Mythical markets and neoliberalism

A summary of Geoffrey M. Hodgson (2019) ‘How Mythical Markets Mislead Analysis: An Institutionalist Critique of Market Universalism’, Socio-Economic Review, DOI: 10.1093/ser/mwy049.

There has been much debate over the alleged virtues or vices of markets, and over the extent to which they should be accepted in a modern economy. This paper is not about this normative debate. Instead it is about how the term market can be misused.

Some authors suggest that markets are ubiquitous, or nearly so, as if they were the universal essence of unhindered human interaction. Here the term market universalism is used to refer to such a prolific, non-metaphorical use of the term market to describe a large number of varied arrangements or processes in the real world.

A problem with market universalism that its use of the word market becomes so pliable that it is difficult to identify adequately any non-market processes or arrangements. Some market universalists identify exchange with choice and markets with competition. But these features exist outside markets. We choose what clothes to wear or what books to read. Competition covers any contest, including sports or games. Not all choice or competition involves exchange or markets. We need additional criteria, particularly to identify what are not markets.

An institutionalist critique of market universalism treats genuine markets and trade as necessarily guided by specific systems of legal or other rules. But among the foremost proselytizers of market universalism are two institutional economists who won Nobel prizes for their work.

In the full paper I provide evidence of the increasing use of terms like political market and market for ideas since the 1960s. This dramatic rise may be associated with the increasing influence of the strong pro-market ‘neo-liberal’ ideologies associated with Ludwig Mises Friedrich Hayek and Milton Friedman. Historians of neoliberalism mostly agree that its spectacular rise of influence dates from the 1970s (Harvey 2005, Mirowski and Plehwe 2009, Burgin 2012, Stedman Jones 2012, Mirowski 2013). The correlation in timing seems too strong to be coincidental. In particular, Philip Mirowski (2013, p. 77) has claimed that ‘the marketplace of ideas’ is ‘a neoliberal notion if ever there was one.’

But unfortunately, the term neoliberal has become so stretched in meaning to include almost every politician or thinker who advocates a market economy (e.g. Harvey 2005). This bland over-expansion of the term makes it useless as an analytic category. It would be much better to confine neoliberalism to the political economy of key exponents such as Ludwig Mises, Friedrich Hayek and Milton Friedman.

Much use of the word market may be metaphorical. Metaphor is legitimate and unavoidable in science. But some influential authors suggest that what are described as markets really are markets.

Of course, there have been attempts to increase the role of markets in the economy, including the extension of markets for intellectual property, and so on. There has also been a market rise in the use of contracted services – by lobbyists, advisors, consultants and others – in the political sphere. Hence, to a degree, rising usages of these terms may reflect real-world phenomena. But it is still the case that highly influential usages of these terms are not confined to these cases where genuine markets or contracts are involved.

This article is concerned solely with phenomena that are not markets. If a phenomenon is described a market, then that description may be intended as literal or metaphorical. This article is concerned with literal (non-metaphorical and false) descriptions of non-market phenomena as markets.

For effective rebuttal of such false claims, two conditions must be satisfied. First, it must be shown that there is no sign of metaphorical intent. Second, it must be shown that phenomenon does not qualify as a market by minimal criteria. It is unnecessary to provide a full definition. The following section outlines such minimal criteria.

In ordinary language a market typically refers to a place where commodities of a particular type or types are regularly traded. As Karl Polanyi (1944, p. 56) wrote: ‘A market is a meeting place for the purpose of barter or buying or selling.’ With the Internet, this ‘place’ may be virtual, as with eBay or Amazon.

By contrast, many economists propose a broader definition, where market implies any form of trade, not simply trade organized in one place. Trade is much older than organized markets (Hodgson 2015, ch. 5). But these days, economists tend to conflate the two.

In addition, some go even further, to regard any kind of exchange as a market. In economics and sociology, terms such as exchange have been applied in contexts where there is not a contract between agents.

In this vein, Mises (1949, p. 97) saw all action, even by an isolated individual, as ‘exchange’ – as a ‘rational’ attempt to swap inferior for superior circumstances. But, when he struggled alone to survive on his island, with whom did Robinson Crusoe ‘exchange’ rights to property? Who ensured that the agreement was enforced? By exchange, Mises meant any situation involving choice, even when one sole individual is involved.

We need to pin down some minimal elements. The requirement is not to define a market, but to establish some of the rudimentary conditions required for markets to exist. These minimal conditions help identify phenomena that are not markets.

A full and precise definition of a market would immediately become controversial because of the clash between broad and narrow definitions in the literature, as noted above. For the purposes of this essay, agreement on an adequate definition is unnecessary. Required instead is the establishment of some minimal, necessary characteristics to identify what are not markets.

A key precondition of a (broadly-conceived) market is the existence of multiple traders who are interacting and communicating with some shared understandings. The traders are capable of entering into agreements with others to supply assets or services in exchange for money or other assets. But (even with illegal markets) there need to be shared rules to determine what constitutes a mutually validated agreement.

These rules do not have to be written down and they do not need to be laws. It is accepted that there can be illegalas well as legal markets. With legal markets, a combination of law and custom may determine the essential rules. With illegal markets the rules may be those of a mafia or a criminal gang. The difference is important, but it need not delay further our attempt to pin down some minimal and necessary features of a market.

These are proposed minimal requirements for a market:

There is some wiggle-room for varied interpretations here, particularly over terms such as accepted, rights, obligations and payment. Most definitions of this kind involve some degree of vagueness (Hodgson 2019). These issues are best addressed using concrete examples, as in the following section.

Note that agreements may be written or unwritten. They may have to be fulfilled over a shorter or longer period. There is no claim here that agreements have always to be enforced by external parties such as the state. Enforcement can be by reputation or by other means.

Using the above minimal criteria, we can now examine cases where the minimal requirements are not satisfied, yet the phenomena are misleadingly described as markets. The term mythical markets refers to phenomena that are non-metaphorically described as markets, but are not markets, at least by the minimal requirements laid out in previous section.

Nobel Laureate Ronald Coase (1974) and Coase and Ning Wang (2012, pp. 190-207) described and advocated a ‘market for ideas’. They gave no indication that their usage was intended to be metaphorical. They used the term not primarily to refer to genuine markets in intellectual property, but to the need for ‘freedom of speech and expression’ and for ‘the creation and transmission of knowledge’ through educational institutions. For them, the ‘market for ideas’ was literal.

Addressing ‘the market for goods and the market for ideas’ Coase (1974, p. 389) went even further: ‘There is no fundamental difference between these two markets’. Given the nature of open conversation and free speech, this implies that contracts, agreements, prices or allocations of rights are not ‘fundamental’ to markets.

Some ideas – as with patents and copyrights – may be traded, but most are not. We have ideas, but mostly they are not deemed objects of property under any accepted system of legal or other rules. The ordinary communication or debating of ideas does not involve agreements with the shared intention of creating obligations according to those rules. Much day-to-day conversation is not a transfer of specific rights. Much broadcasting of information does not identify the individual recipients of the broadcast – so agreements in this case are problematic.

Certainly, there is competition between ideas and there is competition on markets. But this does not mean that all transmission of ideas is via a market. Competition takes place outside markets, as on the sports arena, the TV game show or the battlefield. Competition as such does not necessarily imply the existence of contracts or markets.

Consider the term ‘political market’. While some political services can be traded on genuine markets, and votes can be traded (illegally) in some countries, it is contestable that all voting and all politics can be regarded as markets. A literature emerged in the 1970s and 1980s that applied the term ‘political market’ both to voting in elections and to measures by lobbyists and pressure groups to gain the support and votes of politicians.

Nobel Laureate Douglass North (1990a, 1990b) joined this throng. Again, there was no indication by North that the usage of terms like market or exchange in such contexts was intended to be metaphorical.

In many countries (including the US) it is illegal for a lobbyist to pay or to give gifts to a member of the legislature in return for his or her vote. Legal lobbying is an information service, rather than a contract for votes. But of course, there are many ways in which lobbyists use gifts or campaign contributions to sway the votes of legislators. Nevertheless, incautious rhetoric involving ‘political markets’ blurs the distinction between information services and bribery. If lobbying really creates a market for votes, then it is an illegal one. But if there is compliance with the law, then North is wrong: votes are not literally the objects of market-like exchange.

In democracies under the rule of law, a vote by a member of the public for a politician or a party does not typically amount to an agreement that satisfies the minimal conditions for a market. The elected politician or party cannot normally identify all the individual voters who voted for them, so at least one of the minimal conditions for a market is violated. One is enough to prove the negative.

The manifesto of a political party is an indication of intent, not an enforceable contract. Typically, politicians cannot be sued for broken promises: the voter has no right of legal redress. A politician’s promise is not an ‘offer’ which is ‘accepted’ by casting a ballot: no legally binding agreement is created, involving prices or anything else. The law normally prohibits payments in return for votes. If there were such a contract, then it would be tantamount to political corruption. Of course, in many countries the rule of law is imperfect. But the point here is not to deny that votes can be traded. Instead it is denied that voting always involves some market-like deal.

The notion of ‘political market’ is strangely indifferent between less corrupt democracies and others (such as India) where the (illegal) buying of popular votes and the votes of elected politicians is frequent. The latter may legitimately be described as ‘political markets’ because (illegal) contracts for political services are involved. But this does not mean that the entire polity in every democracy is a political market.

These examples show that the non-metaphorical use of the term market has spread to all sorts of phenomena that should not reasonably be described as markets.

Market universalism impoverishes the concept of a market. True markets always involve rights and agreements, according to mutually accepted rules.

There are good practical reasons to prevent key services of the legislature and the judiciary from being traded, including those relating to property and markets. For example, if judicial rulings were for sale to the highest bidder, then the security of property rights and their exchanges would be undermined. Hence Michael Walzer (1983) established the need for ‘blocked exchanges’ in some spheres, excluding markets from politics, the legislature and the judiciary.

While much information and knowledge cannot readily be shared (because of tacitness, interpretative difficulty, or inaccessibility) much else can, and this can be of huge productive value. Over-restriction of the cheaply-acquired benefits of shared possession of non-rivalrous informational assets can generate remarkable inefficiencies. Consequently, the benefits of private and contractual provision of some information may be much less than the overall opportunity costs of charging a price for its use. A healthy market system itself depends on missing or incomplete markets for information.

Other markets are missing or incomplete. In today’s developed market economies, most people work under an employment contract. But crucially, employment contracts are for a limited period of time into the future. We cannot legally trade our lives away in lifetime contracts. This would be tantamount to voluntary servitude.

There is some future contracting for labour power, such as when a student receives financial support from a company, in return for a commitment to work for some years in the firm. But the time period is typically a few years, amounting to a small fraction of the student’s future working life. There are sometimes ‘non-compete’ agreements with skilled employees, that prevent them leaving a firm and working for a rival for a while. But these are still far short of lifetime contracts.

For this reason, under a market system with employment contracts, there can never be a complete set of markets for labour power. Although capitalism has meant a huge extension of property and markets, and it has made labour power a widespread commodity (as Marx emphasized), it has also, by freeing labour from servitude, sustained missing markets for labour futures. For there to be full futures markets for labour, all workers must be able to enter into contracts for every future instant in their expected working life. Such a complete curtailment of future discretion would be voluntary bondage. The uncertainties involved in modern, complex, dynamic economies make such extensive future contracting impractical.

There is in principle no satisfactory contractual solution, within a market economy with wage labour, to missing markets for labour power. Enforcing detailed and extended property and contracting rights, would limit the freedom of workers to quit their employment. Typically, workers are employed under a contract that allows exit, subject to notice of a few months. The short-term restriction of extended futures markets for labour is an important safeguard of the freedom of the employee.

The absence of futures markets for labour power creates a problem for the employer with the existing workforce. If the employer spends money on employee training and skill development, then this investment is lost when the worker leaves. As a result, without compensatory arrangements, employers might under-invest in human learning and education (Marshall 1920, p. 565).

The problem of missing markets has been addressed within general equilibrium theory. Here a missing market is a market that could exist in some possible state of the world, but does not in fact exist. If such a market is missing, then the absence of key information concerning prices on that missing market can cascade through the system and affect the overall outcome. The efficiency of other markets can be diminished (Hart 1975).  

Missing markets mean that we are in the world of ‘second best’ solutions. As Richard Lipsey and Kelvin Lancaster (1956) famously demonstrated, when one or more optimality conditions cannot be satisfied, it is possible that the next-best solution involves changing other variables away from the values that would otherwise be optimal. If it is infeasible to introduce a well-functioning market in any part of the system, then it is possible that the introduction of further market distortions or restrictions may partially counteract that omission, and lead to a more efficient outcome. There is no ‘one-size-fits-all’ policy solution where the removal of market impediments always brings efficiency or welfare. On the contrary, welfare outcomes of such interventions could be positive or negative – they would be dependent on context.

The non-metaphorical misuse of the term market, to cover arrangements that are not best described in such terms, opens up pro-market normative possibilities. It removes conceptual barriers to pushing actual non-market arrangements towards genuine market mode. If most things are already seen as markets, or they are deemed to have an immanent tendency to become markets, then it would be less consequence to create more markets. Objections to the extension of markets are removed by the claim that existing arrangements are already markets. The temptation then is to ally market universalism with normative policies such as privatization and deregulation.

There is another temptation, with serious consequences. Through notions such as ‘political markets’, market universalism conceptually dissolves the state and its legal system into a generally-marketized vision of society. They all become one and the same. The state and law become additional markets alongside others. This temptation within market universalism is the marketization of society and the state, and the denial of the autonomy of politics. The consequent temptation is to downgrade all non-commercial justifications for democracy, law or social life. Everything is forced into the conceptual straitjacket of property and contract, and then evaluated in terms of profit and loss.

One of the achievements of Enlightenment thought – from John Locke and Adam Smith – was the notion of civil society, which was distinguished from the state and meant more than mere trade or business. Although it is a contested concept, in most accounts civil society includes private business and markets, but it is not reducible to them. As well as trade unions and employer associations, it embraces many forms of social association (including recreation, religion and philanthropy) that are not necessarily driven by business interests. Civil society is important to develop local knowledge, sustain democracy and to organize powers to lobby or protest against governments. It is a vital sphere of action and organization between the individual and the state.

Notwithstanding their interdependence, civil society is different from the state. Civil society is also irreducible to market relations, notwithstanding the inclusion of trade and business within its sphere. Market universalism doubly undermines these distinctions. First, civil society is reduced to matters of property and contract. Second, politics is seen as a market as well.

Making everything a market denies the autonomy of law and politics: everything is subsumed within the market zone. All forms of association are regarded as markets. Legal and political relations are reduced to the bland ‘economic’ facts of possession and exchange. Control over property becomes everything. Property moves from being a necessary condition of liberty, as in Enlightenment thought, to being necessary and sufficient for the same.

Also transformed is the prominent Enlightenment argument that the government must be legitimated by representative democracy, rather than by tradition or divine rule. Instead, the ‘political market’ helps to promote market criteria as the overriding means to legitimize democracy. Furthermore, democracy itself may be seen as secondary or expedient, especially when property or markets are under threat. By treating democracy as another market, a temptation is to regard markets and property as sovereign, rather than democracy.

Consequentially, market universalism enables something very different from other forms of liberalism. One may be tempted to call it neo-liberalism. As Mirowski (2009, p. 456) argued: ‘Neoliberals seek to transcend the intolerable contradiction by treating politics as if it were a market and promoting an economic theory of democracy.’

Whether or not we use the label neo-liberal, clearly there is a prominent strain of modern thought that tries to justify everything in market-like terms. This suggests that there are no longer any worthwhile moral values or principles – including norms of justice or democratic behaviour – that cannot be given a market price.

While absolute precision is unattainable, ongoing vigilance in the use of terms and metaphors is vital. It is suggested here that there is much more involved than casual analogy to the persistent use of the term market to describe a huge range of economic, political, social and legal phenomena.

This paper shows that, by reasonable criteria, with minimal attention to the institutions and rules involved in a world of contracts a trade, the term market has been miss-used in instances such as ‘markets for ideas’ or ‘political markets’. Often, these things are not true markets.

It is necessary to be clear what arrangements are not markets. Furthermore, it also must be understood that not everything can be traded on a market.

A market system with ‘free’ wage labour (in contrast to slavery) inevitably entails some missing futures markets for future labour power. Otherwise the worker would be bonded by contracts for life. According to an important theoretical literature, the existence of missing markets means that attempted market solutions to inefficiencies cannot be guaranteed to work.

Although market universalism is not primarily a normative doctrine, it gives rise to major policy temptations. The most serious of these is the conceptual dissolution of the polity and the legal system into the ‘economic’ sphere of the ‘market’. The boundaries between the polity, the economy and civil society become invisible. In particular, by treating democracy as a market, the temptation is to regard markets as more important than democracy.

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