By Francis Lee for the Saker Blog
According to the economics textbooks, the market mechanism is the most effective method of ensuring technical and allocative efficiencies in a capitalist economy. Technical efficiencies being the method whereby goods and services are produced at the lowest costs and allocative efficiencies being a situation where the distribution of goods is such that there will be no surpluses or shortages of commodities produced. This is sometimes termed as Pareto optimality (after the Italian gentleman who coined the term). Demand and Supply will be in long-run equilibrium. Consumers through their money vote will be able determine what gets produced, for whom, and in what quantities.
This process of production and distribution will be mediated through the market mechanism where price signals tell the producers what the consumers are demanding and they respond accordingly. There are a further set of assumptions on which this market theory rests: firstly firms cannot influence the price of their output; products – trousers, apples, haircuts, TVs, – are homogeneous; the consumer has full market knowledge; there are no barriers to entry between difference sectors of the economy.
The above assumptions are of course light years away from actually existing capitalism. Contemporary capitalism consists of a number of market sectors: the competitive sector, best epitomised by street markets, the oligopolistic sector (oligopoly = few producers); for example in motor vehicles, retailing (supermarkets) pharmaceuticals, publishing, computers, banks and so forth. These markets operate under very different conditions from the classic textbook firm. More often than not they operate in flat opposition to the assumptions listed above: they are price makers, their products are differentiated, the consumer does not have perfect market knowledge, and there are formidable cost-barriers to entry. As Schumpeter pointed out price is dethroned as the principal selling mechanism; instead modern corporations actively manipulate the market in shaping consumer preferences through advertising. Now design, brand, and image exist alongside price as a consumer purchasing determinant.
In oligopolistic market structures wages and profits are administered rather than market determined; this means that wages and profits in this sector tend to be higher than in the competitive sector of the economy. This being the case it would be more realistic to say that producer sovereignty was as important as consumer sovereignty.
Finally there is monopoly where one firm dominates the market. The firm does not necessarily have to be big, but there does not exist any other real competition.
The textbook neo-classical view is that anything other than a perfect free market would not be conducive to technical and allocative efficiency. In the real world, however, productivity gains through ongoing research and development (R&D) programmes of large firms have scotched the notion that only a perfectly competitive market can deliver the goods. These productivity gains have been brought about by economies of scale (and scope) and financed by internally generated administered profits set against a financial situation of long term stability. Moreover, the size of some industries, steel-making, ship-building, oil-extraction and refining necessarily means that these enterprises can only be large scale. In the completely imaginary world of perfect competition there would be no cash for R&D since profit margins have been pared to the bone by cut-throat competition. In this ultra-competitive environment there would be no economic or social stability with wild gyrations in prices and wages.
It has been large scale oligopolistic capitalism which has been responsible for the dynamic economic growth of the last two centuries, not perfectly competitive markets which are little more than a metaphysical abstraction.
Joseph Schumpeter once remarked in this respect: ‘What we have to accept is that it has come to be the powerful engine of that progress and in particular of the long-run expansion of total output … In this respect perfect competition is not only impossible but inferior, and has no title as being set up as a model of ideal efficiency.’’ (Capitalism, Socialism and Democracy – 1943)
Moreover, the growth and development of capitalism has had as its corollary the active participation and intervention of the state in every sphere. From the supply side of providing transport, education and legal infrastructure, to export subsidies, protection of infant industries, procurement policies, industry and regional policy, as well as monetary and fiscal policy the influence and role of the state is pervasive. In addition, the state has provided public goods – police and armed forces, infrastructure including health and public education – as well as what are called ‘merit goods’ – art galleries, museums, parks, swimming baths, playing fields, higher education and so forth. It was broadly recognised that systemic market failures were endemic to the free-market capitalist system and that this had to be compensated for by active public involvement in the running of the economy.
This has been the reality of capitalism after the Second World War (and many would argue even long before this) and formed the basis of the post-war settlement and the long period of capital accumulation circa 1950-1973.
The counter-revolution which began in the closing decades of the 20th century and the ideological holy trinity of privatisation-deregulation-liberalisation supposedly signalled a return to free-market orthodoxy of the textbook variety. And in a certain (rhetorical) sense this was true.
Many regulations which were prevalent in labour, financial and product markets were scrapped or weakened. Controls on capital movements, ‘flexible’ labour markets, rules on borrowing and lending, distinctions between laws governing commercial banks and investment banks, and commercial banks and building societies and much more ‘red tape’ to boot. It was claimed that this was going to have an energising effect on the economy by ‘getting the government off the backs of business’ and letting the system flourish. It was argued by its proponents that if market forces were unleashed then growth and prosperity could be assured since only market forces could produce a positive outcome. And where it was not possible to free-up a market, in terms of the non-market sector – like the UK’s National Health Service (NHS) or civil service – then a quasi-market structure should be set up in these areas in order to maximise efficiency. In terms of outcomes, however, the less said about this latter policy the better after three successive blow-ups starting with the dot.com bubble of 2000.
Such was the rhetoric and to a degree the practise of governments since 1979. It was self-evident that these free-market nostrums became, and still are, with one or two exceptions, the ruling theology among the political, business and media elites throughout the world. However, sustaining such views gets a little problematic when the downturn of the capitalist cycle comes around.
Nothing could illustrate this better than the financial crisis of Summer and Autumn of 2008. The well-heeled captains of finance apparently see no inconsistency in their putative free-market beliefs and then asking for a bail-out when their misconceived lending policies end in a mess. Then the time begins to ‘get the government on the backs of business’. Interesting to note also that Adam Applegarth, CEO of Northern Rock, in the UK, basic salary £760,000.00 per annum was in charge. They don’t even have the decency to resign.
This surrender of the US and UK monetary authorities to Wall Street and the City of London has been well articulated below.
‘’After pretending an unwonted firmness for a few weeks, the central banks in both Britain and the United States caved in, accepting financial sector bailouts and in the Fed’s case lowering interest rates. Moral hazard has thus been made immoral certainty; financial market participants who indulge in grossly speculative activity can be … ‘highly confident’ (in the words of the old Drexel Burnham commitment letters) that they will be bailed out by the public sector, i.e. ultimately by the taxpayer. Rarely has there been such an obvious subsidy of the overpaid by the beleaguered. It raises the question: what if anything is the point of central banks in the new world we have entered?’’ (Martin Hutchinson – The Great Conservatives – www.prudentbear.com)
In 2008 the crisis across the world involved central banks who were bailing out markets by lowering interest rates attempting to thaw-out the liquidity freeze-up in the system. But, hey, wasn’t the whole crisis caused by too much debt and liquidity in the first place? Got it in one. The medium to long term implications of this re-inflation of the liquidity/credit bubble doesn’t bear thinking about, but the defining characteristic of markets is that they think strictly short term; and in the present climate they get what they want from both central banks and politicians: Liquidity, liquidity and more liquidity.
Such state intervention in contemporary markets has been a feature of the whole post 1979 period. From the Savings and Loans and Long-Term Capital Management debacles in the US to the contemporary crisis in world finance with more in the pipeline (that’s for sure) the taxpayers have been dragooned to indemnify the banks (markets) against their own greed and incompetence.
So the entire marketisation agenda has really been nothing more than an attempt to provide investment outlets for surplus capital – privatisation – and a thin ideological veneer to obscure the reality of allowing the predatory beasts of international finance and corporate power free rein to pursue their own ends. The reality also is of a business sector which is totally addicted to state support.
A pure free-market is therefore impossible and possibly even undesirable. It is incompatible with a modern economy and probably always was, except for perhaps early settlers in a huge virgin continent like North America. Markets of some type or other will always exist as part of any national economy. One does not necessarily have to take an ultra-Stalinist command economy as the only alternative. Precisely how a mixed economy would integrate markets into its general framework is another article.
However, what we are currently witnessing in 20/21 is the mother of all blow-outs. But this was always going to be the outcome given the myopic want-it-all-want-it-now of the cultural zeitgeist. We now seem to have reached the financial/economic/political and cultural inflexion point of the existing order. We can only guess at the eventual outcome – an outcome which has germinated in the mental landscape of Klaus Schwab and Bill Gates, and the Great Reset. But I suppose we could always try prayer.