A Proposed Definition of Market Economy
In this post, I give a proposed definition of the term “market”:
A market is the set of social arrangements under which people buy and sell specific goods and services at a specific point in time.
Social arrangements means all of the things that constrain and organize human action, including laws, regulations, social expectations, conventions, and standards, whether created or enforced by governments, institutions or local traditions.
With this definition in mind, how should we define the term “market economy”? To start with, my definition is meant to contrast with other definitions discussed in this post, and particularly that of Samuelson and Nordhaus, Economics, 2005 ed. p. 26.
A market is a mechanism through which buyers and sellers interact to determine prices and exchange goods and services.
That definition forms the basis for their definition of the term “market economy”:
A market economy is an elaborate mechanism for coordinating people, activities, and businesses through a system of prices and markets. It is a communication device for pooling the knowledge and actions of billions of diverse individuals. P. 26.
The terms market economy and free market economy are used by people to describe the economic system in the US. Many people are committed to the belief that free and untrammeled markets are intricately and intimately bound up with political and personal liberty. Milton Friedman is one such: here is a link to a short 1961 essay in which he explains his views. Friedman contrasts capitalism with socialism. He tries to imagine how such a socialist country might convert to capitalism. In such a country, he explains,
The first problem is that the advocates of capitalism must be able to earn a living. Since in a socialist society all persons get their incomes from the state as employees or dependents of employees of the state, this already creates quite a problem.
Presumably Friedman is talking about the Soviet Union. From this we should conclude that his target is the command and control economy which the Soviet Union and the Socialist Republics of the USSR implemented. Friedman sees the capitalist or free market system as the opposite.
Fundamentally there are only two ways in which the activities of a large number of people can be coordinated: by central direction, which is the technique of the army and of the totalitarian state and involves some people telling other people what to do; or by voluntary co-operation, which is the technique of the market place and of arrangements involving voluntary exchange.
So, it turns out that the definition of a market economy is any economy except a command and control economy. The details about the level of organization and constraint provided by various actors, including but not limited to governments at each level, are details worked out in each society in accordance with local desires. I’m not sure Friedman would approve of my pair of definitions, though.
This essay is a fascinating glimpse into early neoliberalism. Friedman gives a history of liberalism similar to the one I give here. He contrasts what we call liberalism, associated with the New Deal, with his views which he calls new liberalism, “a more attractive designation than ‘nineteenth century liberalism.’ “ He denounces what he calls “democratic socialism” as a contradiction in terms. He explains that his form of liberalism is like the 19th Century form with its emphasis on “freedom”. He says that 20th Century liberals put the emphasis on “welfare”, meaning the well-being of the members of society, not like Great Society welfare programs. His 20th Century liberal might ask what the point of Friedman’s freedom is, since it apparently isn’t the well-being of the members of society.
I take this to be his central thesis:
It is important to emphasize that economic arrangements play a dual role in the promotion of a free society. On the one hand, “freedom” in economic arrangements is itself a component of freedom broadly understood, so “economic freedom” is an end in itself to a believer in freedom. In the second place, economic freedom is also an indispensable means toward the achievement of political freedom.
For example, if you are forced to participate in Social Security, you have lost a portion of your personal freedom. But, he says, that’s what you expect of pointy-headed liberal intellectuals:
They tend to express contempt for what they regard as material aspects of life and to regard their own pursuit of allegedly higher values as on a different plane of significance and as deserving special attention.
I promise you that I consider my creature comforts more important than my intellectual pursuits, such as they are. Friedman then explains that economic power is a natural opponent of concentration of power in governments. Economic freedom is a necessary but not sufficient condition for political freedom. The rest of the essay is a surprisingly shallow explanation of these ideas. You might have thought that he would at least recognize the danger of concentrated capital for democracy. After all, he wasn’t that far removed from the Great Depression, the Palmer Raids, and the horrifying treatment of workers beginning with industrialization. But no. Instead we get this:
If I may speculate in an area in which I have little competence, there seems to be a really essential difference between political power and economic power that is at the heart of the use of a market mechanism to preserve freedom.
This is where he gives his hypothetical about a Soviet Republic that wants to switch to capitalism. It can’t happen according to his discussion; but, of course it did. Then he explains how the Hollywood Blacklist was an infringement of the right of suspected communists to earn a living, and how it was destroyed by the demands of the market. Both of these arguments show how right Friedman was to claim little competence. Or perhaps Friedman hadn’t focused on the way his ideology limited his conceptualization of complicated issues; a problem every thinker must guard against.
In any event, it seems that we don’t need a complicated definition of the term market economy. All it means is any economy that isn’t a command and control economy. Anything else is just metaphor, like the communication device conjured up by Samuelson and Nordhaus.
Therefore, by Friedman’s logic, corporations should be excluded from free market economies. And Friedman should have pimped for the anarchists, which he strangely did not because there was little money in that line of work.
And by strict logic, the military is also excluded.
Unless you allow institutional command and control as exceptions to what is not a “command and control economy”.
Unless there is a better motivation for the typology, I think that distinguishing something as a market economy adds very little. It is a polemical point instead of an analytical one. An economy is a complex network of social relations that form supply-to-consumption chains of relationships. Sometimes the information to manage those relationships feeds back to the people who provide goods or services; sometimes it does not. Sometimes the information about the availability of goods and services feeds forward to the people who use goods or services; sometimes it does not. Those are either aspects of those social relations or they are not. And this varies for each relationship in the chain of relationships. At each point, the relationship is either one of cultural habit (tradition), command and control, or negotiation, or a mixture of the three. Characterizing the entire network by the predominating character of these specific types of relationship offers almost zero explanatory value. Just look at households, workplaces, and shopping in the US and look at it as the neoliberal individualists pretend to do as the free voluntary interactions of individuals. Well look at some specific transactions and ask whether it is voluntary, obedience to tradition, or a free voluntary interaction.
I don’t think there is the necessity for the term “market economy” at all. IMO it is propaganda that is mostly about the polity, not the economy.
Friedman is also an intellectual so one should take his criticisms of intellectuals with a grain of salt or turn it back on him.
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There are always restraints on what one can do. We all live in enmeshed in culture and social relationships. Friedman’s notion of freedom derives from a remarkably impoverished conception of man as a self-interested utility maximizer. In neoliberal thought this idea is expanded to nearly all human activity. And the role of the state is to impose this on everyone. The irony is that Hayek, Friedman et al. in opposing communism come up with a vision of society that is totalizing and authoritarian.
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So beware intellectuals who “regard their own pursuit of allegedly higher values as on a different plane of significance and as deserving special attention”.
Lambert Strether had this post in 2012 about monkeys displaying moral behavior when one them got grapes as a reward and the other got cucumbers. Seems productivity goes down. The ones that got the short end of the stick rebelled and were kinda slow in responding. So maybe morality means something after all. Could the neoliberals be wrong?
OTOH if they all got cucumbers, all was well. Still I don’t like it much that some people have billions and others live in the streets.
The neoliberal view of the human is depressing. It amazes me that people meekly accept such a view of themselves, and still seem to think that they have agency.
I wonder what Friedman would think of the Chinese system, in which the workers are drones, producing and consuming, with no say over their own lives, while the oligarchs and the Communist Party consume the best and makes all the political decisions, including the kinds of intellectual activities that are allowed in public or semi-public settings.
“Utopia. Too bad they’re Communists.”
Ed, thanks very much.
Not exactly on your topic, but Econ prof, Mariana Mazzucato, Ph.D. isn’t far off in her extremely well received, “The Entrepreneurial State: Debunking Public vs. Private Sector Myths.”
“Debunking the myth of a laggard State at odds with a dynamic private sector, Mazzucato reveals in case study after case study that in fact the opposite situation is true, with the private sector only finding the courage to invest after the entrepreneurial State has made the high-risk investments. Case studies include examples of the State’s role in the ‘green revolution’, in biotech and pharmaceuticals, as well as several detailed examples from Silicon Valley. In an intensely researched chapter, she reveals that every technology that makes the iPhone so ‘smart’ was government funded: the Internet, GPS, its touch-screen display and the voice-activated Siri. Mazzucato also controversially argues that in the history of modern capitalism the State has not only fixed market failures, but has also shaped and created markets, paving the way for new technologies and sectors that the private sector only ventures into once the initial risk has been assumed. And yet by not admitting the State’s role we are socializing only the risks, while privatizing the rewards in fewer hands. This, she argues, hurts both future innovation and equity in modern-day capitalism. Named one of the ‘2013 Books of the Year’ by the ‘Financial Times’ and recommended by ‘Forbes’ in its 2013 ‘creative leaders’ list, this book is a must-read for those interested in a refreshing and long-awaited take on the public vs. private sector debate.”
http://www.amazon.com/Entrepreneurial-State-Debunking-Private-Economics/dp/0857282522/ref=sr_1_1?s=books&ie=UTF8&qid=1424403393&sr=1-1&keywords=the+entrepreneurial+state
For example her research shows that Steve Jobs’ iPhone is just a collection of technologies that the U.S. government had already built. Jobs, Google, BigPharma just privatized taxpayer funded technologies…..
I forgot why you felt the need to come up with a definition of ‘the market’ . I don’t believe economists have ever had an agreed definition. They just pretend it’s an object with objective laws.
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I do think you are getting at something by bringing in the social. From the marginalists onwards the social has been excluded from economic theory. The economic actor is no longer a social being. The social is what emerges from self-interested individuals acting to maximize utility. The social thereby becomes an epiphenomenon of market forces. This trick is made to work by treating anything that matters as an ‘externality’. Desires and needs appear like magic from thin air. What neoclassical economists describe is a context-free fantasy world that never has existed and never will. No wonder other social sciences mock neoclassical economic theory. Since Jevons, economics has been a social science that denies the inherent sociality of human being.
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The market is not a transcendental object whose true definition waits to be discovered. Concepts of the market are cultural ideas that are inextricably tied to changing fields of social relationships and practices. There is no place for an objective observer. The observer is always enmeshed. One can, however, be subversive of the power relationships. One can ask: “what is the genealogy (in the Foucaultian sense) of ‘the market’? How was this supposed essence fabricated? What do concepts of the market accomplish?
You can take my union, my job, my health care and retirement, but you can never take the wealth of Mr. Friedman’s sponsors or qualify their right to use it as they see fit. I can just see Mr. Friedman on horseback, in animal skins and blue paint, screaming to his troops as the Rooseveltian hordes descend onto the plain. Shades of Mel Gibson.
When Mr. Friedman refers, sotto voce, to freedom, he refers to his desire that wealth be free, untrammeled by government or unions or communities or competition, to replicate itself. He does not refer to workers’ freedom to unionize, or to the government’s freedom to force corporate actors to internalize the costs of their excess. He assuredly does not mean a government using its power to rein in those excesses when they harm to others.
Mr. Friedman achieves the “freedom” he extols when his arguments persuade government to forego using its power to promote the general welfare, or to use it only to benefit those already powerful.
Authoritarian governments that support market economies are preferable to socialist democracies. This at least was Hayek’s position. Google Hayek and Chile for more on how this played out in practice.