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...certain of freedom--expanding the range of choices and giving each person variety of partners with whom to deal.
--David Miller and Saul Estrin (1994)--
Rather than efficiency machines, optimal incentive systems, cybernetic miracles, and human liberators, when we examine markets we find institutions that generate increasingly inefficient allocations of resources, unleash socially destructive incentives unnecessarily, bias and obstruct the flow of essential information for economic self-management, substitute trivial for meaningful freedoms, and lead to irremediable inequities in the distribution of goods and power.
--Robin Hahnel and Michael Albert (1990)--
The debate between those who believe that markets are an integral part of a desirable economy and those who believe we must eventually replace the market system with some kind of democratic planning is long standing. By the end of the twentieth century, supporters of markets had the upper hand for obvious reasons. (1) The demise of central planning not only in the Soviet Union and Eastern Europe, but in China, Vietnam, and Cuba (to a lesser degree) casts a pall over any talk of comprehensively planning how best to use productive resources. (2) In Western Europe and the United States, the free market jubilee began in the 1980s when Margaret Thatcher and Helmut Kohl defeated social democracy in Europe and Ronald Reagan put liberals in the United States on the run. (3) When social democrats regained power in Germany and Great Britain, and Democrats won back the White House in the 1990s, instead of reigning in market mania Tony Blair, Gerhard Schroeder, and Bill Clinton routed progressive forces inside their own parties, promoted pro-market, "third way" domestic policies, and directed the IMF (International Monetary Fund), WTO (World Trade Organization), and World Bank to force free market medicine down the throat of one third world country after another. (4) In the aftermath of the East Asian financial crisis even mighty Japan Inc. and other Asian "tigers" like South Korea were forced to bow to the market gods they had long held at bay, and abandon their highly successful "Asian model" of long-run international economic planning.
Consequently, by century's end, to speak ill of markets narrowed one's access to ears, and progressive economists quickly learned how to reformulate criticisms as suggestions about improving market performance. Any hint that one considered markets to be part of the problem rather than the key to the solution to any economic problem was sure to blow one's cover in the economics profession as well as policy circles. Proclaiming oneself a "market abolitionist" at the dawn of the new millennium was tantamount to a plea of insanity.
But, while it is easy to see why the shrinking circle of progressive economists with lingering doubts about markets have been cowed into silence, none of the above "reasons" have any logical bearing on the positive and negative aspects of either markets or democratic planning. Market performance is not enhanced by the collapse of central planning or by an increase in ideological hegemony of those who sing in praise of markets. Nor does the demise of authoritarian planning mean that democratic planning is also a bad idea. As a matter of fact, one reading of the empirical evidence of market performance over the past thirty years is that when constraints on markets are weakened, the damage to human livelihoods and the environment increases dramatically. In any case, having no cover left to blow, I take this opportunity to reiterate the theoretical case against the market system. (1)
The debate between those who favor the market system and those who favor democratic planning has always consisted of two parts: (1) How bad are markets? And, (2) is there a feasible alternative that is any better? I make no attempt to address the second question in this article having done so elsewhere (Albert and Hahnel 1991a; 1991b; 1992a; 1992b; and 2002; and most recently, Hahnel 2005, where I go to great lengths to respond to important concerns others have raised about democratic planning.) In this article, I also make no attempt to explain why markets inevitably reward people unfairly. I refer readers to Hahnel (2004) for the case against markets on equity grounds, and why I do not believe correctives would be forthcoming even in "market socialist" economies. In this article, I confine myself to arguing that contrary to both popular and professional opinion, there is every reason to believe that markets allocate resources very inefficiently and undermine rather than promote democracy. I also reiterate the case that markets are perhaps the most socially destructive institution ever devised by the human species.
Why Markets Are Inefficient
It is well known among professional economists that markets allocate resources inefficiently when they are out of equilibrium, when they are non-competitive, and when there are external effects. When the fundamental theorem of welfare economics is read critically it says as much: Only if there are no external effects, only if all markets are competitive, and only when all markets are in equilibrium is it true that a market economy will yield a Pareto optimal outcome. But despite these clear warnings, market enthusiasts insist that if left alone markets generally allocate resources very efficiently. This conclusion can only be true if: (1) disequilibrating forces are weak, (2) non-competitive market structures are uncommon, and (3) externalities are the exception, rather than the rule. I will offer theoretical reasons to believe exactly the opposite in all three cases. A second line of defense holds that while free markets may be plagued by inefficiencies, it is possible to "socialize" markets through various policy correctives and thereby render them "reasonably" efficient. While I generally support policies to ameliorate market inefficiencies, I will offer practical reasons why it is a pipe dream to believe that such policies could ever render market systems "reasonably" efficient.
Why Externalities Are Likely To Be Pervasive
Markets permit people to interact in ways that are convenient and mutually beneficial for buyers and sellers. Market exchanges are convenient whenever transaction costs of exchanges are low--which is the case when those others than the buyer and seller are excluded from the transaction. And, it is a tautology that any voluntary agreement is mutually beneficial under the assumptions of rationality and perfect knowledge. While knowledge (which includes foresight) and rationality are seldom perfect, I am happy to stipulate that both are often "good enough" so that market exchanges are frequently beneficial to both buyer and seller. But convenience and benefits for buyer and seller do not imply social efficiency. Ironically, the very factors that render markets convenient and beneficial for buyers and sellers also render them socially inefficient.
Increasing the value of goods and services produced and decreasing the unpleasantness of what we have to do to produce them are two ways producers can increase their profits in a market economy, and competitive pressures will drive producers to do both. But maneuvering to appropriate a greater share of the goods and services produced by externalizing costs onto others and internalizing benefits without compensation are also ways to increase profits. Moreover, competitive pressures will drive producers to pursue this route to greater profitability just as assiduously. Of course the problem is, while the first kind of behavior serves the social interest as well as the private interests of producers, the second kind of behavior serves the private interests of producers at the expense of the social interest. When sellers (or buyers) promote their private interests by externalizing costs onto those not party to the market exchange, or by appropriating benefits from other parties without compensation, their behavior introduces inefficiencies that lead to a misallocation of productive resources, and consequently, a decrease in the value of goods and services produced in the economy.
The positive side of market incentives has received great attention and praise, dating back to Adam Smith who coined the term "invisible hand" to describe it. The darker side of market incentives has been relatively neglected and grossly underestimated. Two exceptions are Ralph d'Arge and E.K. Hunt (1971; Hunt and d'Arge 1973; and Hunt 1980), who coined the less famous, but equally appropriate term, "invisible foot" to describe the socially counter productive behavior markets drive participants to engage in.
Market enthusiasts seldom ask: Where are firms most likely to find the easiest opportunities to expand their profits? How easy is it usually to increase the size or quality of the economic pie? How easy is it to reduce the time or discomfort it takes to bake the pie? Alternatively, how easy is it to enlarge one's slice of the pie by externalizing a cost, or by appropriating a benefit without payment? Why should we assume that in market economies it is infinitely easier to expand private benefits through socially productive behavior than through socially counter productive behavior? Yet this implicit assumption is what lies behind the view of markets as guided by a beneficent invisible hand rather than a malevolent invisible foot.
Market admirers fail to notice that the same feature of market exchanges primarily responsible for small transaction costs--excluding all affected parties other than the buyer and seller from the transaction--is also a major source of potential gain for the...
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