Imperfections of the market order

Hayek may have rejected the neo-classical notion of perfect equilibrium, but other defects sit at the heart of his market order. A number of imperfections appear to cast severe doubt on the omnipotence and exclusivity of market mechanisms in the capitalist system. However, some imperfections to the market order, such as monopoly, some types of bureaucracy and regulation, and other market imperfections are accepted by neo-liberals as inevitable defects and necessary parts of the profit-generating dynamics of the market order. Indeed, for neo-liberals, rather than being obstacles, some market imperfections can be the main source of profit in the market economy and an essential part of its survival.

Monopoly

Monopoly is an obstruction to the market, which appears to undermine the neo-liberal notion of an open and competitive economy. Lindblom identified monopoly as a situation where ‘in any one market, where there are only a few buyers or sellers, one person or a collaborating group can

restrict production purchases or sales in an arbitrary way’. 33 He argued, however, that monopoly should not in any way be considered an ‘impos- sibility’ or a serious ‘shortcoming’ for competitive markets, but rather as ‘one of many defects that markets share with all other forms of social organisation’. Monopolies ‘dampen’ market competition rather than undermine it. 34

Neo-liberals such as Hayek followed Lindbom’s interpretation of monopolies of capital. For Hayek, a monopoly in a market does not mean Neo-liberals such as Hayek followed Lindbom’s interpretation of monopolies of capital. For Hayek, a monopoly in a market does not mean

the total absence of competitiveness. Capital monopolies, he claimed, are self-inhibiting rather than self-destructive. In his defence of capital monopolies, Hayek made explicit the distinction between what he terms ‘enterprise’ monopolies and monopolies of labour. He maintained in his Law, Legislation and Liberty that labour and capital monopolies are distin- guishable because labour monopolies not only are a greater threat to the smooth functioning of a competitive market, but also pose a greater threat to liberty. He commented that ‘enterprise monopoly is the result of better performance, while labour monopoly is due to the coercive suppression of

competition’. 35 Hayek did, however, go on to allocate a central role to the state in the prevention of enterprise monopolies which threaten to coerce other particular individual or firms into specific behaviour or to prevent potential competitors from entering the market. Hayek explained that it is usually not the ‘existence of the monopolies themselves which is harmful, but the ability of some monopolies to protect and preserve their monopolistic position after the original cause of their superiority has dis-

appeared’. 36 In these circumstances where capital monopolies retain a ‘power of discrimination’ over prices and competition is restricted in an ‘undesirable manner’, Hayek argued that it is necessary for such monopolies to be ‘curbed by appropriate rules of conduct’. Hayek maintained that, while ‘it would not be desirable to make all discrimination illegal, discrimination intended to enforce a certain market conduct should clearly

be prohibited’. 37

Bureaucracy and regulation

A bureaucracy is a hierarchy of authority and system of administration which provides solutions to problems through its specialisation and stan- dardised skills. Neo-liberals are ideologically hostile to this notion of a hierarchical-bureaucratic system, which either authoritatively commands individuals, or seeks to ‘educate’ them rationally, through unilateral popular persuasion. Hayek contended that this kind of

great administrative bureaucracy has brought it about that an ever increasing part of the people spend their whole working life as members of large organisations, and are led to think wholly in terms of the requirements of the organisational form of life. 38

Hayek contrasted these administrative agencies, based on organisational thinking, with regulatory agencies, based on the ‘rules of just conduct’. As Hayek contrasted these administrative agencies, based on organisational thinking, with regulatory agencies, based on the ‘rules of just conduct’. As

Hayek readily acknowledged the imperfections of markets, he recognised that markets require a certain type of bureaucracy in order to exist. Hayek’s vision of bureaucracy, however, differs from the traditional model of an administrative agency. For Hayek, the principal role of a bureaucracy or agency is the regulation and universal application of the rules of just conduct, which have evolved with Western civilisation. He was explicit that that these ‘rules of just conduct’ do not encompass either ‘social justice’ or the ‘public law’, which subjects individuals to the commands of authority. The rules of just conduct are abstract ‘Lockean’ rules which determine the preservation of ‘life, liberty and estates’. A regulatory agency confines the scope of an individual’s private actions, regulating the ‘rules of property, tort and contract’. 39

Neo-liberals thus acknowledge that markets require supporting regulatory agencies. Rules and regulations which constrain and govern behaviour make market transactions as socially productive as possible by enforcing property rights and penalising non-compliance. Some neo-

liberals are, however, careful to guard against compulsory state regulation. Norman Barry, for example, contends that it is possible for all ‘regulation to be returned to the market (where it actually began)’. 40 Market failure,

he argues, does not necessarily have to entail state involvement to correct errors. Barry points out that ‘markets are always to some extent imperfect and it is the continual process of experimentation, guided by prices, that gradually pushes the exchange system to an optimum, albeit temporary and subject to incessant change’. The present system of state regulation,

he maintains, is anti-competitive and inefficient: market regulation ‘intro- duces freedom in regulatory regimes delegating authority to de-centralised political units and expanding the opportunities for citizens to move on to one of their choice’. 41

The necessity for state intervention

A paradox at the heart of neo-liberal market theory is that free markets require the state to operate. As King notes, in a free-market economy the state must be present in the political sphere, to maintain a legitimate judi- cial system, address market imperfections and ‘underwrite those vital public goods which the market fails to produce’. King, however, observes that the legitimate roles and responsibilities granted to the state are con- fined to the political sphere; the state is ‘perceived as necessary although this is denied in the economic sphere’. 42 A paradox at the heart of neo-liberal market theory is that free markets require the state to operate. As King notes, in a free-market economy the state must be present in the political sphere, to maintain a legitimate judi- cial system, address market imperfections and ‘underwrite those vital public goods which the market fails to produce’. King, however, observes that the legitimate roles and responsibilities granted to the state are con- fined to the political sphere; the state is ‘perceived as necessary although this is denied in the economic sphere’. 42

Several accounts of the market economy argue that the role of the state in facilitating markets is far greater than neo-liberals are prepared to admit. Karl Polanyi’s classical study of the evolution of the capitalist system in the nineteenth century, The Great Transformation, discussed in Chapter 3, provides a vivid account of the vital role of the state in market society. More recently, Geoffrey Hodgson has provided the most com- pelling account of the association between the market and the state. Hodgson develops a theory of capitalism which ‘essentially relies on its impurities hidden beneath the surface’. His ‘impurity principle’ demon- strates how the market system contains ‘impurities’ or ‘non-dominant structures’ which may not be typical of the whole system, but which are nevertheless essential if the system is to operate and reproduce itself

through time. 43 Like the market, the political institutions of the state act as a coordinating mechanism through which knowledge can be combined and ‘the solidaristic values and co-operative habits essential to capitalist

survival can be promoted’. 44 Hodgson contends that over-reliance on spontaneous market forces in society, in the long run, destabilises estab- lished social institutions – including social norms and rules flowing from state structures – upon which the health of capitalist economy depends. Hodgson’s central point is that the state is the primary countervailing power in successful modern economies channelling and taming the power

of markets. 45 Thus Andrew Shonfield has pointed out that a legitimately active state in the economic sphere does not lead to the centrally planned economy that neo-liberals deplore, but rather promotes and facilitates a dynamic and prosperous market order. 46

Neo-liberals do not envisage ‘perfectly functioning markets’ and thus accept the necessity of the state for certain activities in the political sphere, to correct market imperfections. They do not, however, go as far as Hodgson or Shonfield and assign it an important role in the economic sphere. Hayek argued that the state has a vital role to play in markets, enforcing the rules and laws, but maintained that in a market economy its responsibilities should not extend beyond this.

Nat i o n a l m a r k e t c a p i t a l i s m

The Anglo-Saxon model of capitalism

The primacy of the market in neo-liberal discourse in national capitalist economies is captured in the ‘Anglo-Saxon’ model of capitalism. The The primacy of the market in neo-liberal discourse in national capitalist economies is captured in the ‘Anglo-Saxon’ model of capitalism. The

Anglo-Saxon model of capitalism is a neo-American or what Michel Albert refers to as an ‘Atlantic capitalist’ economic model. 47 The model is driven by the market incentives of individual success and short-term financial gain. It relies for its success on market coordination of economic agents and seeks to address market failures by providing additional market elements where they are missing. The social institutions of the state exist in order to protect and maintain the market, and redress the minor ineffi- ciencies or injustices it produces. David Coates points out that the central actor in this model is not the state, but the private company, ‘which is left free to pursue its own short-term profit motives and to raise its capital in open financial markets’. In such capitalist economies, labour markets are unregulated, leaving workers with ‘limited and statutory industrial and social rights’. 48

The dominance of this generic Anglo-Saxon model of capitalism in specific countries in the post-war period was not simply based on a broad acceptance of markets; rather, it manifested itself for very different reasons in individual national contexts. The extent to which Germany adopted features of this market-led model in the immediate post-war years reflected the need both to reconstruct her economy after the war and to break away radically from the state socialism of her past. German neo-liberals, as

H. Abromeit observes, were committed to a social market economy on the basis of ‘the belief that industrial modernisation and structural change should be best left to the market’. 49 In Britain, the pursuit of market-led capitalism was based on a desire amongst conservative policy-makers to return Britain to the nineteenth-century classical liberal era of free trade, whilst in the United States the principal line of reasoning behind the acceptance of this model was the defence and preservation of freedom. Both Britain and the United States in the late 1970s and 1980s, however, shared a common understanding of the primacy of competition and indi- vidualism and an antipathy towards ‘Big Government’, which became encapsulated in the enterprise society.

Creating the enterprise society

An important peripheral concept of the market is the notion of an enterprise society, marked by the fundamental distinction that neo-liberals make in national market societies between economics and politics. The former is associated with the self-correcting market, spontaneously transmitted transactions and an enterprise culture, the latter, with an active state, An important peripheral concept of the market is the notion of an enterprise society, marked by the fundamental distinction that neo-liberals make in national market societies between economics and politics. The former is associated with the self-correcting market, spontaneously transmitted transactions and an enterprise culture, the latter, with an active state,

corporatism and a culture of dependency. The impersonal forces of the market, neo-liberals claim, create an enterprise initiative by freeing individuals from the constraints imposed by bureaucratic regulation. The Thatcher and Reagan governments in Britain and the United States in the 1980s fostered a new neo-liberal spirit of enterprise. The encouragement of individual initiative and the free play of market forces were marked by an accompanying change in the culture of society. This enterprise culture and society, which ran through much of British and American economic policy-making in the 1980s, concentrated on the short-run outcomes of

decisions made by individual entrepreneurs. 50 Economic progress, neo- liberals gleaned from the writings of Hayek, was dependent on the willingness of individuals to act on their own beliefs and incentives. This willingness required the virtues of courage and self-reliance. Success and failure, which cannot be foreseen, were viewed as part of the natural course of market relations. Competition weeded out inefficient firms and resources were reallocated to the general good of the community as a whole. 51

The pursuit of an enterprise society in Britain and the United States had important domestic policy implications. The movement towards a free and competitive market economy in these countries necessitated the introduc- tion of policy measures to de-centralise the state. Privatisation became the central plank of this policy agenda. The notion of public ownership of major industries was anathema for neo-liberals. The rationale behind privatisation was to expose state-owned enterprises to the full rigours of competition and to restore the central role of the market in the allocation of

resources. 52 In theory, privatisation appeared to be consistent with many neo-liberal principles: it would reduce the size and scope of state control; increase individual freedom through the expansion of consumer choice; decrease the Public Sector Borrowing Requirement; lessen government participation in industrial disputes; make industry more efficient by expos- ing it to the pressures from shareholders; decrease the influence of interest group pressures in investment decisions; encourage the enterprise society and economic success by increasing share-ownership amongst the popula- tion; diminish the power of trade unions; and have a general beneficial

effect on the rest of the economy. 53 In Britain, the Thatcher government subjected the public sector to market pressures, privatising many large nationalised industries and state-owned assets such as British Aerospace, British Telecom, British Gas and Rolls Royce, and introducing legislation for the sale of council houses. The Reagan administration pursued a similar line of policy, privatising many essential services like American Telephone effect on the rest of the economy. 53 In Britain, the Thatcher government subjected the public sector to market pressures, privatising many large nationalised industries and state-owned assets such as British Aerospace, British Telecom, British Gas and Rolls Royce, and introducing legislation for the sale of council houses. The Reagan administration pursued a similar line of policy, privatising many essential services like American Telephone

and the Telegraph Corporation. However, rather than being broken up into separate units, many large public monopolies were simply replaced with private ones, which contradicted neo-liberal free-market principles. 54

In Britain and the United States, there was also a desire amongst neo- liberal policy-makers to move towards private systems of provision. Both the Thatcher and the Reagan governments were committed to reducing public spending on social welfare and education. The aim was to replace the welfare culture of dependency with one of private enterprise, con- ducive to market society. In Britain, attempts were made to reduce the burden posed by the National Health Service on the economy with the restoration of income-tax relief on employer-employee medical insurance

schemes. 55 Further, in both Britain and the United States, neo-liberals argued that the benefits of reducing social security and welfare entitle- ments were threefold: cut-backs would reduce the Public Sector Borrowing Requirement and thereby contribute to the war on inflation; reduce the level of taxation levied on private individuals; and, through reductions in the social assistance available, increase the potential for free

markets. 56 Moreover, a massive programme of deregulation was pursued by the Thatcher and Reagan administrations in an attempt to enhance the forces of the market and reduce government intervention in the economy. In the United States, in particular, supply-side economists were committed to ending federal regulations paid for by private citizens. In the economic sphere, restrictions on economic activity were removed by the Reagan administration, for example, in railroad transportation broadcast- ing and in the oil and natural gas industries. In social and environmental spheres, the responsibilities and powers of the Safety and Health Administration to regulate the workplace and those of the Environmental Protection Agency to ensure environmental control were loosened or eroded by the Reagan administration. Neo-liberals claimed that such deregulatory measures had the positive effect of increasing market forces and consumer participation in markets. 57

Imperfections of the market order