3 - The Problem with Markets

Summary

In his 2004 book, The Company of Strangers, the economist Paul Seabright recounts an anecdote of his time spent advising leaders of the former USSR on the adoption of market economy. In response to the perplexity of a Russian official who asked, ‘Who is in charge of the supply of bread to the population of London?’ Seabright responds, ‘Nobody is in charge’ (Seabright, 2004, p 10). This is, of course, the power of the market system. It delivers outcomes without the need for central planning – there is, however, no guarantee that all outcomes delivered by the market will be socially desirable.

Supposing the official had asked, ‘Who is responsible for climate change and the impending mass extinction of many of the Earth's most vulnerable species?’ The answer would have remained ‘nobody’ – mass extinction being one of the unfortunate side effects of the market system (Wright and Nyberg, 2015). A solution may exist – let us hope it does – but it will not be a free-market solution. It might even be a solution in which markets are constrained to produce rather less harmful outcomes. Indeed, this is what we argue later in this chapter.

Similarly, just as the tiny self-interested actions we all choose in a free-market context amount to ecological disaster on a global scale, so the tiny decisions we all make in a free-market context can amount to economic disaster on a global scale, as happened from 2007 to 2008. For the global financial crisis, no one is solely responsible; rather it was the globalized freemarket system emphasizing growth while evading responsibility which inevitably gave rise to such an unwanted side-effect. In this chapter, we critique two of the central concepts of the current political-economic system: the ill-considered adoption of market-based policies and the general fascination with headline economic growth (GDP) as a worthwhile policy objective.

As we have previously argued, the problems which arise from reliance on markets are often disguised by the definition of ‘progress’ as economic growth. We would not want the reader to conclude, however, that we believe there is no role for markets – far from it. Our argument is rather that markets (and growth) ought to serve society, rather than vice versa. Our criticism of markets essentially consists of the observation that the conditions under which they give rise to an optimal solution are not often met.