Major Themes in Industrialised Societies: Markets I

 

- Robert Holton, Adam Smith and Friedrich von Hayek

Markets represent a key feature in modern industrial society. There are different accounts of it. The liberal account of markets has significant political and popular support.

What is striking about the liberal account of markets is the conflation of the scientific analysis of ‘what is’ with the moral conviction of ‘what ought to be’. Also striking is the belief that liberalism and markets are radical and progressive, rather than conservative. Markets had a corrosive affect on conservative practices of arbitrary government, aristocratic privilege and economic traditionalism.

There are several features of markets in the liberal account:

 

a) Consumer sovereignty

i) This entails the proposition that the consumer is the final arbiter of decisions or choices about individual welfare. This proposition is both moral and sociological, in the sense that liberals believe both that individuals ought to be free to make their own choices, and that individuals in the real world have progressively secured a freedom of action to act in a sovereign manner.

ii) Furthermore, liberals suggest that consumer sovereignty is part of human nature. Consumers will and do act to exercise sovereign choices unless coerced or restrained by government and corporations, though this is regarded as interference with human nature and liberty. This concept of consumer sovereignty treats the consumer as ‘pre-social’ being, in the sense that the capacity for consumer sovereignty is inscribed in the individual in a natural state, prior to any involvement with other individuals in the community.

 

b) Self-interest

i) Prior to interaction with others, consumers and producers articulate their strategies, projects and commitments to secure their own goals and objectives as best as they can. They are motivated to do so by self-interest and self-regarding behaviour. Consumers and producers have particular ‘tastes’ or preferences (like beer over wine, being racist rather than non-racist, hiring men rather women), and pursue these tastes, whims and subjective preferences as best as they can.

ii) Self-interest need not be restricted to an individual ego, but also involve the interests of significant others (such as family members and professional fellows). Some liberals suggest that altruism can accompany self-interest as if it was a taste for moral behaviour.

 

c) Rationality

i) Only consumers and producers possess the information and self-awareness to make the appropriate decisions about what is desirable and in their self-interest. This does not mean that individuals never make mistakes or cannot change their minds.

ii) To act ‘rationally’ means to act to secure self-interested objectives given the choices open to individuals. Given an increase in price of petrol, it is only rational for consumers to look for a cheaper source. Or given a fall in price of oil, it is only rational for producers to delay the costly search for new oilfields. In other words, it is rational to seek the best deal measured in terms of benefits over costs. From this viewpoint, it is rational to buy cheap and sell dear, because this maximises profits and incomes. It is quite irrational to buy dear and sell cheap, or to let other considerations of values, emotions or customs to enter into the calculation.

iii) This view of rationality is not only sociological but also moral: ordinary people should act rationally, it is not only economically rational, but also desirable to be guided by rationality in pursuing self-interested goals.

 

d) Private property rights

i) Under a system of private rights individuals have the right to do what they like with their own resources. Individuals can assert their own self-interest in pursuing their own objectives without the necessity of accounting for their actions to others. Under common, communal and collective rights, the community has the right to overrule individual preferences and objectives, taking precedence over the personal desires of individuals.

ii) Liberals claim that private property rights maximise the welfare of consumers and producers, satisfying human wants in a flexible and efficient manner. Communal rights discourage personal effort since there is a lack of ownership and control. This can result in free-riding and ‘tragedy of the commons’, in which resources are over-exploited and exhausted since individuals have no obligations to each other, or lack a sense of long term preservation of resources.

 

e) Self-regulating markets

i) Adam Smith saw the market not simply as a means of economic exchange, but also as a system permitting human freedom and liberty. Once more this reflects the moral and technical side of liberalism. Instead of the conscious design, intention and purpose of the state or the community, the market more or less regulates itself, relying only on a minimum of state support to secure a stable legal framework and policing of contracts. It is as if the market is guided by an ‘invisible hand’.

ii) The price mechanism regulates markets. The essential feature of the price mechanism is its capacity to regulate and bring into equilibrium the demand for and the supply of commodities. Prices give both information and incentives to producers and consumers. What matters in this analysis is the relative cost and benefit involved in different courses of action as expressed through the relative prices of different commodities.

Prices are free to respond to changes in supply and demand, and require no regulation from institutions outside the market. Only under conditions of (private) producer monopolies where the dominant buyers or suppliers have great control to fix prices is there a need for state regulation. Under perfect or free competition, where consumers are sovereign in their demand for goods, prices are free to move and bring about market equilibrium.

iii) Another assumption of the self-regulating market is that equilibrium and order will occur more or less instanteously. Changes to demand and supply will be quick and painless, so that social order is restored relatively smoothly after any shock to the economic system – hence less need for state intervention.

 

 

f) Private morality

i) Adam Smith wrote, ‘It is not from the altruism of the butcher or baker that we obtain our dinner, but for their regard for their own self-interest.’ This represents the moral and sociological force driving the market system.

Liberals portray the market both as rational, efficient and self-regulating mechanism for supplying human wants, and as a key element in industrial freedom.

ii) Furthermore, the theory of the market assumes a world of individuals, more or less equal in power. Markets are seen as a liberating force able to constrain the arbitrary powers of monarchies and tyrants.

Market-based commerce is also seen as a civilising agent able to soften the brutish, barbaric and warlike customs of feudal and traditional societies. Interactions between individuals in the market are seen to encourage industriousness over indolence, and rationality over hypocrisy and arrogance. Markets reward trustworthiness and honesty, and punishes dishonesty and unfair dealings.