I’ve been discussing markets in a number of recent posts, and was invited to Virtually Speaking to discuss the issues. You can listen to a podcast here. Host Jay Ackroyd made two important points. First, markets are a tool which can be used by policy-makers to solve problems. They aren’t the only tool, but in many cases, they are highly effective. Second, competent economists and policy-makers don’t use the term “free markets” in the same way that the average person does. They know that there is no such thing as a perfect market in the real world. They know that sellers have an edge over buyers in knowledge about the product, competition and other important factors. They point out the dangers of monopoly, externalities, and other imperfections that always exist in the real world, and generally agree that one role of government is to deal with those imperfections.
On the other hand, in common political discourse, you only hear about the markets in worshipful terms. You hear that they are part of the natural order, that they arise spontaneously from the general conditions of society, that they are the greatest thing ever, and that if only government would just get out of the way, the market would solve every problem. Here’s an example from William M. Isaac, former Chairman of the FDIC:
History teaches that when government bureaucracies try to direct economies, stifled creativity, distorted markets and low economic growth are inevitable results. One of the easiest and most insidious ways for bureaucrats to control the U.S. economy is through the banks, directing who gets – and who can’t get – loans and other essential banking services. That’s happening today, and it ought to alarm and frighten all of us.
The problem Isaac addresses is payday lenders; apparently he is really upset that the Department of Justice is cracking down on abuses, because his clients must be allowed to lend to the poorest among us at obscenely high rates of interest, especially after they spent so much money getting rid of State usury laws.
Belief in unfettered markets isn’t limited to paid consultants, though. There’s a good example in this post of an academic economist (Russell Roberts of George Mason University) flatly saying that markets are emergent phenomena. In the same vein, we get Friedrich Hayek, the father of neoliberalism, in an article dated 1945, after a war in which bureaucrats managed the economy successfully through a time of crisis. He claims that markets “evolved without design (and without our understanding [them])”. The problem they solve is “how to dispense with the need for conscious control, and how to provide inducements which will make the individuals do the desirable things without anyone having to tell them what to do.” H. 24. He makes it sound like a miracle that the human race stumbled upon this system. The only difference between this and Professor Roberts’ article is the use of the term emergence in the latter.
Emergence is a real term, used in a number of fields, and with a long history. You can find an excellent description of the history and current usage in this article by Peter A. Corning in the journal Complexity. Corning repeats a standard definition offered by Jeffrey Goldstein in the first issue of the journal Emergence:
… the arising of novel and coherent structures, patterns and properties during the process of self-organization in complex systems.” The common characteristics are: (1) radical novelty (features not previously observed in the system); (2) coherence or correlation (meaning integrated wholes that maintain themselves over some period of time); (3) A global or macro “level” (i.e., there is some property of “wholeness”); (4) it is the product of a dynamical process (it evolves); and (5) it is “ostensive” — it can be perceived. For good measure, Goldstein throws in supervenience — downward causation.
Take a look at the video of the Game of Life; you’ll see examples of most of these points. There are completely unexpected formations, which maintain themselves over very long periods of time. There is some sense that these formations are constant and “wholes”. Some of the formations, like gliders, form from random starting points, and evolve over time. Finally they are easy to perceive. There is no downward causation, though.
I don’t think markets evidence any of these characteristics. A market is an organized system for the exchange of goods and services. There is no output of markets. They exist merely to provide a service. The information you get from a market is merely a time sequence of things exchanged and their prices. There is no self-organization, no purpose behind those prices, no persistence, and in no sense are they predictable, or the result of application of some set of rules. All markets are the direct result of human conscious activity and purpose, just as the individual transactions in the market are the product of human purpose. All markets operate under rules made up by people and changed as necessary to create a chance of fair treatment; or changed purposely to give one side an unfair advantage, as with getting rid of usury laws. There is no novelty in the activities of markets. They provide pricing, and only pricing. There is no thing that comes of markets and persists, merely moment to moment transactions that enable people to assess the desirability to themselves of buying and selling. For example, there is no pattern to prices, no predictability.
That’s not to say they aren’t useful as tools to solve particular problems, such as making it easy to buy and sell. People use markets to do other things, including division of labor, as Hayek and Roberts say, but that is no different from using an allen wrench to assemble an Ikea table. Of course, you could use a flat-head screwdriver to assemble an Ikea table, but the allen wrench is a superior tool for the purpose, just as markets may be a good solution for some problems.
The point of Roberts’ article is to teach his intended audience of average people who know nothing about economics that regulations that interfere with the workings of the miracle markets are evil. I’m no expert on Hayek, but I have read The Road To Serfdom, and commentaries on his thinking. It seems to me that he was horrified by socialism to the point that pushing capitalism to its extremes was morally superior, even when it meant ignoring centuries of progress towards social justice. Hayek and his followers believe in constructing a society in which there is no role for citizens beyond that of consumer, and that the elites who make the rules for the markets they dominate should be allowed to do as they wish, without regard to interests beyond their perception of financial efficiency, that is, without regard to market imperfections and the disastrous impacts they have on our lives and our planet.