstream economists’ argue that economic welfare—consisting of the sum of consumer and producer surplus—is maximized at equilibrium. “Consumer surplus” is the extra benefit enjoyed by consumers in a market who pay less for goods and services than they were willing and able to pay for it (areas A + B + C, in the diagram above). Meanwhile, “producer surplus” is the difference between what producers are willing and able to supply a good for and the price they actually receive (areas E + D). At the equilibrium, the sum of the two is at its maximum. In contrast, when the market is not at equilibrium (such as when there’s a minimum wage, a wage rate above the market equilibrium wage rate, the green line in the diagram), there’s a “deadweight loss” (consisting of C + D). As far as mainstream economists are concerned, each market in equilibrium (whether for oranges or labor) creates the most total welfare for market participants.

PE

What about the market system as a whole? Here, the argument is somewhat different. It’s a theory about efficiency, not welfare.**** Mainstream economists claim that, when taken together (in what is referred to as general equilibrium), markets can generate a set of prices that finds a point—for example, A, B, or C, in the diagram above—on the “production possibilities frontier.”***** That’s the maximum amount an economy, given its technology and resources, can produce. Any point inside the frontier (such as D) represents an inefficient allocation of resources (more can be produced of either or both goods without the kind of tradeoff that occurs on the frontier). Importantly, Pareto efficiency means that no one can be made better off without making someone worse off.

That’s the remarkable, counter-intuitive conclusion of the mainstream theory of markets: everyone—every individual and society as a whole—benefits in a world in which all households and firms make decisions based solely on their own self-interest.

Thus, mainstream economists’ celebrations of the market and market solutions for all economic and social problems rely on both the presumption of markets as the given starting-point of analysis and their sweeping conclusions, concerning individual markets and the market system as a whole.

It is, of course, easy to criticize one or another of the assumptions underlying the celebration of free markets, many of them formulated by mainstream economists themselves. For example, markets may have “negative externalities,” that is, social costs that are greater than private costs (pollution is a common example). Under such conditions, more of a good or service will be produced than is socially beneficial. Monopoly power also distorts markets, since with market power firms will produce less, at a higher price, than if they operated according to the model of perfect competition (and, as mainstream economists are now discovering, it’s likely they will pay lower wages).****** Imperfect and asymmetric information, too, will lead to inefficient market outcomes—such as, for example, when conflicts of interest arise between a principal and an agent in a firm or banks are able to sell more financial products (such as derivatives) if they can conceal the true level of risk.

Thus, we can understand the two poles of debate within mainstream economics. Economists within the conservative or libertarian free-market wing celebrate free markets and criticize any and all forms of government intervention, while those in the more liberal wing focus on market imperfections and call for more government regulation of markets. Once again, it’s the invisible hand versus the invisible hand.

But underlying and informing the debate between the two wings of mainstream economics is a shared utopianism of markets as the best, natural and most efficient way of allocating goods and services—including labor, money, and natural resources. They may and often do disagree about the necessity and effectiveness of freeing-up or regulating markets, which comes down to whether or not they “see” exceptions to the basic model of perfect markets. But they share a belief that the logic of decentralized private markets is the appropriate way of thinking about and organizing the “world of goods.” In other words, mainstream economists debate, often intensely and with no small degree of sneering and sarcasm, the best way of getting markets to operate correctly—but that’s only because they utilize the same basic theory according to which a properly functioning market system is the only appropriate foundation and goal for theory and policy. Market fundamentalism thus represents the utopian horizon of mainstream economics.

The critique of market fundamentalism starts where mainstream economics leaves off—with the idea that the world of goods can and should be organized by markets.*******It highlights the hidden ground of the mainstream theory of markets and calls into question the very possibility of market exchange. The result is a different utopian horizon, which both refuses the self-suturing conception of market value and opens up the realm of possibility for other ways of organizing economic and social life.

When mainstream economists blithely draw the diagram or write down the equations for a market, what they’re doing is presuming—while failing to mention, let alone discuss—a whole host of conditions. Callari focuses on mainstream economists’ “image of the economy as a world of goods, and of the world of goods as a homogeneous field.” Such an image serves as the foundation for the positing of calculable “interests,” which thus become the central code of the economy and society. Within the homogeneous field of goods, every action can be connected with every other action in a measured (that is, analytically calculable) way. Once all the appropriate calculations are completed, “the market”—both individual markets and the market system as a whole—finds its equilibrium, the self-suturing reconciliation of all the competing interests. It also closes off the field of goods to any inspiration or influence other than self-interested rationality—be they traditions, social obligations, or ethical commitments.

Taking up on and extending that point, Amariglio argues that many of the features of non-market transactions involving goods and services (such as the gift) also haunt market exchanges.

There is nothing at all “certain” about any act of exchange, and nothing in it less symbolic or less “about” power, responsibility, meaning, and so forth. Likewise, there is something fundamentally “constituted” and “constituting” about identities and subjectivities in every act of exchange. Leaving aside the question of the multiplicity within selves who enter into trades, the fact remains that exchange is a very overloaded activity, and trading partners not only may be of several different minds about the transaction, but are often uncertain as to what exactly such transactions “mean” in terms of their own or others’ wealth and property, the effects on their well-being, who or what subject positions they occupy, what exactly is being traded, and so forth.

Market exchanges are therefore crosscut—just like any other allocative transaction, be it the gift, planning, or plunder—with a whole host of perturbations and undecidables. Both markets and the interests they are said to represent rely on “external” (historical and social) conditions and are, in different times and spaces, characterized by considerable uncertainty and indeterminacy. And once we begin to investigate those conditions, once we begin to analyze the “openness” of markets, we are forced to confront the ability of any act of exchange—and, for that matter, any economic discourse about markets—to successfully suture itself, at least in any kind of “permanent” act of closure.

The impossibility of market exchange, in general, suggests the need to recognize and attend to the historical and social specificity of individual markets—without any overarching, general theory of price or exchange-value. It also opens the door both to other commitments, whether ethical or political, and to other means of transacting goods and services, as they imply different conditions and consequences for society, for the social relations among persons, things, and nature.

Imagining and enacting those possibilities represent the utopian horizon of the critique of markets and mainstream economists’ theory of the market system.

 

*The Invisible Hand is a rubber copy of the right hand of Leopold II, taken at night from the 1926 sculpture by Thomas Vinçotte, located at the Regentlaan in Brussels, Belgium. The mould was taken to a former rubber plantation in Kasai-Occidental in the Democratic Republic of Congo and filled with natural rubber. The rubber hand was presented at Art Brussels 2015. It refers both to Adam Smith’s theory (as elaborated in the Theory of Moral Sentiments and The Wealth of Nations) and to Leopold II’s use of the International African Association (1877-79) and later the Congo Free State (1885-1908) to pillage the available natural resources. The grotesque result is that, by doing so, he “unwittingly” instigated local economic growth but at a high price: more than 10 million people are estimated to have died as a consequence of Leopold’s “Invisible Hand.” The Invisible Hand also points to the custom of chopping off the hands of enslaved people to ensure the rubber quota. To paraphrase Marx, markets come “dripping from head to foot, from every pore, with blood and dirt.”

**With one notable exception: healthcare.

***The Robinson Crusoe story has been read in a radically different vein by many heterodox economists, including Stephen Hymer and Ulla Grapard.

****Mostly because of Kenneth Arrow’s “Impossibility Theorem,” which challenged the idea that there’s a procedure for deriving a collective or “social” ordering—a Social Welfare Function—based on individual preferences.

*****While mainstream economists can claim to have solved the problem of “existence” (i.e., that there is such a set of prices consistent with overall efficiency), much to their consternation they have not been able to prove either “stability” (that prices, if away from the equilibrium set will move toward the equilibrium) or “uniqueness” (in other words, there may be many such sets of prices).

******That’s why, as I teach my students, there is such a thing as a free lunch: just abolish monopolies and oligopolies, and the economy can increase production (technically, the economy can move from inside to the production possibilities frontier without any additional resources or new technology, just by eliminating imperfect competition).

*******The critique I present here is inspired by two key essays—Antonio Callari’s “The Ghost of the Gift: The Unlikelihood of Economics” and Jack Amariglio’s “Give the Ghost a Chance! A Comrade’s Shadowy Addendum—both published in The Question of the Gift: Essays Across the Disciplines, edited by Mark Osteen. It is also informed by research that appeared in Postmodern Moments in Modern Economics, by Amariglio and myself.

  1. May 19, 2018 at 7:27 am

    Your first argument looks convincing against a minimum wage. But what about Bernoulli? If large profitable producers gain at the expense of poor consumers, do we really say there is no net change in overall ‘welfare’. Whatever you are maximising seems much less important than what I would think welfare to be. As a mathematician, couldn’t I adapt your argument to be one in favour of the minimum wage?

    As for your second argument, what about secondary effects? It may be that the lot of the poor cannot be improved without some form of redistribution, but maybe the rich suffer when the poor are too poor, and large parts of the world become difficult or upsetting to visit. Again, for conclusions to be valid we surely need to challenge the model with our experience.

    To me, the theory as you present it seems not so much Utopian or simplistic as just wrong. An alternative ‘Utopian’ model could at least open up debate. E.g. (1) consider Bernoulli, (2) consider secondary effects.

    • Edward K Ross
      May 20, 2018 at 5:58 am

      Dave Marsay “Again \, for conclusions to be valid we surely need to challenge the model with our experience”
      As an eighty two year old who had very little education before achieving a humble B. A. my knowledge of the world is based on experience in New Zealand, Australia and in a remote area of Papua New Guinea as a volunteer. From my background I have to support your conclusion , logically we all may have different experience, therefor I believe sharing those experiences helps to explains the problems ordinary people experience with the present mainstream economic system. Also I would like to add from an Anthropological perspective past experiences create a subconscious affect of ones understanding of the present as does the culture we live in. Ignoring these issues is what disconnects economic theory from reality.Ted

    • May 21, 2018 at 8:14 am

      Dave, your reference to Bernoulli proved most interesting.

      “Bernoulli often noticed that when making decisions that involved some uncertainty, people did not always try to maximize their possible monetary gain, but rather tried to maximize “utility”, an economic term encompassing their personal satisfaction and benefit.” [https://en.wikipedia.org/wiki/Daniel_Bernoulli#Economics_and_statistics].

      I’m coming at this from statistical reliability theory, so seeing this as saying utility is about maximising the monetary gain they can reliably make. At the point of exchange that may be the same number, but if one one side it is maximum gain, on the other side it is minimal loss. Even worse, if the side gaining maximises the reliability of its doing so, it decreases the options the other side has for ensuring the reliability of its position.

  2. Prof James Beckman, Germany
    May 19, 2018 at 8:31 am

    Ah, the old problem of details. a) What are the outsourcing/mechanization options? 2) What subsidies will government supply if any? c) What is the exchange rate as it impacts both exporting & competitive imports? In reality, the SS & DD functions each depend on 5-10 variables, making analysis impossible except in a computer. But economists made a good start, it seems to me.

  3. visitor
    May 19, 2018 at 10:10 am

    The simplest argument against the “theory” of markets is to ask its proponents to present an empirically observed graph of supply and demand, and show that its actual characteristics, observed “in the wild”, correspond to the abstract arguments they consistently put forth.

    Open any textbook on economics; you will never see such empirical curves of supply and demand, for whatever good or service. Ever. The theory of markets seems to be based on a phenomenon that is apparently not observable, hence not measurable. And we are supposed to accept it as indisputable on “scientific” grounds and derive all sorts of economic calculations from it…

    • Prof James Beckman, Germany
      May 19, 2018 at 7:20 pm

      Hi, Visitor, perhaps the easiest explanation is that companies show sales’ points for various periods of time, except when component markets are broken out for same period. So those marginal cost & marginal satisfaction curves are said to exist inside the collective heads of customers/suppliers. What else can an armchair theorist do? (Marketing researchers sometimes have panels to advise them of these matters, but such research seems to be seldom reported by economists to my knowledge.)

  4. May 19, 2018 at 12:32 pm

    From an economies as graphs perspective: Markets are not a device for finding price equilibrium for a quantity. That’s a very blinkered definition. They’re a device for finding all the different uses a resource or good may be put to and arbitrating between them, without the producer or consumer having overall knowledge. The invisible hand is about finding paths and making edges in the graph.

    Money is also a token for finding paths and making edges in the graph. It’s for finding long cycles of reciprocity (fisher -> carpenter -> farmer-> cobbler-> fisher) that immediate barter does not see. Money is a distributed algorithm for finding these cycles of exchange, and they’re supposed to be equal. The fact than money accumulates, that it can be “pumped” by these cycles, is simply an exploit. And the inequality this generates makes money dishonorable and invalidates money and markets as a fair means to assign resources to purposes globally.

    Economies are graphs. Study them as graphs!

    • Prof Dr James Beckman, Germany
      May 19, 2018 at 1:21 pm

      Pavlos, that certainly fits in with not only alternative uses but alternative locations–many over national boundaries.

    • May 21, 2018 at 8:31 am

      Pavlos, well said! I would just like to point out a macro version of your “long cycles of reciprocity” involving biological and developmental cycles but not finance, which is pumped in and sucked out via a hiatus. And the word “graph” having different meanings, Graph [4] in my mathematics dictionary!

  5. Questa Nota
    May 19, 2018 at 3:23 pm

    A favorite wage story.
    Guy gets fed up, interviews elsewhere, receives offer, notifies his boss.
    Boss together with her boss say, You have to let us match that offer.
    Guy says, If I didn’t have that offer, we wouldn’t even be having this conversation.
    Guy starts new job.

    Second wage story.
    Guy is on 6-month training session rotating through different departments and offices.
    At end, he is placed in low-visibility, low-opportunity department.
    He asks about options.
    Boss says, We have guys lined up around the block if you don’t want that position.
    Guy interviews around, gets offer, doubles salary.

    Moral of story: employers are not monopsonists, even when they try to convince themselves.

  6. Craig
    May 20, 2018 at 2:15 am

    The post makes many good points, of course. However, there’s one little historical thing about paradigm changes that all of the analyses, theorizing and cautionary thinking will not change, and that is: everything adapts to the new paradigm…not the other way around. I know that is anathema to the researcher, theorist and conservatively minded, but that’s what happened when agriculture, helio-centrism, the printing press and the Reformation changed everything in those spheres of human endeavor, and with Direct and Reciprocal Monetary Gifting the obviously increased individual, commercial and systemic workability and general progression will be the same. There’s no end to history and theorizing will pick right back up shortly after the new paradigm becomes the new integrated reality, but there is never a return to an old paradigm.

    • Prof Dr James Beckman, Germany
      May 20, 2018 at 7:08 am

      So true, Craig. In my days doing cognitive anthro, the term would have been “cognitive dissonance”: https://en.wikipedia.org/wiki/Cognitive_dissonance. It is the nature of our brains to build what each of us considers a consistent view of the world. Actually we compartmentalize often conflicting views, such as those we see in many supporters of Mr Trump & other national leaders.

  7. Helen Sakho
    May 20, 2018 at 3:23 pm

    The “invisible hand” turned into blatantly “visible boots” ages ago. I insist that all Economists must now have a thorough and complete eye/vision check up at a trusted optician, who is not herself/himself blinded by super-profits of private business or “hidden” private/public “partnerships”. Good luck to them all.

    Sent from my iPhone

    >

    • Prof Dr James Beckman, Germany
      May 21, 2018 at 5:54 am

      Helen, perhaps we should guess that most econmists have good hearts but are in need of better eyeglasses. Many others can easily find market collusion (“imperfect” markets) & uncompensated environmental costs (“externalities”), for example, with hardly any effort.

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