Market Rules

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The theory of the market economy traces back to the eighteenth-century Scottish economist Adam Smith and the publication in 1776 of his Inquiry into the Nature and Causes of the Wealth of Nations. Smith’s seminal text articulates the powerful and wonderfully democratic ideal of a self-organizing economy that creates an equitable and socially optimal allocation of society’s productive resources through the interaction of small buyers and sellers making decisions based on their individual needs, interests, and abilities. Market theory, as articulated by Smith and those who subsequently elaborated on his ideas, developed into an elegant and coherent intellectual construction grounded in carefully articulated assumptions regarding the conditions under which such self-organizing processes would indeed lead to socially optimal outcomes. Market fundamentalists generally ignore the essential conditions, which include:

  • Buyers and sellers must be too small to influence the market price.
  • There must be a reasonably equitable distribution of income and ownership.
  • Complete information must be available to all participants, and there can be no trade secrets.
  • Sellers must bear the full cost of the products they sell and incorporate them into the sale price.
  • Investment capital must remain within national borders, and trade between countries must be balanced.
  • Savings must be invested in the creation of productive capital rather than in speculative trading.

This bears no resemblance to Wall Street. It does, however, look a good deal like Main Street.

The market itself does not automatically create or maintain the conditions essential to its own function. These conditions must be created and maintained by rules, which in turn require government. Without rules, markets erode the conditions essential to their own optimal function as In other words, The "free" or unregulated market is a myth. Markets require governments.

Historians have traced the origin of the term capitalism to the mid-1800s, long after Adam Smith’s death. It referred to an economic and social regime in which the ownership and benefits of capital are appropriated by the few for their exclusive private benefit to the exclusion of the many who through their labor make capital productive. This, of course describes our current Wall Street regime with considerable precision.

Wearing the mantle of the market, capitalism’s agents vigorously have advanced public policies to eliminate the rules that markets require to function in a socially optimal way. Without rules the most successful players grow in their power to monopolize resources, markets, money, intellectual capital, and even government rule making for their own exclusive benefit to the exclusion of other interests—and the market economy morphs into a capitalist economy.

Like cancer cells that attempt to hide from the body’s immune system by masking themselves as healthy cells, capitalism’s agents attempt to conceal themselves from society’s immune system by masquerading as agents of a healthy market economy. Capitalism has become so skilled in this deception that we now find our economic and political leaders committed to policies that serve the pathology at the expense of the healthy body. To restore health we must recognize the diseased cells for what they are and either surgically remove them or deprive them of access to the body’s nutrients.

Adapted from David C. Korten, Agenda for a New Economy: From Phantom Wealth to Real Wealth (San Francisco: Berrett-Koehler Publishers, 2009, pp. 29-32.