The Market System: What It Is, How It Works, and What To Make of It

"This is by Charles Lindblom, who is the only political scientist on my list. He taught for decades at Yale. This book, The Market System , also has an invisible twin that I’d have loved to have talked about too, a book called The Intelligence of Democracy . What he’s thinking about in these two books is how markets and democracies work as informational systems. He wrote The Market System towards the end of the 1990s; the other book was written in the 1960s. So he was thinking about these questions long before we had this huge explosion of information. What he gets at extraordinarily well is how markets serve as this massive system of coordination, and indeed of cooperation, even though we tend to think about markets as being all about competition . Actually, he argues, there are only a few people who you are likely to be directly competing with in a market. For the most part, it’s a massive system of cooperation, in which all of these tasks—these needs that we have—get solved in a cooperative fashion. Decisions that might otherwise be extremely controversial about who gets what are solved in a way which creates some degree of social peace and acceptance. He’s really very interested in how it is that markets accomplish all of this in an entirely decentralised way. Support Five Books Five Books interviews are expensive to produce. If you're enjoying this interview, please support us by donating a small amount . Lindblom is obviously building on Hayek—who has a famous pair of articles which talk about the incredible system of coordination markets provide through the price mechanism. Hayek’s articles are brilliant, but what I like about Lindblom is that while Hayek is trying to sell his own ideology, Lindblom is coming at it from a somewhat different political perspective. He is a left-of-centre liberal and he’s trying to give markets their due from the perspective of somebody whose politics wouldn’t necessarily put markets at the center. I think that gives a more balanced, more nuanced understanding of markets. That’s right. The emphasis throughout the book is on the benefits that markets provide and he talks about those at great length. But he also makes clear that there are things that market simply aren’t very good at doing, and the problems that markets cause for democracy. On the one hand, he suggests that under some circumstances, markets can actually be better at controlling elite actors than our democratic systems. Consumer power is a very real and very important thing. On the other hand, he points out how if we want to think about how to solve some problems through democracy—and some problems need to be solved through democracy—we have to take account of the systematic ways in which markets distort democracy. We have never had a democracy that has chosen to move away from the market system, which perhaps suggests that democracy is deeply entangled with markets. But it also suggests market elites tend to have a lot of power within democracy as well. A lot of Lindblom’s other work is looking at the ways in which market actors, because they’re able to allocate where production happens—even if they aren’t lobbying directly or yelling at politicians to do this rather than that—have an enormous degree of structural power that it is impossible for politicians to ignore within a capitalist system. That poses some important stresses and strains for politics and for democratic politics in particular. Maybe one way to think about this is to steal in advance from Herbert Simon, who we’re going to talk about in a minute. As an economist, Simon has a very interesting way of thinking about the world. In a certain sense, you can see him as an intellectual descendant of the debates in Red Plenty . He mentions in passing in his book that one of his teachers was Oskar Lange, one of the major figures in the debate over how market mechanisms might be implemented in a socialist system. While Simon didn’t necessarily absorb Lange’s politics, he thinks about the world in terms similar to the ways in which the socialist calculation debate was conducted. In particular, he tries to think about the ways in which different forms of social organization might be better or worse as systems of information processing. So the implicit story behind Lindblom’s project is how markets provide this extraordinary means of information processing (as Hayek and others pointed out). Lindblom has a line about how a market system is a system of social coordination by mutual adjustment among participants without a central coordinator. He talks about the incredible degree of predictability that this creates. It isn’t that I, as a producer of potatoes, have potatoes in my field and I just hang around at random, waiting for a buyer to come along. I know where to go in order to find buyers. The buyers of potatoes know where to find me as a seller and so on. The market entails all of these complex forms of social organization, which pull it along and turn it into something that actually works. “We have never had a democracy which has chosen to move away from a market system” But what I think is useful about Lindblom’s perspective, even if it’s mostly implicit, is that markets are not the only way of doing this. This, again, is where I think that Lindblom is more useful than Hayek. Hayek is pushing back against the socialists in the calculation debate. The articles he’s writing are written directly against the central planners and claim that there’s stuff that central planning simply can’t get. He’s absolutely right, but he tends to eulogize the market as a means of reducing everything down to the price mechanism. It serves as a summary statistic of everything that you need to know about a particular relationship. He’s right, but there are flaws and problems to markets too, as other economists such as Joseph Stiglitz have explained. Hayek is a prophet, but Lindblom is a comparativist. Markets serve wonderfully for these extraordinary forms of coordination and cooperation, but there are other ways of organizing social relations. We need to think about the state. We need to think about the way that the state hierarchy sometimes works together with the market, and sometimes works against the market, while providing essential conditions for markets to work. We need to think about democracy and how democratic decision-making might also provide different ways of doing things. There is a project implicit in Lindblom’s work, which has never really been carried out properly by political science or by other social sciences, to ask in a more systematic way: ‘Okay, if we think about these different systems of adjustment—markets, democracy, hierarchy, and so on—what are their respective advantages? What are their respective faults? What are their respective failure modes?’ That’s something that I think political scientists and social scientists more generally really need to be pushing towards: thinking more systematically about these things from a comparative perspective. One thing Lindblom talks about in passing is the relationship between markets and spillovers and the environment. He has a somewhat complicated argument, but I think an interesting one. One of the problems of markets involves what economists talk about as positive and negative externalities: good things are going to be systemically undersupplied under many circumstances and bad things oversupplied, because they don’t go through the pricing mechanism. There are a lot of cute examples in economics textbooks: I have beautiful flowers in my garden and I obviously enjoy them, but passers-by enjoy them too. I probably undersupply flowers relative to the amount of social utility that people in general gain from them. Economists like to wonder whether we might reach a better equilibrium if there were some mechanism that could allow people who pass by my garden to perhaps give me a tip for the flowers. Externalities have consequences for the environment—pollution and so on. On the one hand, Lindblom suggests that people often tend to overestimate the extent to which markets create problems that they can’t solve. He suggests that many such problems can be solved by a combination of market processes and the state. If you have some actor who has the authority to say ‘Get things done’, and if you have market processes that complement this form of state decision-making to reinforce it, you can actually deal with many of these problems pretty well. “We have . . . a world in which our political imagination has been captured by markets as the obvious solution to big problems” However, he also explains that there may be spillovers and externalities which are just too big to deal with. You might think about global scale environmental spillovers as an important example. He’s writing back in the 1990s, so he’s thinking about things like the ozone layer. Obviously, now we’d look at climate change instead. If we think about efforts to solve climate change, they have involved some degree of state-to-state coordination through international agreements. This hasn’t worked particularly well. They’ve also involved efforts to leverage markets in carbon emissions and so on—to try to to tackle the problem. It turns out that these work pretty badly too. The experience to date suggests that plausibly they might be one part of a bigger solution providing more finely tuned mechanisms of adjustment. However, the fundamental problem of climate change is not that we haven’t created sufficiently sophisticated markets, but that we don’t have any global analogy to the state to try and create the background conditions that would allow these markets to work. What we have instead is a world in which our political imagination has been captured by markets as the obvious solution to big problems. Market mechanisms can solve some problems, but not others, and we need to think about how pressure and coercion might work at the global level. We have sanctions against states who export technologies to other countries we don’t like: why not for climate cheats? We need to think about the national limits to democracy and the blockages within national systems, and try to figure out how to make democratic politics work better when small, concentrated, relatively powerful fossil fuel and carbon interests have an interest in blocking action. Ordinary people have diffuse interests in not having their children and their grandchildren live in a world where they are likely to drown, or expire from heat prostration. Because our imagination has been captured by the market, we find it very, very hard even to articulate these problems, let alone find useful ways to solve them. Here, exercising the kind of imagination that Lindblom is pressing towards would allow us to think better about the relative strengths and weaknesses of these different systems, and how they can combine together. It’s very nicely written. It’s slightly old-fashioned, I would say, in its courtly prose style. He introduces ideas and topics in a very careful, mildly pedantic but somewhat charming way. It would be a great book to teach in an undergraduate class, because it really gets students thinking about stuff that they take for granted. He says we tend to think about the market as this specific and limited set of economic questions, but instead the market is interwoven into our entire society and into everything we do. This is what he means to highlight by talking about ‘the market system’ and not just markets. We, like the proverbial fish, don’t particularly notice it because it’s the water that we swim in, inhale and exhale."