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The massive social changes with which the twentieth century gave way to the twenty-first have written the preface to this book. Much of the world began an unexpected transformation. Communist systems are abandoning central planning of their economies and struggling to establish the market system in its place. China freed its farmers to produce and sell for profit rather than under instruction from the state. It began moving industry out from under the system of state-prescribed targets and quotas. Less buoyant, Russians try to swim in the same tide, both their Berlin Wall and their economy having come down in ruins.
Much earlier, the democratic world had been surprised to see the democratic socialists of Western Europe abandon their traditional ideological hostility to the market system. After World War II, they no longer pressed to abolish it. Instead socialist parties in France, Italy, and Britain advocated a new kind of market system, with state-owned rather than private market enterprises. But not for long. They began to turn to the familiar capitalist private corporation while they pursued their socialist aspirations through income redistribution and the social programs of the welfare state. And so, like the British Labour Party today, they talk not of state-owned enterprises but a "third way"-a way not yet well defined but in any case embracing the market system.
Meanwhile, nonsocialists, both liberal and conservative, have taken a renewed interest in the market system, resisting both government regulation of business and social welfare programs. Much of their change of heart seems motivated by what they see as failures of the state: bureaucratic lethargy, for example, or excesses of partisanship. Some of it, however, arises out of the case now often made for the market system-as, for example, in the drive toward a common market for Europe, in globalization, and in exploiting the opportunities of the "New Economy."
Despite this great current of change, transition of communist systems to the market system may never be complete. Some nations of the former USSR-perhaps Russia itself -may return to old ways rather than continue to suffer the hardships of transition. Many Russians see their embryonic market system as a cousin to gangsterism, so exploitative has become their transitional system-whatever it might be called. Russia today reveals some of the worst aspects of the market system. The end of the story has yet to be written.
What a beginning to a century! These great changes and failures ask for a book neither to celebrate nor deplore but to understand the market system, around which the dramas revolve.
One can study economics for many years without understanding the market system. I graduated from college without understanding it. If my instructors understood it, they did not take the trouble to explain its structure. They taught about trees rather than forest, about inflation, monopoly, and international trade. They somehow failed to present the overarching structure of social organization called the market system. You perhaps have seen a picture full of diverting detail that only on careful examination abruptly reveals a face or other object that had been hidden in all the detail. That was my problem: detail was abundant, but for years I could not find the face.
For at least 150 years many societies have been trapped in an ill-tempered debate about market systems. Now we have an opportunity to think about these systems with a new dispassion and clarity. Market ideologues have learned that there is little to fear from communism. They can come away from their ideological barricades and talk sense about the market and its problems. On their side, socialist ideologues have realized that aspiring for a better society is not enough. They have to face the complexities of constructing one.
Even so, it will not be easy to think straight about the market. Mainstream economics still stumbles because the market's dazzling benefits half blind it to the defects. On the other hand, many critics perceive the benefits only through the smoke of their burning disapprobation. An often tight-lipped rigidity persists, even in the most scholarly discourse. One does not find much intellectual interchange on the market system between economists, most of whom admire it, and those scholars of history, literature, and philosophy who, like the sociologist-philosopher Jurgen Habermas, judge its consequences for values like freedom, rationality, and morality.
One's understanding of the market system is sometimes impeded by a sense of mystery or magic about how it works. Adam Smith acknowledged as much when he wrote, more than two hundred years ago, that market activities are coordinated by a "hidden hand." In our time, the full account must describe the workings of both the hidden hand and the many visible hands.
What Is This Market System?
We need first to draw a distinction between market system and market. Although not all societies embrace or contain a market system, all existing societies make use of markets. Walking down a street in either Maoist China or the USSR, a visitor would have seen markets for haircuts, bicycle repair, and consumer commodities. An observant visitor would soon also have found markets (perhaps more black than legal) for raw materials and machines. Whenever people frequently pay other people to do something-sing a song or dig coal-those interchanges constitute markets. Yet despite the commonalty of such interchanges in Maoist China and the Soviet Union, these societies were not called market systems, because a market system exists only when markets proliferate and link with each other in a particular way. Just as a basket of parts does not make a computer until they are assembled or used in a particular way, so an assortment of markets does not make a market system until they are employed in a particular way-specifically to organize or coordinate many of the activities of a society.
The market system organizes or coordinates activities not through governmental planning but through the mutual interactions of buyers and sellers. To establish a market system it is not enough that people buy and sell. Also required is that their purchases and sales, not central authorities, coordinate the society. This gives us a definition of the market system sufficient for our immediate purposes: it is a system of societywide coordination of human activities not by central command but by mutual interactions in the form of transactions.
I find it useful to contrast the market system with another method of organization, though only small scale: the household. In premarket households, paternal or other authority coordinated the activities of members of the household to try to provide the necessities and pleasures of life. The household was organized to produce for its own use whatever was needed or wanted. It coordinated child rearing, housekeeping, and cultivation of the soil. Householders might only now and then reach beyond the household for some assistance-perhaps musicians for a wedding-or for a commodity they could not provide for themselves. They might only rarely see a coin. The market system appeared only when these households began to attempt production for sales rather than for household use-that is, when they became deeply engaged in producing for distant others rather than simply for family. Only then arose such large-scale and detailed social coordination as market systems provide.
Market systems did not wholly displace the production-for-use household. The household remains a bedrock of the contemporary market system, continuing to organize much of child rearing, food preparation, and maintenance of the home. What, then, changes with the rise of the market system? Typically, the household allocates one or more members of the family to go outside the household with production for sale-he becomes a cobbler, making shoes to sell-so that the household can obtain objects and assistance that it cannot produce on its own.
If not just a household but a whole society is to be coordinated, then in a wider social process the participants have to be assigned to the many tasks that need doing. Tools and machinery have to be made available to those who can use them. Farmers need to feed not only themselves but those engaged in industry. Hypothetically, this can all be arranged through central command, but in historical fact, it has been largely arranged by buying and selling.
Three kinds of markets are the most familiar: labor markets, agricultural markets, and markets for services and goods that industry provides to consumers. Two less obvious kinds of markets are no less necessary for a market system. One is markets for intermediate services and goods produced for other producers-for example, computer chips sold to enterprises that assemble computers from purchased parts. The other is markets for capital, specifically markets for loans, securities, and other kinds of investments. In these two kinds of markets the major participants are no longer ordinary people but entrepreneurs, enterprises, and financial institutions.
The rise of market-system coordination of the production of services and goods for sale outside the household was slow and uneven, but by about 1800, England qualified as a market system (some historians put it earlier), and Western Europe and North America followed.
Drawing people out of the household into a wider coordination was, however, an idea antedating the market system. The usual formula for doing so was central coordination. Ancient Egypt's rulers drew labor from each household in order to put it to work on irrigation projects, defense of the realm, and construction of temples and pyramids. Although royal coordination of a vast labor force declined in subsequent centuries, the idea of societywide central coordination did not. It was still alive more than three thousand years later, in the mid-nineteenth century, in the desire of communists and some socialists to organize society by central direction. At their most ambitious, they envisaged doing away with money, prices, and markets, all considered obstructions to rational and humane social organization. Because some utopians still aspire to it, the idea deserves a name. I shall call it physical planning.
A new idea of central planning arose in a late nineteenth- and early twentieth-century reaction against the market system: convert the great structure of trade with money and prices into a centrally coordinated system. The new planners first came to power in Russia, through the Russian Revolution, and later in China, with a few small countries following in imitation. They were not twentieth-century Pharaohs or advocates of physical planning. They were more sophisticated planners proposing to make use of money and prices and even markets-but not of the whole market system, which they abhorred-as instruments of their central control. It is of course such a system that fueled the great twentieth-century communist challenge to the market system.
Dimensions of Market System
Like the state, the market system is a method of controlling and coordinating people's behavior. If you call on a team of gardeners to do some weeding, you, not the state, exercise the control that brings them into coordination with you. They turn up and do the job. You did not coerce, compel, or even command them, but you succeeded in getting them to do what you want by paying them. When a hundred workers predictably appear at the gate of a factory every morning at 8, their appearance is not commanded by an agency of the state. They are there because they are controlled and coordinated by promise of money payments.
Can it really be true that the apparent disorder of buying and selling accomplishes anything so profound as control and social coordination? Everyone can see that the state accomplishes some coordination of the whole national society, but it is harder to see that the market system also does so-in fact organizes both nation and globe. But is it not true that people are either coordinated by the state or are left to do as they wish, all going their own way, as in the market? That is a colossal misperception. In market systems people do not go their own way; they are tied together and turned this way or that through market interactions. If they were in fact left to go their own way they would not achieve the prodigious feats of production that characterize market systems. That market participants see themselves as making free and voluntary choices does not deny that they are controlled by purchases and sales.
The market system is not, however, Adam Smith's laissez-faire, not a market system tied to a minimal state. In our time it is a governed market system, heavily burdened or ornamented with what old-fashioned free marketers decry as "interferences." In these systems, the state is the largest buyer: it has a long shopping list, including a military force, highways, and the services of police officers and bureaucrats. It is a mammoth supplier as well, although in providing many of its services-elementary education, as an example-it usually gives away the "product" rather than sells it. Rather than let supply and demand set prices, it often does so itself: keeping agricultural prices high to aid farmers, or holding agricultural prices down to curb distress among the urban poor. It forbids some kinds of sales: most nations now prohibit slavery. It taxes, not simply to raise revenue but to curb some industries, like tobacco. One way or another it subsidizes most industries, almost all of which hold their hands out. It is a gigantic borrower and a frequent lender. It engages in sales promotion abroad to enlarge overseas markets for its entrepreneurs. It collects enormous funds to disperse through social welfare programs. And it is a powerfully active manager of supplies of money and credit both through its controls over banking and its own fiscal policy.
Some of these governmental activities are necessary to make a market system flourish. Some are at least helpful, some are wasteful. Some represent nothing better than raids on the public purse. However evaluated, they are part of the story of how market systems work.
Although buying and selling may be natural to humankind, market systems are not. They have in fact arisen only recently in history. Also not natural are the complexities of corporate law, the abstract shares in ownership called stocks and bonds, the rituals of collective bargaining. Neither natural nor God given, market systems are also not all alike. And just as today's differ from those of fifty years ago, they differ from those the future will bring.
Excerpted from The Market System by Charles E. Lindblom Copyright © 2002 by Charles E. Lindblom.
Excerpted by permission.
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|1||Market System Ascendant||1|
|Pt. 1||How It Works|
|4||Bones Beneath Flesh||52|
|5||Enterprise and Corporation||61|
|Pt. 2||What To Make of It|
|8||Quid Pro Quo||111|
|9||What Efficiency Requires||123|
|12||Too Little, Too Late||166|
|14||Personality and Culture||193|
|15||Persuading the Masses||212|
|16||Necessary to Democracy?||226|
|17||Enterprise Obstructions to Democracy||236|
|Pt. 3||Thinking About Choices|
|18||Alternative Market Systems||253|
|19||An Alternative to the Market System?||265|