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Criticism of Market Theory and Market Ideology

by Franz Garnreiter Monday, Dec. 07, 2015 at 1:21 AM

Market fundamentalists cling to the myths of the self-healing market and corporate beneficence..The real market economy functions very differently than the fantastic notions of the theoretical market economy. Maximum individual profit does not agree with social welfare.


By Franz Garnreiter

[This article published on September 4, 2013 is translated abridged from the German on the Internet, ]

The term capitalism provokes meanwhile more resistance than approval in the population. On the other hand, terms like market and competition have positive connotations even for critical organizations like Greenpeace. Connections with performance justice, hostility to bureaucracy, creative personal freedom, state skepticism and free choice among many options are joined with the term market.

By market I understand a regulation system where consumer and supplier of a good, service or labor power as a commodity can relate, determine the price and exchange money for the commodity. This is more than understanding market only as the concrete market place(!) or the department store. Market stands for the exchange of individual goods provided without social (planning-) agreements. Since individuals face each other as unrelated strangers, the market price can only be set through individual benefit maximization and/or profit maximization for businesses. The private ownership of the means of production, and production decisions that also aim at profit maximization are suitable as criteria of profit maximization on the markets – like one twin matching the other.

Markets are an integral component of capitalism. They constitute its nature on capital’s plane of circulation. The neoclassical-neoliberal market theory is the core ideology of capitalism. Thus the criticism of the market economy follows from the criticism of capitalism. The criticism of market theory follows from the criticism of the ideology of the capitalist economic system.

With my criticism I take a much more fundamental approach than the common and frequent criticism of concrete capitalism that focuses on the distortion, monopolization and social harmful effects of markets. In that criticism, prescriptions include breaking encrusted markets, shattering monopolies and introducing a kind of “fair” competition relying on many diligent productive, creative entities. In that criticism, criticism of capitalism culminates in the praise of the middle class.


The central fundamental idea of market theoreticians is that this economic system by its nature strives for an optimal and stable balance [maybe economists prefer the term “equilibrium” instead of balance ?] and that we people do not need (!) to actively bring about this balance. The competition of millions of individual market actors on different markets – as a bonus to individual success – leads to the best possible macro-social result. In this balance, everyone is paid justly according to his/her performance (that is distribution justice). Nothing is wasted, neither labor power nor tangible assets (that is the efficiency of the economy). The balance is stable and is reached again after the mastery of any outward disturbances. According to market theoreticians, this dogma of self-regulation to a balance is the central and most important characteristic of a free market economy.

Adam Smith used the well-known picture of the invisible hand to illustrate such a self-regulation. Competition on the markets acts like an invisible hand, like a higher guiding power bringing everything to a good end.

The need for conscious, macro-social economic planning is invalid. Society as a collective and as a state only needs to worry about observance of the traffic rules on the market. The axiom “We must submit to the market laws; no one can elude them” is then the guiding principle of conduct.

What is the reason behind this statement? In the middle of the 19th century, the increasing crisis-susceptibility of capitalism and the germinating Marxist-socialist class analysis led to doubts of the assumed balanced development. Evidence was necessary. That was the birth of so-called neoclassicism.

Classical political economy – Adam Smith and David Ricardo were its first prominent representatives – was occupied with the value of commodities, with reason for the prevailing distribution of wages and profits and with the causes for the growing wealth of nations after the conquest of feudalism. Marx and Engels revolutionized political economy and profoundly criticized bourgeois classicism. Neoclassicism replied with a completely new approach. Its axiom was everything benefiting a person has a price. The price that is paid proves the usefulness of a thing. Scarcity and usefulness are natural qualities and thus the price is also natural…

Around 1870 the mathematician and economist Leon Walras shaped this theoretical approach. He constructed a “pure economy” in deliberate contrast to the “applied economy” for everyday economic problems… From the beginning, this “pure economy” was a different subject of investigation than the real economy. It consists of an abstract mathematical structure of goods and prices, suppliers and consumers (that’s all Walras needed for his theory), and Walras proves that under certain assumptions there exists an equilibrium point with the quoted nice properties. Thus neoclassicism founds totally on fundamental contradiction: The desire to discover generally valid, exact, unchangeable laws in the economy – analogous to natural laws – required the complete fading out of the real economy.


The mathematical core of the neoclassical balance theory consists of the question whether and under what conditions a system of partial differential equations (formulating the mutual dependence of all commodity prices and all quantities of supply and demand on each other) leads to a mathematical stable solution that then should represent the balance point. Such mathematical systems are only stable under very restricted and special conditions.

>From the start, the population and economists expect a high degree of scientificness from mathematics. This lends a great persuasiveness to neoclassicism. However mathematics has its hidden dangers. It demands that 2 times 3 equals exactly 6 and not just something between 5 and 7 or in the exceptional case 7 ½. The presuppositions for the proof of balance also must be exact. Worlds open up here between the prerequisites in the mathematical description of the Walrasian pseudo-economy and those in the real market economy. Here are several examples.

1, the theoretical households who must be conceived as computers for benefit calculation buy consumer goods to maximize their advantages. To attain this goal, they must know all about all price fluctuations and all practical qualities of all conceivable consumer goods. Economists call this perfect information. This is also true for businesses. If this does not happen, the balance evidence definitively breaks down. We saw how magnificently the complete perfect information work in the financial market crisis.

2. Every market business can only have effects on participating buyers and sellers. Effects on uninvolved third parties (=external effects) cannot occur. But in reality External effects, particularly environmental effects, are a core element of the economy. They destroy the balance process. Energy production and energy consumption may be classic evidence how economies affect people even on distant continents and persons from much later generations far beyond those directly involved. However the energy industry is controlled by private energy companies according to the criterion of individual profit maximization. Marx called this the basic capitalist contradiction, the contradiction between social production and private appropriation. Long lists of completely false presuppositions measured by reality could be drawn up (The core of the theory is very interesting. What does the theory say about the production of balance process to come to / to get [?] an equilibrium ?...


1. …The theoretical and real market economies are completely different.

The market process needs time in a real economy. But the theory allows sales and purchases only at equilibrium prices. These are prices, where offer and demand are equal. For the process to come to equilibrium, Walras had the perception of a stock exchange auctioneer, where the bidding needs a lot of iterative steps. (That is a picture like Adam Smith’s invisible hand.) But as the mathematics demand infinitely many of these steps, this process would not come to an end with a real auctioneer. So Walras presumed simply that this process runs with an infinitely quick speed. This is ridiculous, compared with real processes, but in a mathematical differential equation system an assumption like this obviously does not cause any problems.

2. There is no auctioneer to steer our normal economical activities. Mathematicized logic does not materialize in a real authority. Therefore there is no one or no authority who gives a signal to buyers and sellers when balanced prices are reached and when they can finally buy and sell. However the core of the theory is that exchanges can only occur with balanced prices. This is not a problem in theory because all market actors have perfect information and are omniscient, and the processes are infinitely quick. But in reality the crucial balance signal is lacking: the reference that waiting for an equilibrium now ends, that all prices are now in balance and that all purchases and sales may and must be carried out exactly now. Because this signal is lacking, those real market actors without perfect information can possibly know whether balanced prices are reached or how far they are from those prices. Nothing is left to market actors in the real world if they want to exchange than to exchange at imbalanced prices. This is a fundamental contradiction to the general equilibrium theory, so The theory is fundamentally broken and a real imbalance process begins.

3. Thirdly and strangest of all: the theory (the stability of differential equations) requires that supply and demand quantities can change too and not only the prices during the price adjustment equilibrium finding process. This can only mean that this theory does not describe the exchange of goods but in fact the exchange of production plans or vouchers for goods … The “pure economy” that wants to be a theory of the market economy completely misjudges the principles of a market economy.


This “pure economy” has nothing to do with real market economy. In spite of the same vocabulary we are dealing with totally different worlds. The ideology now is, when the economists, admiring the market system, explain: Okay, real market systems may be a little bit different to the theory, may have some imperfections, but: If the theory proves that a market economy is the best possible economic system, then our real market economies should certainly be the best achievable economic system. In fact this is the simple statement, that real and theoretical markets behave similar. This statement is thoroughly false, so it is ideology.

A lot of characteristics in real market economies prove in-depth, that theory and reality differ completely.

… A real market economy is always marked by an uncertain outcome for every participant. The invisible hand of a guardian angel was so attractive on account of this basic uncertainty…


The survival efforts in economic problem times expose the great imperative of market competition: being better than the rivals and being the best possible. That alone ensures a business’ survival on the market but only for the moment. Being better means producing cheaper than the competitionor and/or earlier coming on the market with new attractive products earlier than the rival. Compared to earlier societies, this leads to unparalleled pressure,

1. to invent and redevelop production, new techniques and attractive products (this the positive side of the development of productive forces acknowledged by Marx and Engels in The Communist Manifesto)

2. and increasing the pressure of exploitation on employees and nature (mineral resources as a material source and the environment as a waste dump for a as high as possible.

This increased tension has consequences. School children complain about stress more than ever. The fear of failing, the anxiety of not keeping up and satisfying the demands any more and the fear of unemployment and going downhill dominate more and more people. This fear is well-founded. In most countries of the world, the income distribution benefiting the rich and to the disadvantage of the poor intensifies.

Like human resources, natural resources are also subject to a comparable strain. Far beyond all limits of regeneration and suitability sustainability, the capitalist world system plunders the natural reserves from metal ores, energy, fresh water, fish stocks, in the supposedly infinite world oceans, and natural soil fruitfulness. A crucified planet remains, enormous costs and burdens for future generations, extreme exploitation instead of balance.


A real market economy functions so very differently than the harmonic optimal conceptions of market theoreticians. The economic freedom of the competitively strong turns so massively against the weaker. Due to this The real market economy leads to spectacular deficits and excesses. The abstract free enterprise principles must be restricted by a multitude of concrete measures. Thus a state is necessary. That in no way means the capitalist state represents an adequate corrective for the results of the capitalist economy. Rather a certain minimum in corrective measures is indispensable to maintain the functioning of this economic system.

Most of the existing political-economic institutions and measures were created “to solve” problems caused by the real market economy. These include a large number of monitoring authorities and measures like industrial oversight [trade supervision?], building regulations, industrial safety regulations, monopoly legislation, bank- and stock market supervision, price monitoring, production bans and regulations and so forth. Wherever we look the real market economy produces a need for political regulations at all corners and ends in view of the food scandals, housing distress, bank swindles, destruction of the commodity labor power, air pollution through chemicals and cars and so on. The health sector plus the pharmaceutical industry, the energy industry and raw material exploitation, old age provisions and foreign trade – a market economy without extensive regulations and restrains by the state would lead to a social chaos. With everything that is important in the economy, a state is necessary to control market outcomes.

We know the term “unfettered markets.” While theory proves that only the completely unfettered, free markets bring forth the best optimal results, “unfettered markets” rightly represent a terror for most employees and consumers. Market results are only bearable when the markets are fettered.

In addition, the historical battles of workers opposed enforced institutions (esp. trade unions) that contradicted the abstract ideal of the market. On the other hand, these institutions stabilize the functioning of the market economy.

Even if the real market economy with its growing bureaucracy with hundreds of thousands of paragraphs) represents the absolute counterpoint of the theoretical market economy with simple regulations, the two principles

1. the first-rate importance of individuals=entrepreneurial freedom in the economy

2. and the maximum possible reluctance [or restraint?] of the state in economic activity

represent the model both in the current free enterprise agitation from schools to talk shows and in the permanent reflections on how far the new regulations should go and whether present regulations should be retracted or expanded.


The term “market-conforming democracy” coined by the German chancellor Merkel – underscores the pre-eminent importance of capital freedom, pre-eminent over against democratic principles. In this view, the markets constitute the fundamentals in society. The form of the state – democracy or not – is artificial arbitrary and second-rank. The first, most distinguished interest of the state is safeguarding and protecting the fundamentals of society, the capitalist market economy. Politics is then the executor of the needs and requirements of the markets, not the social choice between possibilities. Practical constraint is then the justification for politics. Friedrich von Hayek and Milton Friedman, the founding fathers of neoliberalism, said clearly that the democracy, out of control from their perspective, endangers capital freedom. They both welcomed the 1973 fascist Pinochet putsch in Chile that ensured the pre-eminence of capital freedom.

In understanding freedom as the freedom of capital, the freedom of the strong rivals over the weak, social responsibility is branded as a fundamentally subversive doctrine. Belief in social justice, according to Hayek, is the most serious threat to a free civilization.


Market theory starts from a rational economic conduct of persons, from the so-called homo oeconomicus. In this concept, being rational only means having one’s own benefit and profit as a the only goal and being radically selfish. In fact this economic system does everything in its power to produce and promote greed and egoism, rat-race-striving and aggressiveness in the human psyche and make them as dominant as possible over other feelings.

The justification of the competitive economy culminates in a basic credo. One’s own prosperity can only be assured by keeping down and suppressing the competitive opponent (who is far from being perceived as an economic partner).

The idea that an economy could be conceivable in which reasonable living conditions are possible for everyone without victory-defeat competition does not occur to the righteous. This would also not correspond to any free enterprise reality. Desires to that end are made bizarre, illusory, the imagination running wild, never existent, slandered and made ridiculous.

Economic destruction competition is often erroneously compared with athletic competition. With the latter, the goal is identifying the best, second-best order… Sports have no inherent interest in destruction. The market economy in the competition for / about / because of [?] market shares is different than in sports. The greater the distance to the second, the more productive is the competition victory. Victory is complete when all other rivals are wiped out. Here there are no parallels to sports. Unlike sports, the destruction of the adversary may and must be gained with nearly all means like [?] in war. Here the parallels to the market economy are much clearer. In the summer of 2008, a quarter of a year before his firm was destroyed in the financial crisis, Richard Fuld, head of Lehmann Brothers, said: “We will defeat all the people standing in our way. Crushing our adversary is vital.” The term “elbow society” is a true euphemism in view of such programs.


In conclusion, two central points for a counter-draft to the market economy can be distilled from the criticism of market theory for a democratically structured economy.

1. Who determines production? That is the central question.

The mutual dependence of producers is immense today because of the social character of production. Satisfaction of common social interests that are always cut short as external effects in a market economy becomes increasingly important for the social life together. The demand who, what, where and how to produce must be ordered according to social needs and no longer according to the criterion of maximum profits. Individuals must become more aware of their common interests – especially in dealing with nature, raw materials and the excrements of production – and realize those interests in conscious common planned organization. This means nationalizing [socializing, collectivating ? ] means of production and raw material stocks.

2. How do we determine production? The real market economy functions very differently than the fantastic notions of the theoretical market economy. Maximum individual profit does not at all go hand in hand with an overall social welfare maximum. Otherwise we would not be standing before the risk of climate collapse and would not need to pump enormous sums of tax money into the revitalization of the financial markets. So we need a new method for the finding, debating [disputing?], deciding, controlling, and monitoring [supervising?] of the production projects and development plans. This new method can only be a distinctive democratic process, and this process has to include all interested persons and all persons who are concerned [struck?] of the impacts. In democratic societies it is necessary that every citizen has the same possibilities in co-shaping / co-designing / co-formulating [?] the general affairs, also for economic actions.

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