Charles Lindblom on the Market System

Charles Lindblom describes some advantages and disadvantages of the free market in The Market System. In the last two chapters he then discusses an alternative which he prefers. Keep in mind that Lindblom is widely considered ideologically leftist, liberal or statist. Despite that bent, even he cannot nearly deny the amazing power of the free market. The reason for his conclusion that the market needs to be used in limitted fashion is simply derived from a faulty moral argument that societies should prefer an equal distribution of wealth.

Advantages Lindblom atrributes to the market include the ability to coordinate society through mutual adjustment, it contributes to peacekeeping and can greatly increase both top-tier and average wealth. Social coordination is no small feat. What this implies is that the market can either influence or outright determine the action people take. Lindblom starts small with an example of how an individual would show up to work on a voluntary basis simply because of his trust in a promise of wages. He then grows the demonstration to the entire workforce of a factory. He says that they show up because they trust they will be paid wages and this is a distinct market system mechanism.

Lindblom then more widely examines the idea of coordination of collective action which was first hinted at with the factory workforce earlier. The factory workforce example not be considered a true collective coordination because it might be the case that an individual was paying the entire workforce. Lindblom concludes that markets can coordinate true collective actions. An example would be a corporation dealing with a union. Lindblom determines that markets can fully coordinate entire societies. He remarks that this is not just an economic coordination and the idea that there is any specific kind of action which is distinctly economic action is garbage. Instead, Lindblom argues that markets systems pervade all aspects of life to the extent that they are allowed. He says that in theory they could be applied to all aspects of life, but societies choose not to allow their application in such fashion for a variety of reasons. One example of a way in which the market could be applied but is usually not applied would be in selling organs. Selling organs is done in some foreign countries and on the black market, but it is done this way because free market transaction of organs is not allowed, for better or worse, by government policy.

Lindblom notes that the dynamic, self-correcting mutual adjustment exhibited by markets is not by any means the only way social coordination can occur. In theory, government policy is also a dynamic and mutually adjusting system, but in practice government policy is often left unchanged for long periods of time despite changing factors. This system, which might be called “sticky governance,” results in the usual experiences most people have with the government system which is that the government remains relatively unchanged, for better or worse, and the private sector organization or individual actor must engage in one-way adjustment. One-way adjustment means that the individual or private sector organization changes their own behaviors under the assumption that government behavior or policy will not engage in any kind of bargaining or negotiation. Despite the fact that Lindblom clearly documents that the market system can essentially order all aspects of life, he remarks that the fact that markets work so well implies that society should have a balance of markets and central control without clear explanation.

Lindblom discusses the fact that markets encourage peace. He states that many people and even economists are often confused when they are asked how markets can encourage peacekeeping because it is usually the case that free markets are only observed within societies that are already in peace which has lead to a kind of assumption that peace encourages markets rather than the other way around. Contrary to this, Lindblom argues that Montesquieu established the principle that markets make people peaceful in his work doux commerce, although he also argues that this is not necessarily efficient, equitable or humane for some unclear reason.

Lindblom also argues that markets clearly produce great wealth. He argues from history rather than from a particular theory of economics or an extensive use of actual data. He states that history shows that markets can explode the wealth of the rich way up and also pull the average wage up, but that they also result in an unfair distribution of wealth which results in a great number of poor people and damages communities. I would have to argue with this point, in particular because he has no hard data to support his claims. If he had shown the hard data what would be shown would be that markets result in very unequal distributions of income not because they reduce the wealth of many people in a population, but because nearly all incomes rise but they do so at very different rates which produces a natural unequal distribution.

To say that this creates large numbers of poor means that the author ascribes to a very often used and very deceitful idea of what it means to be poor. This definition of poverty is called the relative standard of poverty and it is contrasted with an absolute standard. Markets create huge numbers of relatively poor people because some people earn huge amounts of money which skews the average to a larger number. Markets do not create absolutely poor people, which is poverty measured by a static standard of wealth in real terms rather than nominal terms. The only way to establish a society with no relatively poor people would be to ensure that all incomes were exactly equal and therefore no one would fall below the average. The consequence of forcing such an system would not be expected to eliminate poverty, but rather to trade a society of relatively poor people and a small number of very rich people for a society where no one is relatively poor but everyone is absolutely poor, because such a system would essentially require full social control by government.

In the final chapters of the book the author discusses alternatives to the market system. He reasons that these alternatives should be considered because markets break down in certain instances. The instances where a market would predictably break down include instances of monopoly, spillover and cronyism. He also mentions that a society might not prefer an equitable distribution of income. The alternative he describes is essentially socialism. He says that the only alternative to the market system is a regulated market system because a pure central planning system is not viable. The advantages of that system would be that it largely maintains the advantages of a pure market system, although to a slightly cheapened degree, yet also provides a great room for moral restrictions and accountability for negative externalities like pollution and such. I would argue that socialism creates and exacerbates the problem of cronyism, but admittedly two out of three isn’t bad. A drawback would be that the extensive regulation involved in socialism also often stifles innovation and entrepreneurship. It is difficult to measure the impact to the economy in dollars of the difference between socialism and a free market system. It might be the case that the overall benefit to quality of life offered by a full market system is greater than the benefit to quality of life offered by a socialist system, but before we can really determine that question we would first have to take a chance on a society which is genuinely based on a full market system.

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