Matti Hyryläinen
A MORE PERFECT MARKET THEORY
Abstract
Instead of there being one market economy regarded as antithesis to an economy regulated by government, two market economies can be theoretically separated and defined. In a free-to-sell market there is an elementary imbalance between supply and demand providing the fundament for the capitalist economy with a widening wealth gap and a pressure to material growth. A free-to-buy market is the invisible-hand economy providing equilibrium in which wealth allots optimally from the viewpoint of a random man. This explication gives rise also to a general theory of markets which includes a description of the evolution of three economic systems, socialism, capitalism and a public-market economy.
Keywords: capitalism; socialism; markets; general equilibrium; competition; transaction costs.
I. TWO DIFFERENT MARKETS
Since Adam Smith, Leon Walras and Alfred Marshall , economic thinking is largely founded on the axiom of a "perfect market" in which an "invisible hand" allots recourses and products for the benefit of everyone.1 Main concepts are supply and demand and equilibrium prices characterising a balance where an individual effort for prosperity meets the collective wealth. Essential to the perfect market idea is the elementary symmetry of supply and demand, selling and buying: every individual has similar information and equal access to the market as a seller as well as a buyer. This is the theoretical assumption for a most perfect and beneficial allocation of resources, a type economy with which all less perfect economies are compared. It is essential to note that this is also the only ideologically neutral basis for a common economy.
When the perfect market idea is presumed, it has been reasoned that also certain imperfect markets, especially those typical to present-day capitalism, give rise to equilibrium prices or at least a flourishing economy. As far as the market imperfections are results of decisions made by rational economic agents, not by political regulation, there always seems to be a level on which the market is perfect enough and an equilibrium would be achieved in the long run, or, the imperfect competition is "proved" to be better than the perfect competition.2 Indeed, in recent economic analysis the imperfect competition, rather than the perfect competition, is taken as a fundamental norm.3
In this paper I argue that this particular slip from the classical economics leads to economics and economies which develop successfully only up to a certain degree. The market economy following the teachings of neo-classical economics is not converging toward equilibrium pricing nor optimal allocation but diverging from those.
The reasoning begins from a simple notion. Concerning the classical market condition with free sellers and buyers the interpretation which replaces free access by free action, as it is done in economics which generate the imperfect-but-good-market theories, is erroneous because selling and buying are not symmetrical actions for access. Firstly, it is impossible to have equal freedom to both sell and buy. If selling is free, sellers have influence on buyers’ access to the market, they can, for instance, refuse to sell to some people thus denying their free access to the market. Consequently, if buying is free, i.e. every buyer has an equal access to the market, sellers are not allowed to sell freely and treat buyers differently. In a correct theory, the economic market can be either free-to-sell or free-to-buy, not free in general. (There is a generally free market, too; it could be called a free-to-seize market as explained later.)
So far the situation is in a way symmetrical, but since selling is on the side of self-organising production and buying is on the side of non-organising consumption the symmetry brakes. Due to this asymmetry the free-to-sell market functions differently from the free-to-buy market and it is reasonable to speak about two quite different market economies. Evidently the invisible hand works only in one of them.
An evidence of the asymmetry is the theoretical advantage a seller has over a buyer because (in a money-using economy) the seller holds the merchandise while the buyer holds the money which in itself is worthless. We can imagine a situation where one party owns all goods and the other party all money: obviously the former can sell a simple meal for all the money. Thus, there is an elementary, infinitesimal imbalance of economic power in every transaction. This imbalance, as well as its consequences, has been neglected in modern economics4 – probably just because the neo-classical model does not distinguish between the free-to-buy and free-to-sell markets. In the free-to-sell market it is clear that sellers can and will expand the imbalance by organising supply, which is possible by classifying agents to "us" and "them" and selling cheaper to us than them. When all sellers do it the whole economic system siphons more money from them, i.e. consumption, to us, i.e. production, than the equilibrium would be unless the production accordingly grows. That means: the free-to-sell market is in equilibrium only when production is growing. This is the special condition where neo-classical economics functions as supposed, while the growth is also understood to be the ideological aim of economy. Therefore, in general, all theories in which the assumption of the perfect market (or competition) has essential non-ideological meaning, the meaning cannot be attributed to the free-to-sell market but to the free-to-buy market.
The practical problem is that when growth for some reason does not reach the equilibrium level, the economy begins to decline and there is no rational way to stop the circle because it is every seller’s advantage always to organise and improve production and selling. The production capital, i.e. organisational contracts usually in the form of money and stocks, grows until equilibrium is achieved only by the sinking of the value of the money or the stocks. It is unnecessary to emphasise that both has occurred and still occur in our free-to-sell based capitalist economy, too.
There have been two main paths to contemplate with the problem. The first is to consider that this is the way the economy is and shall be. It is only natural that the firms and the production sectors which do not grow enough diminish and cease. After bankruptcies and recessions the growth starts in more developed firms and sectors and in the whole the economy grows. If there is a problem, defenders of this view, Ludwig von Mises and Friedrich Hayek to mention the most famous, accuse state intervention, government regulation.5 There are good grounds for their view, too, because as an economic conductor a state is quite too far from individual workers and consumers to experience their preferences which, after all, are supposed to express the meaning of the whole economy. The economy should grow better if state interventions were minimised. However, when trading and production technologies develop and the structure of economy become more linked, the "normal" setbacks may over-expand and thus are not perceived as positive steps to a better world. A slowdown in an important economic sector spreads easily into the whole nation or even more globally and it is very costly, to say the least, to replace a bankrupt nation with another.
This is a reason for another way to treat the issue, and it is usually connected to the name of John Maynard Keynes. A state is not only a socialist controller and an inevitable burden for the economy but can be used to balance risky fluctuations. If the economy of a nation is slowing down because of a lack of demand, the state can improve the balance by fixing the rate of interest or by taxation and increasing state consumption by investing in long-term objects.6 Likewise, if the economy is suffering from a weakening trust in some central contracts, for example people’s loans to banks or banks’ loans to production, the state can help guaranteeing the contracts or subsidising the party in difficulty.
Since Keynes, both paths have been followed in economic theory as well as practice. The rule of free capitalism which ended in the 1930s and turned after disgraceful events to well growing mixed economies in the 1950s and 1960s did again take an advantage in the 1980s and 1990s. And now, at the turning point of the millennium, the pendulum seems to be swinging to the left again, or would it be more accurate to say that by now the two ideologies are so jumbled that no-one knows what you call it. I believe I express a common doubt when saying that the central ideas of both Hayekian and Keynesian economics have developed as far as their potential. Economists have laboured hard along and between the two paths, but regardless of how many and bright the contributions, they have not given a reliable answer to the question of what should be done to make the present world economy less prone to depressions, unemployment, social disorder and environmental catastrophes.
I suggest a shift to the new market theory. If we suppose, like the theory says, that a capitalist, free-to-sell economy is in equilibrium only when growing, it is evident that inside limited spaces there will be crashes. The natural reaction to the closing limits of an economic space is a toughening competition for the remaining markets, and it causes increasing competition costs7 as compared to profits. The result is a weakening economy and a devaluation of contracts; the larger the region, the weightier the consequences. After one weighty sum of such consequences, although rather resulted from the competition for colonies and "lebensraum", namely the three decade crash from the beginning of World War I to the end of the second, the Western economy began to develop mainly on small and national basis and along with Keynesian economics. In the industrialised world the economy grew pretty steadily for many reasons. After the war there was plenty of eagerness and room for material growth, the environmental limits were unknown and also the state spending could increase. However, in the 1970s and 1980s the government regulation and corresponding spending overran its effective limits in most countries. Meanwhile production technologies improved, firms grew and specialised, and their progress required international trade. The logical result was, and still is, a move to the right in national economies, because national spending is a cost in international competition. Social programs have to be downsized as if unemployment is needed to produce employment.
It is no wonder that today not only economists are confused. The "right" theory convinces that everything is going fine: when markets are freed they tend to equilibrium, everyone benefits; and by dividing nature into market items even it can be saved. Yet all people, except the wealthiest, can see and feel almost the contrary occur. The "left" theory transfers the problem onto the organisational level above nations and suggests a global government to stabilise the world economy so that the expanding welfare gap does not break too many contracts, and the overuse of environment can be stopped. Yet all people, except true socialists, know that international central planning does not work.
The new market theory exposes why economists should listen to the people. The essence of the problem is the free-to-sell basis of the present economy. The deregulation does not free an equilibrium economy and make it more perfect but it frees the asymmetric economy which siphons extra wealth from consumption to production. The imbalance of supply and demand becomes more "perfect", total, leading to expanding values of real estates, investment funds and stock markets versus decreasing employment rates and poor men’s capacity to spend. And because such a market requires growth to run, Keynesian world government, even if it were politically feasible, would not be a long-term help because it only could level fluctuations on growing production. There would still be a pressure to grow, and faced with environmental and social limits the increasing competition costs would break the regulative system. (This does not mean that we do not need international co-operation and agreements for other purposes).
That leaves us only one theoretical possibility, the free-to-buy economy where the competition pressure is lower and the growth of power is not needed. The free-to-buy economy is always in a good balance because market actors cannot expand the elementary imbalance between supply and demand. However, before examining what kind of rules that obliges in practice, I will briefly study the market theory on one step deeper level.
II. THE PUBLIC- MARKET THEORY
Obviously a fundamental economic theory has to cover all economic systems, including socialism. To grasp the whole picture it is necessary to suppose that all different spheres of economy belong to the same world and obey the same laws.8
There really is a simple logic to make socialism a part of the market theory: on a general level all economic actions take place on a free world. Except for the limitations set by nature, the only restrictions over men are created by other men; there is no superior authority to state practical restrictions for people. And principally everyone is free to compete for the power to order others. Even dictatorships and socialist economies are free markets in this meaning. However, they are not regarded free, because the real essence of freedom is freedom from below. But this freedom cannot be achieved without cost. To acquire a market free from below, the opposite freedom has to be prohibited. This issue can be studied as a question of property rights9 because primarily, in the sense of general evolution, economy is a competition for controlling property in order to survive and breed.
The most archaic and fundamental property right is a "seizure right": the world is a free-to-seize market in where everything anyone has power to seize, keep, exploit and produce is his and he can use it how ever he wants. This is the strongest property right, because it is backed by physical power, and it also stands for the most free market without any man-made restrictions. Nevertheless, a group is more powerful than an individual, so the seizure right will mean that: everything a group can seize etc. it owns. This arrangement needs a method to distribute the property among the group and the simplest case is: a more powerful man takes everything, but he gives something to a less powerful man so that he will work in the group of the former. He "buys" organisational power "selling" an organisational right to a common property. This initial element develops a system where the real use of physical power is replaced by the threat of it, or by the threat of rejection; and individual power is replaced by organisational power multiplying the basic imbalance of physical power. This is the fundament of the socialist economy. Perfect socialism is a free economy of a group to use physical threat to "sell" and "buy" all kinds of organisational rights to the property, money included, in order to gain more power for seizing, producing and distributing commodities for the benefit of its members, as it is defined by the hierarchy of the group. And because the base of the order is one organisation, it inevitably leads to a centrally controlled authoritarian system, as seen in real socialism.
The second way to gain a property right is by trade. Besides seizure goods people can voluntarily exchange goods. They can also make all kinds of contracts about exchanges and they can exchange these contracts. So we end up with a "trade right": the world is a free-to-trade market and everything anyone owns by a trade or contract is his and he can use it for any other economic purpose except for seizing from other people or damaging others’ property. The trade right needs a community to legalise it by forbidding the seizure right, because powerful groups would not be willing to trade if they are allowed to seize or steal. This defines the rules of the capitalist economy which takes the form of the free-to-sell economy because a seller is free to make all kinds of contracts. So, in perfect capitalism there is no public market but such special markets as the sellers find useful when trading goods and contracts in order to gain more power to invest, produce and trade. In capitalism the imbalance of physical power or hierarchy does not count, but like in socialism there is an imbalance in economic power in capitalism, too. Although trade is, by definition, voluntary to both parties, in theory a perfect trade is more profitable to the seller, as explained above, and/or to the wealthier party (either the seller or the buyer) who has greater possibilities to pressure the other party. Therefore, one can, for example, buy exactly the same labour at less cost from poor workers than from wealthy workers. And since trade systematically over-favours the wealthy and the sellers10, wealthy sellers grow in power and the whole economy based on trade rights do not tend toward equilibrium but widens the gap in wealth and productivity, just as seen in real capitalism.
The most advanced property right is a "market right": the world is a public market where the buyer is free to dispose of his goods as he wishes, except sell it outside the market. In addition to seizure, the community forbids the trade right because wealthy producers would not be willing to sell on the market if they are allowed to trade. The idea of the public market is simple. The market provides an equal possibility for every individual to sell and buy. In addition, everyone has free access to all information about each item and price. All prices are stated and paid in public money. The seller has the right to decide what he sells and at what price – he can sell goods, information, labour or intellectual property – but he may not treat buyers differently or sell any rights or contracts which do so. A buyer has a right freely to decide what he buys and if he pays the money asked he must be sold to. As we can see, market right corresponds to the free-to-buy market and it is the foundation of the public-market economy. It should be noted that in the perfect public-market economy there are no mutual contracts nor contracting costs; all possible contracts sellers can and will offer are found on the market – at least in theory – and free to be chosen by anyone. On this market, no seller, nor buyer, has power to distort the balance, because the other party is always the more large and weighty public market. Evidently this is the invisible-hand economy where wealth allots optimally from the viewpoint of a random man11.
III. THE EVOLUTION OF ECONOMIC SYSTEMS
Now we have definitions of socialism and capitalism as well as the public-market economy. The definitions are based on the competition methods used to legitimise the corresponding property rights, and the competition methods are: physical power to legitimise the socialist property, trade power to legitimise the capitalist property and no power, or only information power, to legitimise the public-market property. Yet, although the physical power is not needed to legitimise a certain capitalist property, it is needed to legitimise the capitalist system which legitimises singular possessions. The same applies to the public-market system: collective power is needed to establish and ensure the property system in which no power is used to legitimise individual property.
Like most definitions in social sciences these are not perfectly clear and exact. They can be discussed about and improved, still, already they provide a more unambiguous concept than the present picture. It is to be remembered that in everyday speech – which is not criticised by economists – socialism is defined as an economy regulated by state, not realising that also the capitalist economy needs regulations; market economy is defined as a free economy, not realising that there are controversial freedoms; and the concept of public market is unknown, the concept of perfect market being inadequately analysed and used only in some forgotten economic models.
It is understandable that every real economy is a mixture of socialism, capitalism and public market, and about certain economic practices it is not always easy to tell if they are more socialist, more capitalist or more public-market. However, there seems to be an evolutionary direction between the great systems. There is a tendency from the socialist economy to the capitalist economy12 and – so I argue – eventually toward the public-market economy.
The above argument is reasoned by the inevitable technological progress which facilitates the growth of production in a world which is limited in certain spaces. In an economic system a competitor is successful when he, obeying the rules of the system, can acquire property from the nature or from other competitors. The system itself is successful when aggregate competition costs including "referee costs"13 do not exceed profits acquired from the nature. When the possibility to gain certain profits from the nature narrows, the corresponding competition costs increase, evidently the more expensive and destructive the competition method becomes. The competition method, on its own, is very costly in socialism where arms are used to legitimise possessions and rivalry culminates in warfare. The method is less costly in capitalism where people struggle with trade power for market shares. Obviously the competition method is least costly in the public-market economy where no-one has trade power, and the only way to compete is to produce as good products as possible. Therefore, it is only logical that the system costs exceed profits in socialism before they do so in capitalism, and in capitalism before they do so in the public-market economy. And, along with the evolution toward the public-market economy, the essential economic growth shifts from material production to information production.
It is obvious that big economic theories formulate their own versions of history, as well as the future. The public-market theory does not make an exception. If we use the definitions above, it is reasonable to say that the general make-up of the world economy was more or less socialist until World War I. There were economies of emperors, churches, landlords, guilds, princes, towns and nations, but mostly these participants were organised very hierarchically and backed by physical power; often in outright wars with each other. Military officers were celebrated benefactors such as chief executive officers are today. Even big Trade Companies, regarded as ancestors of capitalist firms, were socialist by the way they used physical power to pressure the people in colonies to trade. When science and technology developed and imperialism spread across the globe, the competition for colonies and military power grew tougher. The conquering nations turned against each other, breaking into World War I, and the competition costs became sky-high. During the ensuing destruction the world economy divided in two. In the West, the long developed capitalist system eventually won the supremacy; while in the East, the economy became even more regulated, or "socialist" in today’s jargon. The capitalist system stagnated in the 1930s and this was followed – hopefully – by the last battle for military dominance of the world economy World War II, in which National Socialist Germany, Fascist Italy and Imperial Japan tried to expand the regime of centrally controlled economies. However, the competition costs grew unbearable, and the defeated countries were integrated into the capitalist economy, except for a part of Germany, which was connected to the socialist camp. After the war, Soviet socialism developed until its widening gradually ceased, and its competition costs, in the form of bureaucratic and armament costs, grew larger than profits; and in the 1980s the whole system began to collapse.
After the fall of Soviet socialism and the failing of Keynesian model, the capitalist economy has extended its dominance almost everywhere. New countries have been joined to the global market, total production has grown and capitalists have made huge profits. The fast development of information technology has made the whole world a universal trading place (not necessarily a market place); and especially capital, knowledge and contracts flow fast and free to where the profits are reaped. Capital-owners and CEOs are the most admired and rewarded human beings – well, along with some actors and athletes. The economic aristocracy experiences "La Belle Époque" accompanied by a strong belief in everlasting progress. Yet, also poverty is increasing and there is a vague and uneasy feeling that this dividing cannot continue forever.
If this parallel between a socialist and a capitalist competition system is valid, we are now living in times similar to those preceding of World War I – as also other economists have noted.14 In a limited world with improving technology it becomes ever harder to find fresh trading markets, hence also the competition becomes ever tougher. At some point the growth turns against the other competitors and the competition costs rise exceedingly. It happens, when politicians privatise the last national possessions; when corporation take-overs do no longer raise the quality of production; when stock markets swell, but do not realise growth in the real economy; when the incentives to empower the economy focus more on the means of competition and destruction than the means of co-operation and construction; when the expansive exchange of currencies rather unbalance than balance exchange rates; when total marketing expands, but does not increase total sales; when court cases multiply without leading to a more righteous economy; when police forces grow but crime does not decline; when environmental costs rise but surroundings get worse; when employment policy leads to jobs which cause unemployment, when the quantity of vehicles grows but the quality of transportation begins to decline; and so on. To state it simply: there is a vicious circle of competition costs when men work harder but get less because more and more of the energy is used to win and control each other and the environment.
It is worrying to recognise that within the capitalist, or socialist, or mixed, system there is not even a theoretical way to stop this circle. In a pre-war situation it is always rewarding for every company and nation to improve its competitiveness against others. So the economic armament policy will persist until there will be economic World War I. If the history repeats itself – which is the best guess although it never happens just like before – at some point the slowly toughening competition will compel the greatest economic powers to contracts with which they divide certain investment "markets" between each other. Then some unhappy occurrence leads to a situation where it is impossible to keep some critical contracts and the whole system starts to collapse, bank by bank, firm by firm, in all lands.
Still, economy goes on. Some nations, the ones less divided by winners and losers, survive better than others. As a triumphant party, they now have authority to rewrite economics. They reason that competition costs are the critical costs: all institution and transaction costs are somehow based on them, and they must be lowered. The whole capitalist competition system has to be shifted to a less competitive economic process.
IV. BASIC RULES FOR THE PUBLIC-MARKET ECONOMY
The principle of the public-market economy, free buying, can be divided into two elements. First, the economy is "unsocialist" meaning that the state does not use political power, legitimised by arms, by "selling" different rights to different organisations. Thus all economic organisations are treated like individuals, i.e. via individuals. Second, the economy is "uncapitalist" meaning that whatever individuals or firms sell, the seller must not treat the buyer differently. Although these principles are clear in theory, the practice is more complicated. It is not self-evident which are the overruling types of trade and what exactly is meant by equally free buying in each case. However, there are also evident cases and if the perfect model is difficult to construct it is usually easy to judge which alternative is less perfect. In the following, I demonstrate briefly five main examples of transactions in the free-to-buy market economy.
There are no trade, price or bank secrets; all market information is open to everyone. The special advantage secrets offer to states, capital-owners and companies in their battle against each other is substituted by the general benefit from better market information.15
There are no exclusive rights, franchises or price discrimination in goods as well as in information business. The advantage vertical integration offers to effective production16 is substituted by the benefit free buying offers to economical consumption. Especially the intellectual production changes dramatically. Since the competition pressure is lowered, because of the narrowing scale of prizes; the reward of inventions providing methods to exploit others decreases and the reward of co-operative creativity increases.17
There are no corporations but personally owned firms. The firms are treated, for example taxed, via their owners in relation to each one’s share as their personal income without deductions or subsidies, just as families and individuals are treated. The advantage the corporation system and stock markets offer to fund production is substituted by the value a personal and more local ownership offers to make production more responsible.18 The special profit mergers offer in facilitating transactions between daughter corporations is substituted by the common profit achieved by everyone’s freedom to the same transactions.
There are no social funding or subsidies for special groups but an equal basic income to everyone, man or woman, black or white, rich or poor.19 The advantage politicians gain from classifying people is substituted by the value people gain from freedom to choose. This does not mean that there would not be liberal public education, health service, environmental projects etc., on the contrary, when private competition pressure is lowered, the competitiveness of public production increases.
Every social unit, a family, a firm, a nation etc., having its own authority to decide what part of its economy is collectively planned, has a right to buy or not to buy anything it decides. For example, import taxes and quality standards are not considered as trade restrictions but as market rights, which belong to every autonomous nation. The advantage free selling offers to economic organisations is substituted by the value social collectives gain by freely judging what products to purchase. On the other hand, far away buyers have the same right to buy anything sold to the local people and at the same price, not more or less in the place of production.20 This makes the international co-operation as wide and free as possible when respecting social bonds.
As the reader may notice, every item above has been at least a clause in some old economic utopia; in that respect there is nothing new. Yet, until now the ideas in question have been separate cases with only occasional theoretic reasoning: they have been easy targets to both capitalists and socialists to label unscientific or unrealistic. Now all the given examples are grouped and strongly connected to the very core of economic theory, and more than that, they unambiguously show the direction of the Third Way, the long sought new economy which cannot be found between capitalism and socialism21. Regardless of how far in that direction it is possible or wise to advance, the theoretical alternatives are clear.
V. CONCLUSIONS
We have two different ways to understand and define the market economy. The conventional theory used today (t1) views and defines the market economy in relation to government or market participants: market economy is the economy free from government regulations, or, market economy is the economy which comprises of infinitely small participants equipped with perfect information but no power to set prices. The new market theory (t2) views and defines the market economy in relation to the trade transaction: market economy is the economy free from control by sellers, governments as well as firms and individuals. The attributes of participants do not matter.
Here I argue that t2 describes and explains the reality better than t1, and I base my argument on a rather well known test constructed by Karl Popper22.
t2 makes more precise assertions than t1. The t1 way to understand and define market by two separate and partly contradictory conceptions is a very vague one. For example, t1 does not clarify at what point a monopoly changes to an oligopoly or this changes to a perfect market, or, do some monopolies possibly belong to the perfect market. The role of government is as obscure. t1 does not explain how to distinguish the restrictive regulations (which make the economy socialist) from the freeing regulations (which make the market economy more perfect when ensuring that market participants are well informed and unable to set prices). Clearly t2 is more exact in stating that a market is perfect only and when sellers do not control it by directed selling.
t2 takes account of, and explains, more facts than t1. I have in mind especially the competition costs which are not explained by t1; even these, ranging from the costs of non-informative advertisement to the costs of warfare, are most actual in every economy. t2 defines the competition costs and proves that they are the critical costs when an economy is stagnating. It is to be remembered that a recession is typically preceded by some kind of panic, i.e. progressively competitive acting in a limited situation. In general it seems that t2 explains t1 but t1 does not explain t2.
t2 unifies problems which t1 finds unrelated. Here I refer, as an example, to the pollution caused by socialist production and, on the other hand, to the pollution caused by the market production, which problems t1 clearly takes for separate ones. The pollution in socialism is due to the lack of freedom, which prevents people from responsible production and consumption, but in capitalism the environment suffers because people are free to produce and consume. Even in advanced t1 models where both problems are linked to transaction costs, the involved transactions are different. The socialist failure is seen as a result of the high costs of central planning to collect and process the information needed to look after the environment, while the environmental failure of the market economy is seen as a result of high contracting costs, first in creating the initial allotment of pollution rights and then in trading those rights. t2 suggests a solution to both the problems by uniting the two views with the concept of competition cost. It is because of the competition for property rights that the socialist bureaucracy exists in the first place. Likewise, it is because of the competition for "owning" air and seas that the market of polluting rights has been so difficult to create. Hence, both the problems can be eased by lowering the competition pressure of an economic system. When the competition pressure is lowered, also the pressure on environment is lowered.23
t2 suggests experimental tests which are not applicable to t1. It is reasonable to say that all the above mentioned five examples of public-market practices, and all the questions they raise, are such suggestions. However, it must be realised that in social sciences experiments cannot be processed as in natural sciences; they have to be performed as virtual tests conducted by logical reasoning. Although the experiments in question are not all new but already separately suggested by various precocious thinkers, they could not have been created or treated on the basis of t1, because it does not hold information to evaluate them. For example, t1 does not contain any information to tell, if the global economy would function better with corporations or with personally owned firms, or, if technology would develop better with or without exclusive rights. On the other hand, t1 does not suggest any experiment – except the one going on in reality – which could be proved, by any test, to turn the global economy less polluting or more pleasant to poor people.
Since the score of this Popper-test is definitely positive – and since most people, after all, believe in scientific progress – I am convinced that t2 eventually supersedes t1. However, according to this very theory, it will not happen easily. Also in science competition is tough and costs are high. The strong powers, which profit from the capitalist (and socialist) economy, will do anything to resist all changes which could jeopardise the economic status quo. Capitalists will ignore the public-market theory; they will deny the need of the public market; and they will argue that they represent the one and only real market. Certainly capitalists will make known that poor people and environment could not manage without the power of the rich. Shareholders know how to prosper and they can lead the unlettered to abundance. This is true, of course, but only in the sense the more powerful have always reasoned their dominion. For centuries European noblemen and landlords knew best how to seize land and grab gold and silver, and following them also the peasants made progress. For seventy years Soviet communist leaders knew best how to defeat the bourgeoisie and to build a socialist state, and following them also the proletariat advanced.
However – and that is what this paper is about – any economic system cannot continue forever. When science and technology develop, the sources of wealth change and different sources need different economic systems. An authoritarian class society was effective to utilise land and lay the foundation for industry, but later the privileged aristocracy became a burden to the industrial production. An authoritarian communist society was effective for some backward nations to set up heavy industry, but the privileged party and central regulation could not satisfy the needs of individual consumption.
The problem with capitalism is parallel. Capitalism, with the authority of shareholders and the power of the trade right, is efficient as far as wealth and well-being is provided by industrial production. However, day by day it is becoming clearer that it is not the efficient and extensive industry that is the determining source of tomorrow’s well-being, but it is knowledge. And it is no longer the knowledge of how we can produce more or how we can defeat rival producers, but the knowledge of how to stabilise the world trade; how to allot production so that social tensions are lowered; how to build responsible, human-scale industry; how to produce with less pollution; how to create an economy in which no woman’s value depends on her ability to deliver babies; and so on. This kind of knowledge, however, is not the one which is rewarded in a capitalist economy. On the contrary, the great rewards which are gained by the privileges of corporations and the trading power of sellers make it unprofitable to produce and sell goods which are constructed according to this kind of knowledge.
So – to continue the prophecy – there is only a slight chance that capitalists would give up the privileges they have in relation to the public-market system, and we could avoid economic World War I (coming any time in the next, say, twenty years). In addition to increasing unemployment and poverty it means that the great institutions of the global economy will be ruined. The IMF, the World Bank and the WTO fail in their jobs, and their work is undermined. In the following disorder, there are two directions to follow.
The countries or cultures which do not learn from history are compelled to repeat it. The economy begins to grow in the control of hard "capitalists" like mafia, as it is today happening in Russia, and sooner or later some Fuhrer, or Leader, an anxious devotee of industrial power, raises "righteous" Universal Capitalists to defeat the "corrupt" economies and conquer the world, leading to economic World War II.
The other way is to learn from history. The men and cultures which understand the circle of progress know that a war is useless unless there is a plan for a better peace than the one which lead to the war. They know that in a learning environment it is essential to carry on learning, and a better economic peace means a better economic system with a better chance for new knowledge to be gained and spread. That is why capitalism is a better peace than socialism, and the public-market economy is a better peace than capitalism.
NOTES
1. The start was not so quick. Smith mentioned the invisible hand only once in his famous book, first published in 1776 (Smith 1937: 423), and Marshall was not much more abundant in 1890 about the perfect market (Marshall 1961: 323-30). Although he shortly explained how a market can be more or less perfect, it seems that in the book he did not use the phrase "perfect market" once. Nevertheless, perfect market is a substantial concept in classical economics.
2. There is an interesting difference between economics focusing on the perfect market and economics focusing on the real economy. When the aim of the former is to find practical ways to make markets more perfect, the aim of the latter is to theoretically prove that various imperfections can be used to benefit a firm or a nation. As an example of imperfection economics see the contents of Stiglitz (1986). My focus is the first mentioned because I consider the economics attached to reality ideologically problematic. Every real economy is in some way ideological, and it colours the connected economics. Take socialist economics thirty years ago, for instance. Realistically Soviet economists studied the socialist economy and tried to find better ways to control it. Now we know that they should have studied the market economy. My aim is parallel: to forget the capitalist realism and its ideological emphasis – manifested in imperfections – and to examine how a more perfect market would function.
3. The words are from Thompson (1997).
4. For example Arrow (1986: 186) tries to demonstrate the sturdiness of competitive equilibrium by the assumed unprofitablity of seller coalitions: "The sellers ultimately can depend for sure only what they can achieve by trade among themselves, and of course, this may be very little indeed". In the real economy the sellers can depend on buyers’ ultimately desperate need to acquire commodities.
5. See Hayek (1979: 149-52) and von Mises (1963: 281-83).
6. See Keynes (1936: 378).
7. It is surprising that the concept of "competition costs" seems to be unknown to modern economics. There is a wide literature about "transaction costs" which, according to Cheung (1998), are presumed to cover everything except production and transportation costs. However, only narrow slices have been theorised, namely when explaining the emergence of the firm, Coase (1988: 5-7), and some related cases, for example Grossman (1998). Here I suggest a model based on a distinction between the horizontal productive function needed for competition and the vertical productive function needed by consumers. It is clear that the production and use of, for example, arms and aggressive marketing causes real costs to consumers regardless to how smoothly the related transactions occur. The point is that these costs are independent of consumers’ choices but dependent of the rules of the competition. On the other hand, concerning the production wanted by consumers, the transaction costs of collecting information, making contracts, using middlemen and exchanging assets are a logical extension to production and transportation costs. Those functions can be submitted to the free-to-buy market which defines their value in a normal way. Therefore, unless the transaction costs are competition costs they can be treated as production costs when following the free-to-buy economy. There will be only the competition costs depending on the rules of the game. Yet, when applying the free-to-buy rules to the economy, also the competition costs will vanish and on that level the "transaction costs" problem fades away.
8. Maybe I have missed something but I haven’t seen an economic theory where socialism is treated by the same laws and concepts as capitalism. Usually the two are studied like opposite spheres obeying totally different rules of action. However, since Galileo Galilei argued that Jupiter and its moons obey the same laws as Earth and its moon, parallelism between different worlds has been a proper scientific method to find new ways of thinking and progress in understanding. In the following, I think, it works beautifully.
9. The concept of property right has been successfully used to study externalities, harmful or beneficial effects of market acts caused to outsiders, see Demsetz (1967). The central idea is an "internalisation" of externalities by widening the range of property rights and freeing their trade so that more outsiders shall be insiders in a market process which pays for harms and is made to pay for benefits. The three-level model I propose supports this idea and the model can be used to explain how the ability to internalise depends on the property right system.
10. Karl Marx (1872: 150-163) was right about the accumulation of capital but wrong about the cause of it when supposing that the essential surplus value is due to the employer-employee relationship. In an economy of very poor workers, this is the case but only because of their poverty contra employers’ wealth. In those circumstances workers, or the working class, can manage best by organising their selling power and threatening to go on strike. When the workers prosper in wealth, the wealth factor loses its weight while the selling factor increases its weight. In a developed economy like ours, this means that it is usually profitable to both employers and employees to unite their selling power in an organisation of a firm. This decreases the organisational power of workers as a class, and the strikes are limited to those of some key workers with high selling power. However, such strikes do not balance the economy but rather increase the income gap between rich and poor workers.
11. In my opinion this is a good answer to John Rawls’ (1973: 11) inquisition about "the principles that free and rational persons concerned to further their own interest would accept in an initial position of equality as defining the fundamental terms of their association". Rawls’ own answer containing some regulative actions has the same defects as any socialist system.
12. Francis Fukuyama (1993) wrote the well known view into a best seller. However he, like many others, focused only on the battle between capitalism and socialism and could not see further on.
13. "Referee costs" is a descriptive name for a large range of costs of law and order needed to control the competition within the system rules. Naturally there are also "political costs" caused by competitive processes which affirm and change those rules, and "revolution costs" of fights which change the basic structure of the rule system – which costs, by the way, are the ones this particular paper try to minimise.
14. Paul Krugman (1998) describes impressively the similarity between the beginning of this century and today: "On the eve of the storm the world economy was, to an extent never seen before, truly global. It was linked together by new technologies that made it possible to ship products cheaply from one side of the globe to the other, to communicate virtually instantaneously over huge distances. But it was also, more importantly, linked together by the almost universal, if sometimes grudging, acceptance of a common economic ideology: the belief that free markets, with secure property rights, were the only way to achieve economic progress; and in particular that a nation hoping to make its way forward needed to welcome foreign trade and foreign investors with open arms. . ." The year, of course, was 1913 – the high-water mark of what economic historians sometimes call the First Global Economy – and over the decades that followed all of its certainties were lost.
15. This is an illuminating case to see the ideological difference between standard economics and new market economics. Instead of reasoning the benefits of perfect information and suggesting an obvious policy to improve the public accessibility to all information, neo-classical economics focuses on cases where imperfect information is given, and the problem is how a firm can utilise it.
16. One of the main arguments for exclusive rights – as well as many other market imperfections – is that while facilitating high profits they increase the incentive to try harder and produce more. Whether this works or not, this is not a scientific but ideological reasoning based on the faith that it is good that production grows (regardless to what people want). In the world where environmental problems are enormous this is a most risky ideology. In an unideologic economy the growth defined by a neutral, free-to-buy market is enough.
17. There is an interesting example. It seems that the most serious threat to Microsoft does not come from any commercial competitor but from Linux, a freely developable and distributable computer programming system initially created by a Finnish student Linus Torvalds. People who develop Linux try to make it as multipurpose as possible while Microsoft spurred workers try to create programs which commit clients to Microsoft.
18. Among others Joseph Schumpeter (1942: 142) has noted the lack of responsibility in "the capitalist process, [which] by substituting a mere parcel of shares for the wall of and the machines in a factory, takes the life out of the idea of property". The defects of the corporation system are widely clarified also by David Korten (1995).
19. An idea of basic income is originated in the 1920s. Van Parijs (1995) has well reasoned its benefits. I would highlight the ethical aspect conducted by the fact that much of the well-being enjoyed today is produced by former generations. It is wrong to allot this common legacy to present-day people depending only on how they rank in the economic competition today. It should be allotted, like family welfare and impartial heritage, equally to everyone as public services and basic income.
20. The free-to-sell ideology between nations is parallel to a free-to-come ideology between houses. It is rational only when all neighbours are well-off on rather equal basis. Before that stage the community works better when its houses have doors open from inside for everyone to go out but locked from outside for only friends to come in.
21. See Giddens (1994: 68-69).
22. Since Popper himself (1989: 232) estimated this list somewhat unsystematic, I took the liberty to slightly rearrange it.
23. See Hyryläinen (1987). The fundamental lines to the theory of diminishing competition costs are drawn in this book. The theory involves three dimensions, ideological, political and economical, and explains how they are connected to each others. The central thought is that when science and technology advances and the means to control people and environment improves, the evolution is stabilised by making the social system more equal, more random.
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