The market - a solution to what? Part 2

In part 1, I explored the nature of 'the market'. The word is ubiquitous but often quite vague.

So far, I have clarified 'the market' is a process for allocating resources for humans. The economy is very complex, so some simplifying ideas are essential: 'the market' simplifies ideas about the world into 'things', 'ownership' and 'utility (use value)'. 

When an old meme is perfect. Source

Knowing that, I want to explore the idea of a 'market-based solution'. To the problem of ensuring enough apples and turnips to meet the food needs of people, it seems reasonable. But for the problem of ensuring clean air for people to breathe, I can't see that as a matter of 'things', 'ownership' and 'utility'. 

So how does the market provide a solution? To answer this, I need to delve into how 'the market' process functions and how it measures success and failure.

Now, a warning: this exploration involves some nerdy, abstract, and perplexingly vague economic words. My focus, however, is not economics jargon, but the ideas about the world that economics relies on to explain the way 'the market' works. 

Economics¹ can make you feel confused and lost, but my suspicion has always been that it is deliberately opaque. So, stay with me!

In fact, as you're about to read, it is downright strange and scary.

What is a market-based solution?

What 'kind of thing' is a market-based solution and what sorts of problems can it solve? 

I could not find a definition in dictionaries or accessible articles on the topic². In fact, despite a sub-heading Definition of the market solutions, this article doesn't actually define them. It uses a common replacement instead: examples. Not that helpful.

So, I looked for the parts.

The Cambridge Business English Dictionary provided the adjective market-based: 

 ♦️ encouraging or leading to an economic system based on supply and demand.

Okay, it's not technical jargon; market-based can be understood literally: 'using the market'.  

And then a definition for solution: 

 ♦️ an action or process of solving a problem, an answer to a problem. 

Now, a Wordly Explorations definition is required. Integrating the ideas from part 1, a market-based solution:

 ♦️ is-a process of solving a problem through setting a price for ownership rights of the tradable things that make up 'the problem'.

So, a market-based solution is a process: actions to solve a problem. (It's not a 'thing'; it's an 'action'. Hold onto that concept!)

How does the market process go about solving problems? 

The market-based solution: the process in action

In Part 1, I explored the importance of simplified diagrams - process models - of the world that help economists to understand 'the market' process - the exchange of ownership of things for a price. 

The market process model: balancing in equilibrium Source

'The market' process includes the buyer's role, seller's role, buyers making rational choices based on their needs, a labour supply matching production for market, no barriers to sellers taking part and a number of sellers competing³ for buyers, all of which leads to the supply and demand (for 'things') balancing in equilibrium without the need for outside intervention.  

Proponents of 'the market' hate outside interventions - government regulations or taxes - that distort the process. They say governments should just get out of the way and let 'the market' work as a self-organising and balancing process. Because when it does, it's perfect and efficient.  

In a 'market-based solution', the buyers and sellers assume legal and financial responsibility. The 'solution' allows efficient resource allocation while generating a profit for the owner. The government's role is limited to establishing a market for the problem, setting the parameters and standards, and monitoring that the market is functioning. An example is the Australian government's monitoring and auditing of the market it established for residential aged care services in 1997.  

The owner can buy and sell their ownership rights within the market, just like any other 'thing', at a price established through the interaction between buyer and seller. An familiar example is the trade in carbon credits. 

It seems an odd fit though. How does a market-based approach solves the various social and environmental problems that are not about 'things' and don't seem to be a matter of who will pay what price for what? Can we conceptualise all our problems in a way that fits into a market? Some problems are extremely complex and entrenched (even 'wicked').

I'm intrigued to understand how a market-based approach solves our problems. 

How does 'the market' demonstrate that it achieves its goals: how do we know it is successful? 

The goals of the market 

We often hear about economic goals such as efficiency, equity, choice, full employment, growth, and price stability.

When governments consider how to solve problems related to security, employment or aged care, these economic goals support their rationale for market-based solutions; for example, private provision is more efficient than public, choice is a fundamental principle in a free society, price stability is essential for confidence. 

Competing with quality and price. Source

I will just explore one: the goal of efficiency, which contrasts to the perceived inefficiency of reciprocity (between families or communities) and redistribution (by plunder, kings or a central committee). 

Efficiency is achieved through buyers choosing the best product at the lowest price. Sellers compete to be 'the choice' of buyers through quality and price. This interaction ensures the most efficient and cost-effective resource allocation. It also sorts out the winners and losers. Inefficient sellers will not be able to compete for buyers and they will fall out of the market, until only efficient and well-pricing sellers remain. Efficiency is success, and inefficiency is failure.  

I'm comfortable with that: efficiency seems better than inefficiency. Growth sounds better than stagnation

Economic theory explores how to balance these goals for a functioning economy, recognising that sometimes trade-offs between the goals are needed in various contexts.

(We're nearly to the interesting bit. Stay with me.) 

Trade-offs between economic goals 

However, deciding which goals are more important in a particular context is not economics; it is politics.

Recent Australian governments have promoted efficiency and growth as the more important goals.

For example, the Australian government trades off full employment for growth (using a target of 5% unemployment). That's a long-standing political choice between economic goals.

Not sure I like THAT trade-off. Source

A second example is when the federal Government voted down a proposed law in December 2019 for aged-care homes to make their staff and food budgets available to the public. It accepted the providers' argument the law would create a reporting burden (red tape) and negatively impact profit to the provider - reducing efficiency and growth. It decided this was more important than public information that would allow consumers to make fully informed choices between options - ensuring equity and choice. Equity and choice were traded off for efficiency and growth.

Sure, efficiency is better than inefficiency, but is it more important than equity? 

Such trade-offs imply incompatibility between the goals of the market, which supposedly work together to achieve 'supply and demand in equilibrium'. 

Process models often have actions that balance to achieve stability or an outcome - like evaporation and rain are balancing actions in the water cycle. They alternate, but they always function together. But directly incompatible - trading one off for the other - that's not how a process is supposed to work. (Rain is more efficient maybe??) 

I find it quite strange. 

But hang on! There's a MUCH bigger issue. Efficiency is not a goal. 

Economic goals? But efficiency, equity, choice, full employment, growth, and price stability are not goals - they are not outcomes. They are attributes of the process that is 'the market'; in other disciplines they might be called 'process goals'. Process goal are quite distinct from outcome goals (sometimes called 'end goals').  

Process goals don't measure what a process achieves.

Good for measuring precision of the process, not outcome. Source

These 'economic process goals' are akin to measuring the speed of processing ticket sales for a concert, without demonstrating that everyone got a seat and no seat was double booked. Speed is desirable, but it's not more desirable that everyone with a ticket getting to see the show. Speed would be the wrong thing as the only measure. Or measuring the precision of a tiny component in a new house, without measuring the comfort of living in that space. Precision is important, yes, but it is not the end goal of the process. 

Economic process goals measure the wrong things. 

A process is supposed to lead to an outcome; it's not enough to measure that you have a perfect process.  

Economic goals should be related to whether the market allocates resources as we want in our society. 

Surely, you say, there are such measures too; and you'd be right. But there are more trade-offs to consider then. 

And things go from strange to scary.

Trade-offs between our social and environmental goals and 'the market' process goals.

Those economic process goals seem hard to argue against - who wants inefficiency and stagnation?

However, you would assume that no one would argue that efficiency is more important than, e.g. human life.

Well, actually some do, though not in those terms. Some argue that keeping the economy open (with a focus on the process goals of price stability, efficiency, growth) is more important than stopping people die or end up with as-yet-unknown complications of Covid-19 (the outcome goal of healthy people.)

You have to choose: the process OR the outcome! Source

In my example about aged care above, I mentioned that the process goals of efficiency and growth won out over equity and choice. Well, efficiency and growth also won out over our desired outcome goal of quality, humane care for our elderly family members.  

And in the employment example above, the government prioritises growth over the desired outcome goal of human well-being that our society afford people through with having a job.

A third example is the main tool for measuring a country's economy - gross domestic product (GDP). It's a measure of growth - the value ('price') of all the 'things' that transferred 'ownership' in a time period (economics would prefer 'produced', but it's not 'product' until it's traded). Economics has long debated how best to take this measure. Regardless of how, GDP is no measure of people's well-being - a country with a high GDP may have high inequality or significant damage to the natural environment (air and water) from producing all those 'things'. To rely on GDP means valuing it as more important than those aspects that represent people's goals (employment, health) over this measure of the process. 

The process of 'the market' usurps its purpose.

Measures of whether 'the market' is successful in resource allocation in society have been sidelined by governments making decisions based on measures of the process. Efficiency, etc., is touted as a rationale for a decision and treated as an 'end goal'; anything threatening efficiency is challenged regardless of its impact on the outcome. 

That's not how it's supposed to be - a process is a means to an outcome. Not instead.

To pursue its economic process goals of efficiency, growth, etc., 'the market' focuses on such measures as price trends, consumer behaviour, utility, inflation, seasonally adjusted value, productivity, currency fluctuations, price-earnings ratio, and so on. You won't hear about outcome goals of responsive and accessible health services, breathable air, meaningful employment, clean water in our rivers, human well-being, social cohesion, quality training and education, ecological integrity and sustainability, or human dignity. 

But aren't these goals all fundamentally questions of resource allocation? Resource allocation that we solely rely on 'the market' to achieve.   

You might say they are political, not economic goals, but politicians argue using the terms of 'the market' process, the economic process goals. 

It seems 'the market' is not required to demonstrate success in meeting our needs; in achieving what it is there to do.

To me, that is a bit scary.

But what about market failure?

For sure, we do hear about market failure. You and I might describe a market failure as a negative outcome, like people in aged care homes experiencing poor care or even abuse. We would say the market has failed to deliver appropriate, quality and humane care to vulnerable people. You and I might describe the lack of dignity and self-respect of people unable to get a job as a market failure. 

For us, success is defined as the achievement of the desired outcome or result, and failure is a lack of success.

But that's not how 'the market' defines a failure. 

In neoclassical⁴ economics, market failure:

 ♦️ is a situation in which the allocation of goods and services by a free market is not Pareto efficient, often leading to a net loss of economic value. 

There's that word efficient again. And Pareto efficiency:

♦️ is a situation where no individual or preference criterion can be better off without making at least one individual or preference criterion worse off…  scarce resources are not being put to their best use.

Makes you cry. Source 

Market failure thus relates to inefficiency; it's not about the failure of the market to meet human needs. It makes no statement about the overall well-being of a society. An economy in which the 1% owns the vast majority of resources can be Pareto efficient. (Whereas, I call that an obscene failure).

Rather unsurprisingly, the market defines a failure of terms of its own economic process goals. If the market process displays efficiency, growth and price stability, it is a success. Inefficiency, lack of growth and price variability define a market failure. 

What a self-referential process!

Of course, governments do have to respond when the people are unhappy with the outcome of 'the market' (our definition of market failure). They do so by creating something called 'market-based instruments'. 

Market-based instruments - a bit like the French horn, hard to get right but very satisfying to fanatical horn players. 

Market-based 'instruments' are regulations and tweaks to encourage certain buyer or seller behaviour, aimed at the desired outcomes of 'the market'. These include taxes, subsidies, wage and price controls, and regulations. For example, market-based instruments to encourage less production of pollution include fines for pollution, tradable permits, market barrier reductions for limiting pollution, and government subsidy reductions for excess.

A beautiful, complex, difficult instrument. Source

Market-based instruments are an alternative to 'command and control' approaches involving explicit directives or legal requirements to get the desired outcome. 

Fans of the market don't much like these market-based instruments, because they distort the way the market process is supposed to work. Government involvement is always described as inefficient, bloated or distorting because it doesn't fit with the idea that the market is a perfect self-organising and balancing process.

In fact, market-based instruments are regularly denigrated as red tape or green tape.

I'm not saying all market-based instruments achieve what is intended. It is challenging to develop market-based instruments that achieve the desired outcomes without creating other unforeseen problems (thinking pink batts). 

But that's not the argument that fans of 'the market' use against them. It's all about the process!

They argue against the market-based instruments set up to achieve the outcomes people want - including safety, health and well-being - on the basis they create inefficiency and reduce growth (profit). 

They argue against market-based instruments, e.g. regulations for minimum standards in training for aged care staff, because they distort the market.    

In fact, government intervention is sometimes blamed for the negative outcomes of the market, e.g. poor quality aged care, high cost of energy, inadequate housing, etc. This article on housing in the UK claims the government's instruments (rebates, taxes, etc.) are the CAUSE of housing shortages, and if the market were not distorted by them, it would provide adequate housing for all. Economists even refer to government failure: government intervention in 'the market' which stops it working the way it should. It is based on the idea that even if the market is not ideal, government intervention may make matters worse.

I can't get over this strange circular logic. 

Circular logic when markets fail to deliver what society wants. 

If the market doesn't deliver what society wants, fans of the market blame government for distorting an otherwise perfect process. The market doesn't even consider the outcome.

Trade-offs between society's goals and beliefs about 'the market' process.

We end up with a circular argument. It's a self-protective, self-justifying, impossible to argue with circle. 

And we love perfection. Source. 

It relies on the assumption that IF the market were left perfect and undistorted, we will all be better off. 

But it's never perfect - 'perfect conditions' only exist in simplified diagrams with 'non-market elements' left out. And it's never undistorted - if various process goals have been traded against each other (e.g. efficiency over equity) it's not even working as the diagrams say. 

And don't mention the word monopoly!

We're measuring the wrong things (process goals), and proponents of 'the market' push back against 'market instruments' aimed at delivering outcome goals, BECAUSE they distort the process.

When market-based solutions fail to rein in pollution or lead to poorly-trained staff abusing people in residential care, economists focus on improving growth and efficiency, etc., they blame government failure, or they ask: 'why do the market-based instruments achieve so little?'  

They NEVER ask, 'is the market the solution?' 

Circular logic of a market-solution for complex problems

Instead, the market is promoted as THE solution and fiercely defended with threats that the only alternative is starvation and poverty under a non-market or centralised economy.  

The circular logic of 'the market' gives the process model a life of its own.

The market involves trading off the real goals of a society (outcome goals related to resource allocation for human needs) for how economists believe the market process works.

Economics is focused entirely on diagrams and process models and measures of the processes. In fact, both a justification and a criticism of 'the market' is that it can only achieve its process goals, e.g. efficiency, if it is blind to its purpose as a process to meet human needs. 

Blind to its purpose? Blind to the problems that it is supposedly the solution to? 

In fact, the market trades off solutions for blind faith in one process.

I find that enormously scary.

Is the market the problem?

Blind to your purpose? Source

Why on earth would we place 'the market' process above every other way of addressing our problems? When did 'the market' stop being a method of trade and start becoming a method of valuing life and the natural world, and organising society itself? 

With all its simplifications, self-referential justification and blindness to its purpose... I can't help wondering, 'Is the market the problem?'

In part 3, I will explore⁵ just how 'the market' became so powerful and above criticism. And how the field of economics allowed itself to become the beating stick of the politically powerful. 

Because it's all about power in the end.

Footnotes

1. If you think I'm being unkind to economics throughout this post, you'd be right. And I'm leaving out a lot of detail and caveats issued by economists. But there's a reason and all will be revealed in part 3.
2. I've chosen throughout to reference Wikipedia because of its accessible and simply worded explanations. I've read a lot of economic theory… not because I like it, but because I've been trying to understand its words, concepts and 'view of the world'. It is difficult and opaque to read. It used to bother me; now it scares me.  
3. Strictly speaking, a 'free market' does not require competition, however it does require that is always allows new market entrants. I KNOW. 
4. Market theory is based on classical and neo-classical economics which define failure term in this way; various other school of economics do not. 
5. I need a break from all this market strange scariness first! So do you, probably… 

Image credits, used under Creative Commons Licences

• Confused woman meme: https://www.liveabout.com/best-confused-memes-4160924 [Used under terms]
• Process model for market bu Lorie A. Wagner, Daniel E. Sullivan, and John L. Sznopek: https://en.wikipedia.org/wiki/Circular_flow_of_income#/media/File:The_competitive_price_system_adapted_from_Samuelson,_1961.jpg [Public domain]
• A market, the market: https://en.wikipedia.org/wiki/Horticulture [CC BY-SA]
• Trade-off sign: https://unviejotimo.wordpress.com/2014/11/13/trade-off/   [CC BY-NC-ND]
• Measuring with calipers:  https://i2.wp.com/boingboing.net/wp-content/uploads/2014/10/fractional_caliper.jpg [CC BY-SA-NC]
• Cross and tick on see-saw: http://www.carnegieknowledgenetwork.org/briefs/value-added/teacher-misclassifications/ [CC BY-NC]
• Inefficiency tears: https://makeameme.org/meme/inefficiency [Used under terms]
• French horn: https://uncyclopedia.ca/wiki/File:French_horn.png#file [CC BY-NC-ND]
• Morgan Freeman meme: https://memegenerator.net/instance/55320987/morgan-freeman-god-inefficiency-i-believe-youre-trying-to-mess-with-my-perfection [Used under terms]
• Blindfolded: https://bigthink.com/errors-we-live-by/updating-hayek-can-the-market-prioritize-well [No details provided; image search found no source]

A few references 

• William K. Shireman and Clifford Cobb (ND) Market-Based Environmental Laws; 100 Ways to Use Prices To Prevent Pollution. From the University of Wollongong course: The socio-political context of environmental issues.
• Tolerate Unemployment, but Blame the Unemployed: The Contradictions of NAIRU Policy-Making in Australia By David Richardson Senior Research Fellow The Australia Institute November 2019.
• This paper begins by documenting the evidence that 5 per cent unemployment is the government’s policy objective, which it believes is consistent with ‘full employment’. In defining as ‘full’ something that is less than full, the government avoids justifying its policy by defining away the problem.