A Brief Critique of Market Apologetics
By M.G.
So much has been written over the past hundred years about the market and the information it provides that it is remarkable what desolate stretches of economic discussion one enters as soon as the subject comes up. Apparently, the only method of determining needs ever to have been refuted by the facts is the most centralized one. Thanks to the market, after all, there are no empty flats standing next to people without homes, and no grain ever leaves a famine-stricken region because buyers elsewhere offer more for it.
People buy what they need. What else are firms supposed to produce except what people buy? Everything beyond that is the social romanticism of those who refuse to accept supply and demand, which govern our daily lives. Anyone impertinent enough to ask how it comes about, then, that billions of people urgently need goods essential to life and still receive nothing is answered with a reference to the Soviet Union. A question about how the market economy works is answered by pointing to the failure of something else. In another science, one would rarely get away with that. Instead of rejecting the trick, the left has taken to offering it a friendly alternative: the market is chaotic, after all, and with today’s computing power all of this could be done better. Anyone who asked about the purpose of the economy will be none the wiser. The dispute has simply been moved onto a field where the Austrian School sits enthroned, and it is at least partly understandable why it considers itself the grown-up side of the debate. The way it presents itself, however, is a subject in its own right. From the fact that human beings act, this school has fashioned an axiom from which it derives a method capable of evading every empirical test. One can admire the construction the way one admires a well-built clockwork that tells no time. Then there are its devotees, who would deserve an article of their own — one I will spare the reader here.
A word in advance. One term appears as a self-evident premise in almost every defence of the market: scarcity. Human beings, we are told, have by nature unlimited needs, to be satisfied with finite means. From this it is supposed to follow that economic activity as such consists in economizing scarce means. The quantity of goods produced — which can, after all, be increased precisely by production — is then offered as the explanation for why those goods do not suffice for a given need, as though produced goods belonged to the same natural condition of scarcity as genuinely finite natural conditions. Sometimes productive possibilities exclude one another, and sometimes certain materials and areas of land exist at a given moment only in limited quantities. If a plant can produce only one of two products at the same time, or a stock of raw material is insufficient for two intended uses together, then of course a decision has to be made. But knowing that such situations occur is one thing; the claim that human needs are infinite and therefore condemn humanity to the market economy — to the permanent administration of shortage by producing additional wealth — is quite another.
Three Arguments for the Market
The claim that only the market can coordinate a complex economy is assembled out of at least three arguments.
The knowledge argument goes back to Friedrich August von Hayek. No central authority can fully possess the knowledge dispersed among the various participants in the market. The individual decision-maker must also learn how conditions relevant to his own activity are changing. The achievement of prices is supposed to lie in transmitting such changes in condensed form, without every participant having to know their causes.⁹
A modern economy must moreover choose between heterogeneous means of production and alternative uses, since tons of steel, hours of different kinds of labour and machines of various sorts cannot simply be added together. Money prices — market prices — provide a uniform measure for calculation and thereby the basis of rational economic calculation.
Distinct from this is the motivation argument. Even where the information is available and the calculations can be made, someone must have an interest in handling resources carefully. Profit and loss are supposed to tie decision-making power to its consequences. Whoever decides wrongly loses his fortune; whoever decides rightly is rewarded.
What binds the three arguments together is that, in treating the market as a procedure for solving a problem of coordination, they all presuppose the same thing: that things belong to someone who is entitled to exclude others from them. Wolfgang Möhl and Theo Wentzke bring this connection sharply to the point. Property, “forcibly instituted,” first separates needs from the objects that would satisfy them; access is made dependent on paying the owner the price he demands. The state that guarantees this property order and makes money the general means of access does not thereby make the satisfaction of needs the purpose of the economy, but subordinates it to purchasing power.¹ The technical difficulty that money is supposed to solve — how to distribute goods — is inseparable from a form of access already socially constituted as access to someone else’s property. That explains how unsatisfied needs and unsaleable commodities can exist side by side. Where access to a reproducible good is restricted by patents or other exclusive rights, a high price registers a real market scarcity of access. With digital goods, an additional copy costs next to nothing in material terms, yet access can still command a substantial price. In this case the information supplied is accurate: it tells us how expensive access is under the prevailing property relations. What must not happen is for this relation then to be passed off as a natural scarcity of the object itself.
What the Market Calculates
The standard business-school praise of the market runs as follows: thanks to the market, to supply and demand, nobody has to know how many shoes a society needs. No one has to collect knowledge about productive possibilities and changing wishes in a central office. When something becomes scarce, its price rises. Where there is demand, profit beckons. Producers react, resources move into the right uses, and the result is an order no planner could have designed. Fine. Prices therefore tell market participants the monetary terms on which their own purposes can prevail against competing claims. On the demand side, a need registers insofar as it is backed by purchasing power; on the supply side, a use of social labour registers insofar as it pays for a producer. For the claim that the market determines needs, this means that two people can need the same medicine with equal urgency, but if one can pay and the other cannot, their needs enter the market with unequal weight. Economic demand theory does not even dispute this: willingness to pay is already determined by preferences and budget constraints. It is therefore impossible to derive from the market price what share of observed willingness to pay is due to the intensity of a need and what share to command over money. Social need, insofar as it makes itself felt as market demand, is determined by the relation between the classes and their respective economic positions — among other things by the relation of wages to surplus value and by the distribution of surplus value. Supply and demand therefore do not explain their own social basis.
The vast majority of the population can access social wealth essentially in the form of wages, while capital commands the means of production and the products of the production it directs. For the worker, the wage is the means of subsistence. What he can buy with it is a result of the capitalist relation of production and class, and of the struggles conducted within it. Capital has an interest in limiting or reducing this cost item insofar as competition and the requirements of the business permit. On the supply side, the same antagonism appears in inverted form. The purpose of production is not the satisfaction of needs, and yet a capitalist enterprise has to serve needs. “Whatever provision of needs takes place, or fails to take place, is the dependent variable of the business. The supply of goods and the satisfaction of needs are the by-product of capitalist competition.”² The firm advances money and produces commodities in order to get more money back by selling them. The use value of the product is indispensable to this process — as the vehicle of a piece of business. The customer and his need are conditions the firm has to make use of for its profit-making; great need therefore produces no correspondingly great supply. What matters is which effective demand can be served at prices at which the capital advanced pays off. What economics calls consumer sovereignty accordingly consists in a very specific freedom: the buyer may choose among the commodities offered by other owners, insofar as his money reaches. He is sovereign neither over the social distribution of the means of production, nor over the conditions of production, nor over the size of the means with which he can make his wishes count on the market. The business world assesses the purchasing power at hand, designs offerings intended to attract it, and turns the needs of the public into the field of a competition for sales. If market demand is treated as information, therefore, the competing suppliers themselves participate in producing, shaping and redistributing it. What is produced, how much of it, and by what means is decided by separate firms according to their own calculations. Whether these private decisions fit together becomes apparent afterwards in sales, profit rates and possible losses. Private labours carried on independently of one another are continually brought into a social relation, but not through prior common decision. Their own social movement confronts the producers as a movement of things, and socially necessary labour-time asserts itself, as Marx puts it, “as a regulative law of nature” — like the law of gravity when a house collapses over one’s head. That is the material basis of what today is fondly described as the market’s “learning.” Society certainly does correct the proportions of its production, but it does so post festum. If, capitalistically, “too much” of a commodity has been produced while people could still make use of it, that does not mean too much measured against the need. It means too much measured against the sales through which the capital advanced can successfully be realized. The commodity is devalued, plants are shut down and workers are dismissed because continuing production does not pay. Society may then possess labour-power and needs at one and the same time and still fail to bring them together because the mediating purpose of profitable valorization drops out. Crises arise from considerably more causes than insufficient consumer demand alone. They concern the entire nexus of production, accumulation, credit, profitability and the proportions between branches of production. Credit pushes the testing of private calculations further into the future: it makes production and sale possible before payment has finally been made, drives the elastic process of reproduction to its outermost limit and expands accumulation. A socially unsustainable disproportion can thereby persist for longer, and its subsequent correction becomes all the more violent.
Price Signals
What Hayek’s famous reflection on dispersed knowledge is driving at can be seen in the example of tin. If tin becomes less available for its existing uses, those who use it need not know whether a mine has failed or other buyers are demanding larger quantities. They learn what matters for their own calculation: tin has become more expensive.¹⁰ The price translates the effects of manifold changes into a single monetary relation. Why another use is drawing more heavily on the tin, what purpose that use serves, and whose need is being served ahead of one’s own need not be known by the individual user. For his separate calculation, the change in his monetary conditions is enough. According to cost and profit, he decides whether his own application can still bear the increased price, whether to economize on tin, or whether to substitute something else for it. The cause can remain a matter of indifference to him because the social priority of the competing purposes is not decided in common. The price system does not merely spare people superfluous knowledge; it dispenses with a common comparison of purposes by allowing the result to emerge from their competition for the material. The condensation performed by the price is therefore the appropriate information for a system of production in which separate operators dispose of their means of production according to the success of the property they have advanced as capital. It should be noted in passing that the example is loaded — and not only with tin. First we are told that part of the tin is now “more profitably employed elsewhere”; immediately afterwards Hayek speaks of the “more urgent need” in favour of which other users are to economize on the supply. That a particular use can bear a higher price for tin under the given market conditions, or is more profitable for the capital concerned, demonstrates its greater ability to prevail economically. It does not demonstrate that the purpose served by that use is socially more urgent. A well-funded demand for a scarcely urgent use prevails just as surely over an existential need without the corresponding purchasing power. The higher price is a material condition of access. The producer has to bear the higher costs; for the consumer, the price limits what his income still allows him to buy. Take two competing uses of the same material — medical devices and beverage cans, say — without presupposing that either deserves priority. The medical-device manufacturer knows the requirements of his product; the can manufacturer knows his. Each examines what the new price means for his own capital calculation. The social result emerges from which capitals can continue using the material under these conditions and which are pushed out. Which needs go unmet, and what consequences the allocation has, need not be objects of these separate decisions. The proportions that arise in this way are the result of capitals competing for successful valorization and of a demand whose economic weight depends on command over money. Hayek subsequently describes the adjustment thus enforced as movement in the “right direction.” “Right” here is measured solely against the market’s task of adjustment. The intensified competition for tin is translated into substitution and altered uses. That the uses pushed aside are those a social comparison would consider most dispensable has not thereby been shown. For such a comparison the market possesses no standard independent of purchasing power, property and profitability. Its fetish character consists in this: the relations among competitors producing independently of one another take on, for them, the form of properties and movements of things — of their products and monetary magnitudes. Rising raw-material prices, falling selling prices and declining profitability confront the individual firm as objective conditions to which it must adapt. In later lectures Hayek expressly describes competition as a procedure through which economically relevant knowledge is first discovered. For the form of coordination at issue here, however, that changes nothing about the fact that market participants also react to conditions that have themselves resulted from the previous market decisions of others. Purchases, investments, credit decisions and speculation in turn alter prices, and with them the conditions of subsequent decisions.
Hayek’s initial problem is more general than the capitalist form of his solution. Knowledge of the particular circumstances of time and place is distributed, and those making decisions must at the same time take account of changes beyond their immediate horizon. Both remain true where the means of production are collectively controlled. From the decentralization of knowledge, however, what follows is the need for correspondingly distributed decision-making powers — not private property and competition. Those add a further barrier to the problem, since firms have reasons to withhold technical procedures, accumulated experience and productive innovations from one another wherever their exclusive use forms part of a competitive advantage. Collective control at least removes this systematic reason for secrecy. Among associated producers, the flow of information would follow the material division of labour: particular knowledge remains with the particular activity, while common accounting is required wherever activities share common preconditions and consequences. This opposition recurs in the critique of the Soviet economy of levers. Against an “accounting” intended to stimulate and control production through value magnitudes stands the planning of labour “according to natural and technical conditions”; for this purpose, technological knowledge and considerations of health are more directly relevant than calculations of value.³ How common decisions are to become practically binding in such an association without the coordinating function establishing itself as a separate power over the producers is a question of its own. It does not alter the substantive distinction between the necessary binding force of common decisions and an autonomous authority of rule that dictates the producers’ purposes to them. The informational economy achieved by prices rests on the fact that social production is organized as a competition among private calculations of valorization and income, and that its interconnection therefore need be known to the participants only in the form of its repercussions on those calculations.
Economic Calculation
Only the exchange of the means of production produces the common monetary denominator to which their possible uses can be reduced. There are, to be sure, numerous large capitalist corporations in which departments and productive processes are coordinated according to plan without these sub-units buying and selling means of production from one another. Mises objects that the corporation’s internal accounting nevertheless rests on market prices formed outside the firm. The corporation gets its valuations from the market; it organizes the material interconnection of its production itself. In Human Action Mises develops this objection against conceptions of a socialist quasi-market. For him, the managers of existing plants perform only a subordinate part of the task. By founding and closing firms, and by allocating and withdrawing capital, capitalists and speculators alter the structure of production under conditions of uncertainty. The allocation of the means of production among the various branches of production is the real task, and it goes beyond the administration of enterprises already in existence.⁴ Under uncertainty, trial and error counts as a procedure only if there are criteria, independent of the procedure itself, by which a successful attempt can be recognized. In capitalism, profit and loss deliver this verdict. Without market prices for the means of production, socialism, according to Mises, lacks the independent standard by which trial and error could be evaluated at all.⁵ Profit and loss can indeed be established independently of the individual attempt; that does not make them a standard independent of the market order. Success here means that the money value advanced yields a return at the prevailing market prices. Mises himself explicitly explains what counts as “better” from the standpoint of consumers buying on the market. A socially decided project of production can determine its criteria of success — quality, effort and resource use, say — before it is carried out and test the result against them afterwards. Where such criteria conflict, a problem of weighting arises. That this problem can be solved only by profit and loss does not follow from the general conditions of trial and error. At the same time, the market’s procedure of correction is supposed to generate responsibility on the part of capitalists. A manager without property can ultimately be held responsible for a wrong decision only in a moral sense; the owner, by contrast, bears the loss of assets himself.⁶ But before it can be settled what consequences a wrong decision is to have for him, it must first be settled by what criterion the decision is recognized as wrong. Mises answers both questions in one stroke: wrong is whatever produces a loss, and the loss is at the same time the material consequence that disciplines the owner toward the right decision. What has thereby been posited is simply that the preservation and increase of the property advanced counts as the success of production. The owner bears “the consequences of his decision” in the specific form of a change in his assets, and it is to this that his responsibility is directed. As long as the consequences do not appear as corresponding costs to his property, the calculation was in fact correct. A productive undertaking that fulfils a socially desired purpose is a wrong decision if the outlay required does not pay off. Profit and loss connect the disposal over property with the consequences that this disposal has for the property itself. The fact that the owner can lose his own assets gives him a material reason — quite apart from any sense of responsibility — to employ resources in such a way that his fortune is preserved and increased. Whether this interest coincides with an economical use of resources or with the satisfaction of urgent needs is a different question. The motivation argument therefore presupposes precisely the standard of success whose general reasonableness it is supposed to prove. Money prices measure no social weight of the means of production independently of property and valorization. For capital, they make otherwise heterogeneous conditions of production commensurable because these conditions confront it as costs of a monetary advance. From the necessity of weighing heterogeneous preconditions and consequences against one another in complex processes of production, Mises infers that they must be reduced to a common quantitative denominator — a function performed in the market economy by the money price. In this way, the commensurability produced under private property and exchange becomes the necessary form of rational economic calculation as such, and the description of one particular mode of economy becomes the standard for every other without any proof being supplied for that step. If, among technically suitable alternatives, one requires more labour and less material while another requires less labour and more material, this initially shows only a conflict among material consequences. Where one variant is superior in every respect relevant to the purpose, no additional “economic” valuation is necessary. Where advantages of different kinds conflict, however — less expenditure of labour against greater consumption of material — it has to be decided what weight these consequences are to carry. They become comparable through the purpose for which the comparison is being made, not through a denominator to which they must first be reduced. Whoever knows what is to be produced and to what end also knows what counts in judging a variant; the magnitudes need not first be rendered commensurable for that purpose.
A number expresses an economic ability to prevail that has arisen under definite social relations — relations of property and of the market. The money price is no exception to this rule but a particular case of it. It is the rule by which consequences are weighted within a particular form of production: each consequence counts to the extent that it appears as a cost of an advance or as a return on it. Insofar as a consequence affects neither the money advanced, nor property values, nor liability, nor costs imposed by the state, it does not appear as a cost item in the private calculation of profitability.
The commensurability that Mises presents as a condition of calculation is its result. It arises because production has already been subordinated to a purpose against which everything is measured. What profit and loss test after the event is valorization. The owner’s interest determines not only who answers for a decision, but also what result counts as its success: from the standpoint of this calculation, a responsible decision is one that preserves and increases the assets advanced. Mises says openly what his monetary calculation calculates — private fortunes, costs, proceeds, profits and losses in an economy based on private property. That rational decision-making and monetary calculation are not identical is something Mises himself expressly acknowledges. For him, health and life can be either means or ends of human action without therefore entering into monetary calculation. As an example, he discusses a town council that has to choose between two projects for the water supply. The cheaper alternative would demolish a historically significant structure; the more expensive one would preserve it. The fact that the historical or artistic significance of the building cannot be measured in money in no way prevents, for Mises, a rational decision between the two possibilities.⁷ A consciously organized social production can distinguish the decision about purposes from calculation without separating the two. Calculation makes the preconditions and consequences of different productive possibilities known; which of these consequences are to be weighted, and how heavily, is decided in light of the respective purposes of production. The critique of monetary calculation does not deny the trade-offs that arise when choosing between procedures or when means are limited; it disputes the monetary denominator as the necessary form in which those questions must be settled. Mises and Hayek arrive at the asserted indispensability of the market from different starting points. One declares the monetary calculation produced under private property and exchange to be the necessary form of economic decision-making. The other begins from the general premise that knowledge is incompletely distributed in every complex social division of labour and identifies the market price as the necessary form of information for dealing with that fact. In both cases, the necessity of the capitalist form of the solution is derived from a general problem of social production. The form in which private property is defended thereby changes: presented as a theorem of knowledge, property turns every objection to the purpose of profit into a confession that one does not know how to calculate.
The Socialist Label
Whether state or central planning is automatically oriented toward needs is a question to be settled case by case. The fact that production is planned says nothing yet about the purpose the plan serves. Nor does the history of the Soviet Union prove that every form of non-market coordination is impossible. From the failure of one particular historical form of planning, a general impossibility follows only if it can be shown that the failure necessarily resulted from features that must belong to every form of planning. The critique of actually existing socialism is directed, among other things, against the fact that the political leadership did not simply organize production around material needs to be met, but sought instead, through indicators and material incentives, to induce enterprises to produce the desired overall result out of their own partial calculations. In the reforms of perestroika, this orientation was pushed further in the direction of enterprise autonomy and profitability. Products that were needed in material terms but scarcely profitable for the individual enterprise could consequently disappear from the range on offer.⁸
The communists’ critique of the Soviet Union, however, is an entirely different one. Against the supposed critics of communism, it should be noted that there is no need here to demonstrate in detail what such a system would look like. The burden of proof lies first with whoever makes the capitalist market a fundamental precondition of economic activity as such. That proof has yet to be supplied, which may well explain the desolate state of the discussion. One may remain curious as to what arguments the successors of the Austrian School will come up with.
The Answer
There are two billion people in the world without safely managed drinking water. One might be tempted to think that some failure has occurred here. But a failure of what, exactly? A failure presupposes a task that has gone unfulfilled. What task would that have been?
It cannot be a lack of knowledge. Where these people live has been recorded; the World Bank keeps statistics on it, and the World Health Organization publishes them annually. The relevant procedures are older than the debate itself. There is no dispersed knowledge that a central office lacks, no man on the spot whose particular knowledge of time and place has not been called upon.
Everybody knows.
That is the remarkable thing about it.
The calculation, then? Not that either. Pipes, pumps, filters and hours of labour are entirely calculable, and engineering offices perform precisely those calculations. There are tenders, cost estimates and feasibility studies. The common denominator is ready, the figures are in, and compared with what is spent each year on far more dispensable things they are unremarkable.
That leaves responsibility. But nobody has been irresponsible. No water utility has squandered its assets, no investor has fallen for a foolish bet, no balance sheet contains an item that would give cause for complaint — quite the contrary. Anyone who had invested in regions without effective demand would rightly have been called to account for the resulting loss. The absence of supply is the result of nothing but responsible decisions.
So the market has done its job. It has delivered the answer it is designed to deliver, and it has delivered it precisely.
The answer was: no business.
One may consider that a scandal. One should not mistake it for a malfunction.
And the question why a society that knows everything, can calculate everything, and in which every decision has someone answerable for it nevertheless gives two billion people no water is, according to its own leading theorists, not an economic question. It merely shows that the person asking it has failed to grasp the elementary conditions of rational economic activity.
They should have placed an order, then.
Scientific critique, not worldview. Analysis, not appeals. Rupture, not reform.
- Wolfgang Möhl and Theo Wentzke, Das Geld. Von den vielgepriesenen Leistungen des schnöden Mammons [Money: On the Much-Praised Achievements of Filthy Lucre], GegenStandpunkt Verlag, p. 9.
- Alexander Melčok, Kritik der Betriebswirtschaftslehre. Planungsregeln für erfolgreiches Wirtschaften in der kapitalistischen Konkurrenz [Critique of Business Administration: Planning Rules for Successful Economic Activity in Capitalist Competition], GegenStandpunkt Verlag, p. 18.
- Karl Held (ed.), Das Lebenswerk des Michail Gorbatschow. Von der Reform des „realen Sozialismus“ zur Zerstörung der Sowjetunion [The Life’s Work of Mikhail Gorbachev: From the Reform of “Real Socialism” to the Destruction of the Soviet Union], GegenStandpunkt Verlag, p. 35.
- Ludwig von Mises, Human Action, “The Quasi-Market.”
- Ludwig von Mises, Human Action, “Trial and Error.”
- Ludwig von Mises, Economic Calculation in the Socialist Commonwealth [Die Wirtschaftsrechnung im sozialistischen Gemeinwesen], sec. 4.
- Ludwig von Mises, Human Action, “The Limits of Economic Calculation.”
- Karl Held (ed.), Das Lebenswerk des Michail Gorbatschow. Von der Reform des „realen Sozialismus“ zur Zerstörung der Sowjetunion [The Life’s Work of Mikhail Gorbachev: From the Reform of “Real Socialism” to the Destruction of the Soviet Union], GegenStandpunkt Verlag, p. 210.
- Friedrich A. Hayek, “The Use of Knowledge in Society,” The American Economic Review, vol. 35, no. 4.
- Friedrich A. Hayek, “The Use of Knowledge in Society,” The American Economic Review, vol. 35, no. 4.