Every time that an unregulated market fails it is another nail in the coffin of the simplistic economic belief that unregulated markets are fundamental to capitalist, economic life. However, the exposed mortality need not herald the end of capitalism but point to the critical need to understand its complexity.
Now then is a good time to examine the corpse to look for a fuller appreciation of the essential nature of a healthy market economy. For that, along with determining the cause of death, is the purpose of post-mortem examination. If we learn from it capitalism will survive otherwise it won’t but either way the fat lady has sung for its under-regulated extreme end.
In my humble view the current world economic woes owe much to the teaching and unchallenged acceptance of an economic theory that is based on a misunderstanding of the nature of the very markets that it promotes. Indeed I believe that the subject of economics should be renamed The Market Theory of Value and that it should be subject to an epistemological review to test the validity of what it contains. (But that is for another day.)
In that context, I submit that the collapse of “extreme capitalism” was inevitable and not just bad management and further that failure of unregulated markets should not be seen as a disaster for capitalism but merely as a regrettable necessity for its survival.
An analysis of the elements of market structure will show that the unchallenged hegemony of The Market Theory of Value over economic analysis poses such a threat to our economic well being and indeed that of the planet itself.
Market structure has two fundamental elements. One is the relationship between individual buyers (consumers) and individual sellers (producers). The other is the relationship within and between groups of buyers and sellers.
The former was identified by Adam Smith as what gives markets strength and was later designated “countervailing power” by John Galbraith. The latter, under the general banner of “competition”, gives markets their increasing scope and growth but at the expense of market strength.
There is little doubt that, in the realm of economic orthodoxy, countervailing power barely survives in the shadows of “competition”. I am not sure why; perhaps it is just too difficult to work out, politically, how to apply its principles in practice because it does seem to point to a need for increased government activity. Such an increase would not be generally supported in the current political environment.
But, back to the market analysis. Despite identifying a set of necessary conditions that constitute a perfect market, the orthodoxy simply nominates competition between large numbers of buyers and sellers as a sufficient condition for a deregulated market to flourish and optimise economic health.
However, immediately more than one buyer enters a market a new dynamic is established that diminishes the effectiveness of countervailing power because each buyer must now take into account the perceived intentions of the other buyer.
As more and more buyers enter a market the strength of the countervailing power is thus progressively weakened. The eventual buyer or buyers will probably pay too much.
Actually, that becomes a certainty when each bidder assumes each other bidder has set an independent value. That would not matter, except for the inflationary implications, if there is continued confidence that the markets will continue to flourish. However, if confidence in markets fall and that confidence is what is driving demand it follows that prices will crash for want of a solid basis of value.
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