Self regulating market and rationality – philosophical consideration.

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.