A great paradox of our time is that former communist dictators win electoral credibility and the approval of international bankers by embracing the market while some candidates in America win considerable support and some elections by damning the market.
In some eyes the global capital market is a pernicious threat to global stability. Each new round of populist rhetoric implies that we are faced with a fundamental peril. Radical or revolutionary change is promoted to rid us of the malevolence of the market and its driving force, competition.
Arguments that blame markets for our woes fail to see that we are the targets. This is because markets are merely a summation of the results of actions arising from the myriad of decisions made by each of us every day. A full understanding of market processes indicates that if there is an enemy, it is us.
Some commentators describe markets as if they were the outcome of a conspiracy concocted on Wall Street. However, it is more accurate to describe markets as the outcome of choices made on Main Street. Certainly the choices of mutual fund managers and bond dealers are more prominent and better chronicled. Yet these self-important movers and shakers cannot match the power of the faceless masses. Power in competitive markets is always limited ultimately by the refusal of consumers to pay higher prices for what they perceive as lower quality products or when preferences shift without warning.
It is useful to understand what the market is and what it is not. Unfortunately it is difficult to make sense of the market in the context of an ongoing political debate that demonizes it. Despite having weathered withering criticisms and surviving real-world experiments with communism, the market economy remains under assault.
Many critiques of the market are deemed credible even though beginning university students could debunk most anti-market hype after a few weeks in an introductory economics course. It is understandable that non-economists like Robert Reich or Pat Buchanan can muddy the intellectual waters. This confusion is worsened by the apostasy of reputed economists with the prominence of Lester Thurow or John Kenneth Galbraith, who repeat ill-formed utterances about the workings of the market. Similarly, pronouncements by renowned financiers like George Soros or Felix Rohatyn or Robert Rubin reveal an expertise based on economic opportunism mixed up with their own political orientation. It is little wonder the general public becomes confused when stock market mavens are ignorant of how their own success depends on the forces behind all market activities.
If the market reflects human choice, then competition is at its heart. Competition is the logical outcome of choices that drive economic behavior. Contempt and condemnation for market outcomes reflect an elitist view of the choices of the unwashed and ill-tutored. Those who accept such nonsense have taken the notion of “fallen man” a bit too far while being equipped with too little knowledge. It might be said that the market, like democracy, is the worst economic system available except for all the others.
In the first instance, economics is best understood to be a study of exchange arising out of choices guided by the life purposes of individuals. Second, it is these choices made in the face of competition that constitute the market. Finally, exchanges generate mutual advantage for trading partners and lead to a “positive-sum game” where all trading partners gain. Too often, anti-market forces portray international trade as a “zero-sum game” where gains to one country come at the expense of some others.
Although prices and markets can be temporarily distorted by government decree, they can never be eliminated. Markets operate whenever and wherever human beings act out their lives and whenever the setting is more complicated than Robinson Crusoe’s.
Several aspects of economic life are inescapable; as in other aspects of life, exceptions tend to prove the rule. These can be combined in a single simple sentence that appears as banal to professional economists as it is considered evil by others. Self-serving actions taken by individuals in a competitive market setting provide benefits that spill over to the entire community. It is also true that there are spillovers of costs to other groups, but the fact that individuals have continued to rely on markets suggests that the spillover benefits dominate.
Markets require a set of certain supporting institutions such as property rights and extensive individual freedoms protected by an independent judiciary under a rule of law. Under these arrangements, free people can pursue their life purposes within the context of the market. In many ways, markets serve as a civilizing agent.
Development of Trust
Once accustomed to the interactions of the market, people tend to develop a greater regard for and sense of trust in strangers, which itself represents a form of investment in personal and corporate reputation. Transactions based on trust are more inclusive than purely personal relationships.
Markets inspire the development of a contract culture where the spirit of compromise becomes part of human interaction. In such a setting, equals are treated as equals just as unequals must also be treated as equals before the law. Governments or large corporations should not receive special treatment in the courts over individual citizens, and domestic interests should not override those of foreign claimants.
In this sense, markets are a necessary underpinning for democracy’s success rather than a sufficient one. It is through the individualist-based institutions associated with and arising from the market that people can exercise true self-ownership to pursue their own chosen goals.
Condemning markets ignores the human content that lies behind them. Experiments with communism show that legislating against self-interest can have disastrous results. Instead, it is better to provide institutions that reward entrepreneurial actions so the overall community can benefit through the wealth and opportunities created by the market.