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Market Failure Wherever One Looks

by Conrad Schuhler Wednesday, Oct. 20, 2010 at 9:38 AM

7-8 million jobs lost in two years, 150,000 public sector jobs lost in September, are signs of total system incompetence. It's time to redefine state and market and adopt alternative economic policy with reduced working hours and infrastructure investment.

"The real market economy leads to problems. Prominent representatives of this economic system admit the market economy has no prescriptions to avoid or make up for its life-threatening damage..

The invisible hand, the organization of an economy as a market economy, burdens society with enormous costs. Belief in the market economy theory and holding to the real market economy is expensive for us."


By Conrad Schuhler

[This editorial from isw, institut für sozial-ökologische wirtschaftsforschung, July 2010 is translated from the German on the Internet, http://www.isw-muenchen.de/forschungshefte40.html.]

“Climate change is the greatest case of market failure ever seen by the world” (Blatter 2006). The former chief economist of the World Bank (from 2000 to 2003) and advisor of the British government Nicholas Stern wrote this sentence in his widely-publicized study on the costs of climate protection and the expected climate catastrophe. “Ackermann said he no longer believed the markets alone can solve the financial market crisis. In light of the international turbulences, he doubts the self-healing powers of the market” (Tagesschau, 3/18/2008). Josef Ackermann outed here as a market skeptic is head of Deutsche Bank and of the IIF (The Institute of International Finance, the union of national bank associations and one of the most important managers at the center of the German economy.

What is special in these two quotations of the scholar and the capitalist is not simply the admission that the real market economy leads to problems. Prominent representatives of this economic system admit the market economy has no prescriptions to avoid or make up for its life-threatening damage. [1] [“It was a mistake to believe the market is always right. We must correct our view of the world.” Nicolas Sarkozy, SZ, 1/28/2010]

These judgments were printed by hundreds of newspapers and journals. Given these events, one would think the followers of the market economy would be completely shocked to raise elementary questions or to speak out. But nothing like that happens. The two judgments are trivialized as very witty remarks. The followers are protagonists.

The market economy theoreticians developed the well-known idea of an “invisible hand” that orderly guides the conduct of individual market actors and the economy altogether to the best. This invisible hand as a figurative idea for the central elementary claim of the theory that the market mechanism guides the conduct of selfish individual market actors to an optimal and just economic result – without any special expense or coordination costs.

This view that the market and competition are superior to other economic systems is widespread in the population. On account of their school- and university education and the constant daily media exposure, many people have a vague idea that – somehow free and pure – markets can stabilize the economy, that they are efficient (achieve the best possible use of resources) and bring about an optimal distribution.

The basic theory about the stability, efficiency and optimality of a market economy is the so-called general equilibrium theory. This theory should be tested for its conclusiveness. To back its assertions, this theory depends on assumptions and presuppositions about economic relations and actors in the economy which are false – compared to reality. Thus the whole theory must be rejected as unsuitable for the analysis of the real market economy.

This theory is an ideology. A theory is more than a simple thought and the observation and ordering of particular facts. An economic theory must be able to make the logical connection of social and economic facts and events. A theory proposes a set of statements that are free of contradiction to one another and can explain the totality of observable facts: referring back to preceding causes and predicting and showing the consequences and conclusions for further events. This last capability of theory turns into instructions on goal-directed conduct. Theoretical findings are used to reach goals. This is a central feature of theories.

Theories can prove false, outmoded or incomplete. But false theories do not simply dissolve in thin air because they are false. They do not simply dissolve when they are permanently propagated at enormous expense and have an appearance of plausibility on first view. That the sun goes around the earth was a consensus for a thousand years. Hard struggles were needed to correct this.

False theories in areas where material interests play a great role (like economics and unlike pure mathematics) can continue existing as ideologies. By ideology, I understand a false opinion or theory that covers conditions of social rule (cf. Hofmann 1969). Thus ideologies are not mere errors but false statements with justification tendencies justifying existing conditions. This does not always mean supporters of an ideology are active conscious liars. Ideologies are not obviously ridiculous but can correctly explain isolated phenomenon torn out of the total context like the bankruptcy of a certain business after high increased wage- or raw material costs. Real market economies doubtlessly make usable products, growth and income so that the possible view that markets freed from all deficiencies are optimal in some way is not ridiculous from the start. To examine its ideological content, the theory must be tested on its ability to explain a real market economy before one asks about the interests that vigorously justify the maintenance and diffusion of such a theory.

The following questions must be raised and discussed regarding theory and ideology: How did this market theory arise? What are its basic ideas (chapter 2)? What makes this theory so attractive? What does it claim? How does the “invisible hand” guide everything to the best (chapter 3)? Where is the reasoning wrong? To what extent does the market theory treat what is not a real market economy (chapter 4)? This 4th chapter will claim most of the space. Why is such a failed theory maintained? How is it exploited for the ideological stabilization of the existing economic system (chapter 5)? Finally, can it be that this theory contributes nothing to explaining a market economy? Then we may not live in the best of all theoretically conceivable economic systems even if the real market economy is experientially the best of all possible economies. The invisible hand, the organization of an economy as a market economy, burdens society with enormous costs (chapter 6). Belief in the market economy theory and holding to the real market economy is expensive for us.


VIDEO: “21ST Century Enlightenment”


Free Internet Book “Culture Change” by Alexis Zeigler








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