Scope and Limits of the Market

I UPPSALA PAPERS IN ECONOMIC HISTORY 1997 RESEARCH REPORT NO 43 Scope and Limits of the Market Bo Gustafsson Reprinted from Teichova, A. - Mosser, A. - Patek, J. (eds.), Der Markt im Mitteleuropa der Zwischenktiegszeit. Prague: Universita Karlova, Vydavatelstvi KAROLINUM, 1996. Depattment of Economic Histoty DER MARKT IM MIlTELEUROPA DER ZWISCHENKRIEGSZEIT KARLS-UNIVERSITÄT - PRAG 1994 S. 19-52 SCOPE AND LIMITS OF THE MARKET Bo G USTAFSSON (Uppsala) “It has been said and may be said that this is precisely the beauty and the greatness of it: this spontaneous interconnection, this material and mental metabolism which is independent of the knowing and willing of individuals, and which presupposes their reciprocal independence and indifferente. And, certsinly, this objective connection is preferable to the lack of any connection, or to a merely lotal connection resting on blood ties, oron prime- val, natural or master-servant relations.” Karl Marx, Grundfisse (1857; 1973), p. 161 “In principle the study of business relations is the study of the machinery by which men are liberated, over a large area of their life, from the limitations which a failure of correspondence between their faculties and their purposes would otherwise impose on them. The things they have and can, are not the things they want and would; but by the machinery of exchange they can be transmuted into them. The economic relation, then, liberates them from the limitations imposed by the nature of their own direct resources. And this liberation comes about by the very att that brings a corresponding liberation to those with whom they deal. ‘It is twice bless’d. It blesseth him that gives, and him that takes.’ Surely the study of such a relation needs no apology, and there seems to be no room to bring against it the charge of being intrin- sically sordid and degrading. The conditions under which business is actually conducted (like other conditions under which we live) may be far from ideal, but the business or economic relation as such, does not seem to be open to the faintest suspicion of a taint, even when regarded from the loftiest aesthetic or ethical position.” Philip H. Wicksteed, The Gommon Sense of Politicd Economy 1, (1933), p. 173 Introduction ver sinte Aristotle made his observations on the tontrast between oikonomike and chrematistike in his Ethics, the properties and legitimacy of the market have been hotly contested. The r Schoolmen, following Aristotle and the teaching of The BibZe, fought a rearguard action against the advancing market ideology in the late Middle Ages. Weber, Tawney and others have shown how 19 important the issue was in earlymodern times. Before Adam Smith, and some of kis predecessors, entered the scene it was predominantly the moral problem of the legitimacy of the market that was at issue. By attempting to show that the market, based on self-interest and competi- tion, was not orrly a rational but also a beneficial mechanism promoting human welfare, Smith killed two birds with one stone. But he also opened up a main theme in modern social discourse that is still with us. In British and French social thought the central teaching of Smith has on the whole prevailed and become more and more elaborated. The modern theory of general competitiv,0 equilibrium as suggested by Kenneth Arrow and Gerard Debreu may be regarded as the crowning achievement of this tradition even if representatives of Austrian economics from Menger on would claim a rival interpretation. The situation was, however, differ- ent in Central and Eastern Europe with traditions that were less liberal and more favourable towards regulation. In the wake of the German ZoZZ- verein, Friedrich List emphasized the crucial importante of the statein promoting economic growth; and to Karl Marx and his followers the interaction of competing, autonomous and self-interested individuals in the market was as likely to produce economic chaos as economic har- mony. In this tradition, shaped in a social environment distinguished by strong and strongly interventionist govemments, there was also a general distrust of the cash-nexus and market mentality, on the one hand, and a strong belief in the possibilities of wholesale social engineering, on the other. This ideologital tontrast between market liberalism and state socialist thinking is clearly seen in the great interwar debate on the possibilities of socialist planning (Hayek, 1935). With the benefit of hindsight it is easy to conclude that the advocates of the market mechanism stored a victory over the advocates of (coercive) economic planning; the first- mentioned representing realism and tommon sense, while their oppo- nents appear idealistic and utopian. However, in the high and palmy days of seemingly successful Soviet economic planning most Observers had regarded the 0utcom.e of the debate as inconclusive. Sinte then the scene has changed dramatically. We are now living in an epoch characterized by the triumphant propagation of the market mechanism all over the world. The centrally planned economies of Eastern Europe are gone and in Western Europe and the USA publit assets are sold off, industries are deregulated, and some publit economic activities are transferred to private firms and the market nexus (Donahue, 1989, chapter 1). But also, parallel to this, mass unemployment is back, and ine- qualities In income and wealth are once again growing. Even if this new tum towards the market has clearly been ushered in by politital changes (the downfall of the Communist regimes in Eastern Europe and the coming of conservative governments, starting with the governments of 20 Thatcher and Reagan in the 1970s in the West), we may still believe that these politital changes were conditioned by a growing disbelief in the superiority of administrative economic mechanisms. Markets in history If we take a very lorigg” viewwe may argue that the market mechanism has history on its side. It all started in ancient Greece, where the achievements of Greek civilization were conditioned or, at least, paralleled by the first prospering of commerce and markets in the Aegean. Likewise, Roman civilization showed at its best during the late Republic and the early Empire when the Mediterranean developed into alarge market area. The decline of Rome and the onset of the so-talled Dark Ages of early Europe witnessed, on the other hand, the shrinking and disappearance of markets. When Europe started to expand from the eleventh century, markets, trade, merchants, handicrafts and towns proliferated on the basis of the division of labour between agriculture and industry. Similarly, from the early sixteenth century modem Europe’s development was paralleled by the new world market economy created in succession by Portuguese, Spanish, Dutch and British traders although, to be sure, trade was also effectively assisted by guns and sails. Moving forward in history, we may plausibly argue that the industrial revolution of the late eighteenth century, with its great technological and organizational innovations, like steam power and the factory system, was triggered of by an impressive market growth channelling information from expanding markets and creating incentives for increasing production. The first industrial revolution was followed by a setond one from the late nineteenth century, when modern science was integrated with industry and the modern, big torporation emerged. Once again we may connect economic progress with widening and more efficient markets conditioned by the building of railways and the introduction of steam ships and the telegraph. Thereby, people and countries were brought closer to each other, and information about goods, prices and exchange rates were, for the first time in history, rapidly transmitted all over the world. Markets for labour and capita1 supplied factors of production to industry on a scale unheard of. Admittedly, the first part of the twentieth century was distinguished by shrinking markets, state intervention, extensive regulation of economic activity and, in Russia and Eastern Europe, even wholesale replacement of the market mechanism with a command economy. But by now the market had regained and extended its earlier prominente. On the basis of these sweeping observations, one may be inclined to think that there are no serious problems involved with the market mechanism sinte, if there were, history would not show us its triumphant 21 expansion. Rather, history would have weeded it out and would have given rise to other viable mechanisms for resource allocation. But against such a somewhat simplistic view, one may argue: firstly, that it is possible to find successful alternatives to markets in history; setondly, that market mechanisms have sometimes been successfully restricted and controlled; and thirdly, that we cannot be absolutely sure that the historital failures of alternatives to markets have failed because of the inherent characteristics of those mechanisms rather than their specific historital form and/or because of the conditions of their operation. (1) Economic historians have always felt somewhat uneasy about the textbook picture of markets found in mainstream economics. In the main, 1 do not have in mind the obvious and admitted fatt that the perfect market of the textbooks is a construct of a possible, not an actual world (Arrow-Hahn, 1971, p_ vii). 1 refer to the empirital counterpart that this construct implicates. This empirital counterpart presents us with a market economy made up of myriads of (small) firms operating in anonymous and highly competitive auction markets, with exogenously given prices and technologies, instantly adjusting mixes ofinputs and outputs accord- ing to relative price changes and with a passive and minimal state in the background. In this image of a market economy there is no room for organizations, sinte firms are only production functions. This model may have had some empiri& relevante in mid-nineteenth century Britain, but it was always difficult to apply it to other periods and other countries.

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