An unregulated market economy does not exist since no economic system is possible without common standards and their
enforcement if there is to be predictability and efficiency. Without
standardization there is no economy, and without society, and especially
government, there is no standardization. Different economic systems are constituted
by what is regulated, but all are like a centrally-planned economy in a sense that they
require a government to secure the all necessary variables for optimal efficiency. Approached
as an integrated rational system – economics is perhaps more properly
distinguished by the pre marginalist revolution term, "political
economy."
Disorder
is
the default state in an open system, thus rationality
is inconceivable
without establishing a common solution by
extensive institutional regulation. Order at the macro level across individual
exchanges requires imposed rules and standars. Only in this circumstance is macroeconomic optimality meaningful. Within these
parameters there is predictability, which allows humans to behave rationally in unconstrained
activity. “Consistency is
introduced by controlling variables, allowing
people to plan so they can more effectively secure their interests.“1
At work here is the uncertainty of the
primitive condition of common understanding, which humans seek to avoid by institutional
standards. Economists express this
institutional disposition in
the assumption of a market tendency toward equilibrium, which is possible
solely when economic components are fixed. And even here an economy will function efficiently just
if all within it accept its parameters. When people do not share common
institutions, order must be implemented by the supreme authority of government.
Social legislative processes are
informal and hence difference in interpretation occurs
with no immediate mechanism of resolution. Similarly conflicts can arise which
participants refuse to resolve
consensually. Only in the political process can be achieved the order necessary
for
the level of rationality
presumed by economists. This is because government is sovereign, providing it with the ultimate authority which
makes order possible. Douglass North makes the economic role of government explicit when asserting,
"The basic services that the state provides are the underlying rules of the game."2
Failure to recognize the economic role of government
arises from a confusion of the economic or an exchange and an economy or a set
of exchanges. Such confusion is a product of marginal analysis
which presumes to integrate micro- and macroeconomics. With the breakdown in
the marginal assumption of a closed universe, individual economic decisions no
longer can be understood to form a rational whole. Micro- and macroeconomics
are severed by people having different conceptions of reality.
Avoidance
of a breakdown between micro- and macroeconomics occurs only when government interjects
itself by rigidly defining economic elements. The economic establishes norms by
mutual agreement when there are no norms. But an economy is not the sum total
of economic decisions, for these are imprecise in extent. An economy is
necessarily specified decisions of specified individuals in specified
circumstances. This is because of the problem of disjunction, an uncertainty
which cannot be resolved by market principles. All that can be done is minimize
this indeterminacy by appeal to the subjective deontological values of some
common authority.
Efficiency is incalculable unless the
factors constituting an economy are fixed in this way. Variables are infinite
without an encircling margin, in which case there can be no determination of an
optimum distribution. What variables constitute an economy, though, are
arbitrary. Efficiency of a market economy must come into question, then,
because different individuals are likely to understand an economy in different
ways. Relevant information for one will not be for another, so an optimal
distribution of resources is accidental on any definition of an economy.
Predictability requires incorporation in a calculation of optimality the
economic conceptions of all individuals considered, which is practically impossible when numerous
individuals are considered. Aggregate error in economic calculation is
attributable to this inadequacy.
Optimal
efficiency is only calculable when all share the same conception of an economy
and are aware of all aspects of it. Since individuals can have different conceptions
of an economy, it is only possible for them to have the same conception if it
is imposed by a common authority. Such an
authority must necessarily be supreme in the group to insure a common
understanding. As such it is sovereign,
which is the defining condition of government. Thus a market economy is efficient only where there is a government to
rigidly constrain the behavior of the members of a group. Only in this
circumstance is there predictability in the effects of one’s choices.
Of course perfect knowledge is impossible
because others have choices which one cannot take into account in making one’s
own decisions. This can be accommodated by an even more rigid constraint of
variables. Most efficient, then, is a wholly planned economy controlling every
aspect of the lives of its citizens. Here is a Platonic world where capitalism
and socialism meet. So long as the most rational environment is sought, it can
occur only within the Republic. Singapore currently illustrates this, with
impressive economic success. But when the social and political costs of such
control are incorporated into the cost-benefit calculation, any notion of
optimality becomes highly problematic. lt is at this point that capitalists and
socialists part in what “works.”
With
all of the diverse conceptions of the economic, there is difficulty in
concluding an economy is an objective thing existing independently of human
definition. Classical economics presupposes an economy as arising from some
fundamental human nature. People are effectively portrayed as predetermined
beings in a predesigned universe, so all is in a natural balance independent of
human awareness. Because this natural order is intrinsic to human activity, any
attempt to alter it will fail.
When humans
are approached as free self-determining beings struggling to understand a
universe beyond their comprehension, however, this model is no longer viable. Constructivist
thinking shows us how human beings constitute their knowledge and how confusion
and disorder are the natural state, resolvable only by an artificial order.
Since each understands reality in a different way, coherent human behavior
requires common rules, and this requires a common authority to legislate and
enforce. An economy is a manufactured institution which is rational only
insofar as all its members understand it in the same way. Such understanding
requires a governing body which defines for all members of a society the
components of an economy and secures its functioning.
From socio-historical
perspective - Karl Polanyi argues in his
book The Great Transformation that the notion of self-regulating free market is ahistorical and utopian. It is utopian because it shows not the world we live in, but an imaginative state of things that exists only in the minds of its believers. It is a tautology because whenever one points to the
failures of attempts to instill free market dogma, its supporters reply by insisting that the market
hasn't yet been made ‘free’
enough. If only we make government
smaller, decrease regulation, remove restrictions, slash social
services and etc, we will
see the birth of a perfect
new economic world order.
According
to Polanyi, what has passed for self-regulating
markets has in fact been the result of drastic and all
encompassing government
intervention.
Another
difficulty occurs in determining the width of the commercial stream. A market
economy might be thought a market without parameters,
for if there are parameters, they determine members who are no longer free. All
is uncertain in this state of affairs, the rules of behavior constantly
altering. Unhappy with such indeterminacy individuals may establish a stable
relation in an exchange. Raised is a new problem of how such an exchange is to
be understood. Do market economic principles require the individual to conform
to agreements constraining trade because they are agreements, or to not conform
to agreements constraining trade because they constrain trade? Resolution of
this issue only can be by fiat, and this is possible for a people only when
imposed by society and/or state.
Simply enough nothing without parameters is
conceivable, so a market economy must be distinguished by some characteristics
if it is to exist at all. Determining what occurs, parameters are logically
inconsistent with a market economy, yet there can be no market economy without
parameters. Incoherent in this way, no objective definition of a market economy
is possible. A market economy can mean whatever anyone chooses it to mean. Such
a concept is necessarily normative, its identity relative to subjective
judgment. Illustrating this is that Hal Varian's First Theorem of Welfare
Economics, stipulating all market equilibria are Pareto efficient, applies
whether or not parameters are extensively defined.3 Yet if a market
economy is broadly defined, it is indistinguishable from a planned economy.
Internally inconsistent as a concept, no
coherent market economy can exist in any objective sense outside the context of
social and political rules, these providing the means to model the assumed
natural order of classical economics. And the more minutely an economy is
defined, the more rational it is, so that the economic ideal of a wholly
rational economy is only approached by an overwhelming totalitarian state. A
policy of economic rationality seeks to make all predictable and the human into
a machine. Such is the price paid for efficiency.
Ironically the claim that government cannot shape
economic policy is only plausible because of the ability of government to shape
an economy by constituting it. A uniform response to government policy only can be
expected when the context within which it occurs is rigidly fixed so there is
only one logical implication of any economic event. Solely when a sovereign
government imposes variables and holds them constant can this happen. Otherwise
individuals will interpret what occurs in the context of their own conceptions.
Differing for different individuals, there will be no consistency of response.
A rational economy does not spontaneously arise in human interaction, but
misunderstanding and confusion do.
Predictability
of response to economic events is only plausible by fixing their meaning.
This is the purpose of controlling variables and why it succeeds. Unless
economic events are fixed in this way, the economic behavior of another is
inherently unpredictable because of different understanding. There is an irony
here for followers of rational expectations theory, who view governmental
action as ineffective because individuals will adjust for its policies. Without
a government to establish a common interpretation of what occurs, there is
disagreement and disorder.
1. As
anthropologist Conrad Kottak observes,
[Economists] have tended to neglect the interactions and
conflicts between the market
and other social institutions. Economic development involves
here not only the use of
new and more productive methods, it also depends on the
presence of appropriate incentives
which will induce the population to adopt the new
techniques. In these circumstances,
therefore, the recognition of the interplay of all social
institutions becomes particularly
important.
Conrad Phillip Kottak, Cultural Anthropology, fourth edition
(1987)
chapter 7, 139.
2. Douglass C.
North, Structure and Change in Economic History, 24.
3. Hal R
Varian, Intermediate Microeconomics.' A Modern Approach (1987) 501.
