Two popular turns of phrase among those who support unfettered free markets are ‘leave it to the market’ and ‘let the market work.’
The phrases are deployed as solutions for a wide range of issues, such as environmental regulation, government subsidies, unionization, minimum wage, rent control and education funding. However, ‘the market’ invoked by these phrases does not—and could not—exist. At best, these vocal free market advocates are utopianists, believing in a system that could never exist. At worst, they are rhetorically advocating something they know is impossible to obfuscate self-serving purposes.
Basic economic theory claims that markets allow an ‘invisible hand’ to balance supply and demand, which maximizes well-being. Although economics has grown intimidatingly complex, this remains the foundation of mainstream theory. When pundits, politicians, businesspeople, and others tell us to ‘leave it to the market,’ they are implying that actual markets function like this theoretical market. However, actual markets have nothing in common with the abstract markets of economic theory.
Constructing a theoretical market
To construct the efficient market of economic theory, economists perform two separations.
First, they separate markets from the rest of society. Governments, religions, cultural practices, families, laws and every other social institution are deemed ‘exogenous’ in the economists’ parlance. Similarly, the individual’s desires are deemed exogenous. In this fantastical market, functioning out of time and space, we enter to make our exchanges, uninfluenced by the rest of our social life. And, when we leave the market, we are unaffected by the exchange, with no impact on anyone or anything else.
Second, they separate producers from consumers. In order for theoretical markets to produce a single, stable equilibrium, economists adopt a few assumptions. The independence of supply and demand is one such assumption. If supply and demand are not independent, then there is no single equilibrium and no basis for claiming a given combination of price and quantity is fair and efficient. Yet, the assumption of supply and demand independence is patently at odds with one of the most visible aspects of market societies: marketing.
The entire purpose of marketing—from ubiquitous advertising to meticulously designed packaging to the charming salesperson—is the influence of demand. Businesses spend enormous sums of money trying to understand consumer decision-making in order to entice the purchase of their products. Advertisements are painstakingly created, with every word and image detail scrutinized. Store layouts are continuously tinkered with to increase the attention a customer gives to the goods. Even sellers at farmers’ markets will agonize over their displays. Would so much money and effort be devoted to marketing if it were completely worthless? Indeed, if marketing were a useless undertaking, it would undermine another basic assumption of mainstream economic theory, which is that individuals are perfectly informed, rational decision-makers.
Markets are historical
While theoretical markets are asocial and ahistorical, actual markets are both social and historical.
The functioning of markets is throughly mixed up with culture and politics.
Consider the car market. Demand for cars is not driven solely by the desires of isolated individuals. The car is an indelible part of American culture. Many people express themselves through their cars and the companies design advertising that plays on that relationship. Design trends connect the appearance of cars to certain periods of time. The car companies create, facilitate and respond to these trends. There are technological innovations that come both from inside and outside the R&D facilities of the manufacturers. Car sales are greatly affected by the price at the pump, which is itself affected by events in the Middle East. The car, and the market for cars, cannot be separated from the rest of society.
Or, consider the pipeline debate currently raging in Canada. What would it mean to leave pipeline decisions to ‘the market’? Constructing new pipelines would facilitate the export of bitumen from the Alberta oilsands, allowing production facilities to increase output. However, the pipelines must cut through other people’s communities, bringing the risks of spills with them. It is owing to this risk that so many people beyond the buyers and sellers of pipeline capacity, and beyond the buyers and sellers of oil, are weighing in. Some supporters of pipelines are suggesting that construction of them is a ‘nation building’ exercise akin to the railroad. Both sides of the debate are connecting pipelines to other social institutions. Pipelines are political, whether free market advocates want to admit it or not.
Pipelines and cars are not the exception. They are the rule. Every market emerges from the interactions of numerous people and institutions. And, every market affects people and institutions outside those responsible for supply and demand. Fruit and vegetables rely on migrant workers, which tend to be drawn from precarious racialized communities. Construction is affected by housing demand that is further affected by interest rates set not by dispassionate markets, but by a committee of central bankers who pretend to mimic the theoretical market. Long-distance transportation costs are affected by the capacities of global ports, the building of which affect neighbouring communities. Coffee markets require inspection mechanisms so companies can ensure their brand is associated with reliable quality.
Another favourite phrase among economists is ‘there’s no such thing as a free lunch.’ Yet, they seem to have convinced themselves that the functioning of markets is precisely that. The reality is, far from being free, markets require a great deal of time and effort just to exist. But, all that work disappears as a ‘free lunch’ in the theory of supply and demand and in the rhetoric of free marketeers.
There is no free market that things can just be left to or we can simply let work. The invisible hand exists nowhere outside the utopian fantasies of free marketeers. By obfuscating the difficult work needed to make a market, mainstream economic theory and market utopianists make it more difficult to understanding how real markets actually work.