Thursday, December 23, 2010

Are markets in any meaningful way "natural"?

It is a common meme of our culture (and by meme I mean "something that I claim to be 'in the air,' but I abjure any responsibility for proving that people actually say or believe it") is that "markets" and "market mechanisms" are "natural" and that attempts to interfere with them by, say, government regulation, are "artificial" constraints on the natural. It's sort of a zen thing: the natural laws of, say, supply and demand are immutable, and regulations don't change those laws, they just frustrate and channel their operation in what are, in the long term, harmful ways. I simplify, of course: I suspect that I don't really understand the "laws supply and demand" and that at any rate they by themselves do not sufficiently explain what a market is.

What is a market? Wikipedia defines "market" (at least today it does) as " any one of a variety of systems, institutions, procedures, social relations and infrastructures whereby businesses sell their goods, services and labor to people in exchange for money. Goods and services are sold using a legal tender such as fiat money. This activity forms part of the economy. It is an arrangement that allows buyers and sellers to exchange items." I'll work with this definition not necessarily because it is the right one, but because I'm too lazy to come up with my own or to research all the other possible meanings.

Those who speak of the market and "market mechanisms" as natural are, I believe, speaking metaphorically. The most literal construction to put on the difference between "natural" and "artificial" demonstrates that, literally speaking, markets are not natural at all. According to my Google master (which is the ultimate owner of this blogspot account and the Prime Mover behind the search engine I use, praise be its name), lists, among several definitions of artificial:
  • contrived by art rather than nature; "artificial flowers"; "artificial flavoring"; "an artificial diamond"; "artificial fibers"; "artificial sweeteners"
  • artificially - not according to nature; not by natural means;
  • Man-made; of artifice; False, misleading; Unnatural
It is the notion of "(hu)man-made" that I want to emphasize here. (I do not, however, want to emphasize "falsity," as is implied in the last definition I cited.) In the most literal reckoning, markets, because they involve, by Wikipedified definition, people, are "artificial." Without people, there would be no markets. (Probably. I don't know if people make the argument that non-people, say, dogs, cats, paramecia, or venus flytraps engage in behavior that can be properly labeled "market"-oriented behavior. I'll also concede, without knowing or even caring, that there is probably some species of chimpanzee somewhere whose members participate in some "market-like" behavior.)

Rather than claiming that markets are literally natural, the "market naturalizers," I think, are making a different claim. One variant of this claim is that people, left to their own devices, engage in market-like behavior and that a political economy that lessens obstacles to this market-like behavior encourages people, in effect, to do what they are "naturally" inclined to do. Conversely, a political economy that, through regulation, increases the obstacles to this market-like behavior discourages people, in effect, from doing what they are "naturally" inclined to do.

This claim and its converse have a corresponding normative claim that markets are good, first on the the ground that what is "natural" is good, but second on the much more tangible ground that markets lead to greater material and even non-material happiness: market competition leads to more "choice" and more goods and services (material) and allows each to develop his or her comparative advantage (material and non-material inasmuch as pursuing one's true calling is a "comparative advantage" and leads to personal happiness). The first ground is facially compelling but empirically unprovable: it's just assumed, and most people presumably share the assumption. The second ground is subject to quantifiable proof, and even though "happiness" is always tricky to pin down or to quantify, access to the goods one wants and to the ability to pursue what one does best can be easily measured.

One question that comes to mind, for me at least, is who or what enforces fairness in the market? If I cheat somebody on a sales transaction, how can someone get redress? I suppose that one would not patronize my business or services if I were known to be a cheater (and, for the sake of simplicity, I am speaking of a market as a center of distribution of goods and services and not the more hoary (because I don't understand it) notion of "public choice" theory that probably extends market behavior to other types of other words, I'm sticking toward my working definition cited above). Would the person I cheated get their money back? How? It seems that there needs to be some arbiter that will prevent the person I cheated from resorting to challenging me to a duel, or paying protection to a bunch of thugs who will make sure I pay back that which I stole (but then we get into a feudalism thing, and that's usually not very pretty).

The type of example I just mentioned is not really all that damning. The market naturalizers recognize, usually, that there needs be some enforcement mechanism for a market to operate smoothly; they also mention the phenomenon of "market failures," in which goods and services are not really allocated all that well (the tragedy of the commons, and all that). In answer to my assertion that "there needs be some arbiter," a market naturalizer might claim that a distinction ought to be made here between "government" and "governance," and it's a distinction I don't understand fully. But to the extent that I do understand it, it merely begs the question (in the sense of "raises the question" and not in the sense of "assuming that which is to be proven") of what "government" is, or what the "state" is, or what is an "artificial regulation" and what is a "regulation in accord with the natural laws of the market."

I've written a lot here, and I don't have an answer to my own question, at least not an answer that would convince anyone not already predisposed to agree with me. Here's my tentative answer: markets, whether natural or not, are fragile things and need to be propped up by something and the something that props them up is part of what defines the state. Two objections to the preceding sentence: the first clause (about inherent fragility) is merely the confession of a bias that is not particularly provable; the second clause (about defining the state) merely begs the question (in the sense of "assuming that which is to be proven" and not in the sense of "raises the question"). But that is the starting assumption I am working with.

Why bother stating this assumption? I'm certainly not the first at questioning the naturalness of the market, nor is my questioning of it necessarily the most eloquent or even comprehensible. But I think, or at least hope, that looking at markets as fragile entities "demystifies" (a term I hate, because it would make me look like a Marxist who spends all his time whining about commodity fetishisms and the "alienation of labor from the product of labor") the notion that "darn it, markets just need to be free" and any governmental intrusion into the economy is a hindrance of that freedom.

There are, of course, wiser and less wise governmental intrusions into the economy, and some intrusions create perverse incentives that make things worse. The Health Insurance Reform, for example (which I support by the way), will, even if it works like it's supposed to and isn't declared unconstitutional, create certain challenges that can't be escaped from just by governmental fiat: will there be enough doctors to service the newly insured at the lower remunerations that will likely result from government controls on the prices of premiums? how much will the prices of premiums be lowered? how will smaller businesses bear the burden of having to provide insurance? how will people out of work find jobs now that it would be more expensive for even larger businesses to hire new employees? But the notion that the reform merely impinges on something "natural" would not be a good argument by itself to lodge against the reform. Any such argument needs to be supplemented by what would be better, by an assertion of a different kind of structuring of the health insurance and health care markets, and that assertion would either be the status quo (which no one, to my observation, claims to like) or something different, based on, say, tort reform or tax credits or decoupling (through new employment taxes) employment from access to health insurance.

One of the tags for this post is "libertarianism." By so tagging this post, I do not mean to imply that libertarians have no valid points when it comes to regulating or deregulating the economy, and I do not mean to build a man o' straw--I know their critiques of regulation are more sophisticated--but I do notice that they sometimes indulge in the "markets are natural" rhetoric, and it is this indulgence I am objecting to.


James Hanley said...

I mostly agree. As some random comments, I would suggest looking at some of the literature that looks at markets among pre-modern humans and even among non-human primates. Frans De Waal has an article on "the chimpanzee's service economy" (food for sex), and in The Origins of Virtue, Matt Ridley has a chapter on "the gains from trade" among pre-modern humans. So there's good reason, I think, to believe that there is a naturalness to market transactions that doesn't require a superstructure of state regulation/organization.

But markets are fragile in some ways, and I think most of that fragility revolves around the issue of trust. That's why familiarity is so important--as is well recognized, McDonalds didn't create a better hamburger, they created a hamburger you could trust when you were driving across country and had never set foot in that specific restaurant before. There's a lot of experimental research in political science, economics, psychology, and sociology, and even in biology, that looks at the issues of trust and cooperation. The more real knowledge of a person/business becomes difficult, the less trust there "naturally" is, so the greater the value of other institutions to create the trust that helps a market function (on the assumption that people won't want to trade with those they don't trust). Word of mouth and personnel recommendations are one. Certifying organizations like Green Seal, Snell and ANSI are others. Government regs also help play that role, both by setting standards and by providing some assurances that you can get recompense if you get ripped off, which allows me to trust a stranger just enough to risk the transaction. Libertarians tend to be very approving of that latter function, and more dubious about the former one, preferring to leave that to non-governmental actors. I think non-governmental actors do a better job of that than most people think, but ultimately that's an empirical question, and it's possible that someone could show me evidence that I'm wrong.

Pierre Corneille said...

Mr, Hanley,

Thanks for the comment.

I should say, I somewhat regret even writing this post because I'm not sure if anyone really argues that markets are "natural" in any way except the allegedly in-grown market-like behavior. I also wish I had read Mr. Kuzinicki's recent post at Ordinary Gentlemen (about the minima of libertarianism) before I wrote this. I will say I'm intrigued by his idea--mentioned in passing--that most forms of "fraud" would be included in his definition of "coercion."

As for whether there's good reason to suppose "a naturalness to market transactions that doesn't require a superstructure of state regulation/organization," I'll concede I've read almost not very nearly enough about "pre-modern" humans (pre 1400s humans?) to know. I will have to think on this quite a bit before even commenting on it (which didn't stop me from writing the post in the first place).

James Hanley said...

Clarification on pre-modern. A bad choice of terminology, but I couldn't grasp the right words at the moment. The other phrase that came to mind was "pre-civilization," but that's a risky term. So what I really meant was hunter-gatherers--people living in societies that have not developed true states.

Of course even those will often have some social arrangements for monitoring and ensuring non-fraud in trade (and to the best of my knowledge, treating fraud as a form of coercion is a fairly standard libertarian belief). But there's also trade between individuals who are/were not in the same societies/ethnic groups. In North America, for example, trade goods made their way from the coasts as far inland as the Great Plains and Rocky Mountains, from both directions.

And one thing that really caught my attention at the time I read it was the story in Undaunted Courage about Lewis and Clark trading with the Shoshones for horses. As the Shoshones realized just how very many horses the Corps wanted, they began offering lower quality horses at higher prices. Perfectly "modern" market behavior. It struck me because at the time I had a post-modernist prof who insisted that all is culture, and different cultures can't understand each other at all, and that all these economic ideas are purely western social constructions. Of course Wealth of Nations was published in 1776, so maybe the Shoshones somehow got a translation of it and studied it closely.

I don't think you need to feel bad about this post. This type of writing is a great way to work through ideas. You might not have come to think about whether anyone doubts the naturalness of markets that way if you hadn't written it all out. And as my former prof seems to indicate, there probably are a handful of people who do in fact question it.