Arnold Kling  

What is a Market Economy?

Regulatory Re-Org... Why Hitler Chose the Jews...

Troy Camplin writes,

In the "Acharnians," Dicaeopolis is in Athens and complaining about the war and how he is "longing hopelessly for peace, loathing town and homesick for my village . . . where you don't hear cried of "Buy my charcoal," "Buy my vinegar," "Buy my oil." My village doesn't include the word "buy" in its vocabulary but simply produces all that's needed --- with not a "buy" person in the offing." (7, Paul Roche, tr.)

Dicaeopolis here is complaining about all the people in Athens trying to sell him things. Realistically, did these people who were trying to sell him charcoal, vinegar, and oil get those goods through plunder? Or did they grow and produce those things?

Dicaeopolis could have complained about finding sellers of goods in Moscow in 1950, but that does not mean that he would have been in the midst of a market economy.

For more pushback against my view, see Gavin Kennedy, who writes

My own research (unpublished) on the ‘Pre-History of Bargaining’ supports Adam Smith’s speculative assertion on the longevity of the said propensity, and its earlier evolution from teamwork for unequal shares of meat from kills to reciprocity behaviour (what I call quasi-bargains) evident not just among humans –and presumably the hominids before them – and in the behaviours of primates.

I am reading just now a most valuable book bordering on these issues, edited by Paul J. Zak, Moral Markets: the critical role of values in the economy (Princeton University Press), which develops themes contributing to an understanding of the social-evolutionary importance of humans establishing the criteria by which fairness and unfairness is mediated in primate and human relationships.

But criteria of fairness and allocating shares within a small group don't necessarily get you to long-distance, voluntary trade. Instead, the most natural thing to do with your rules for sharing meat is to apply them when you raid the next village as rules for sharing plunder.

It could be that my views of economic history are colored by ignorance. But one thing that is going on is that I have a very strict definition of a market economy.

1. Are most goods and services you consume (a) produced in large part by strangers; or (b) produced by someone in your household, clan, tribe, or village?

2. Think about goods or services that had to travel a long distance. If something was imported from a long distance, did it travel to you (a) guided solely by the price system; or (b) somewhere on the way was it moved by imperial command? If something ever was distributed as plunder or collected as tribute, then the fact that it eventually wound up for sale in a market does not make it a market economic transaction.

3. Do workers (a) labor by choice, with the ability to freely change occupations; or (b) is some important production done by subjects of authoritarian rulers, slaves, serfs, or members of a restricted caste?

To satisfy a strict definition of a market economy, one has to be able to answer (a) across the board. You need a wide trading system that takes advantage of specialization and comparative advantage. Moreover, the trading system must be based on approximate parity of political power, rather than on coercive exploitation.

Now, think about ancient Egypt, the Incas, Greece, Rome, the Muslim empire, the Silk Road, the Spanish empire in the New World, the early European empires in India and the Far East, or the antebellum South in the United States. Were there markets and was there trade? Absolutely. Did they meet the strict definition of a market economy? My sense is no.

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CATEGORIES: Economic History

COMMENTS (14 to date)

I've noticed in your rhetoric that you have increasingly moved from arguing that there was no trade that wasn't plunder based (which you still manage to keep) to there wasn't a free market in the strictly modern sense. I've consistently argued that there was trade, including trade among city-states, in ancient Greece.

If I made the argument that we only have transportation in the 20th century because by my definition of transportation you have to have wheels, a mechanical motor, and a mechanical guidance system, then you would rightly argue that I have too narrow a definition of transportation. You could point to horses, stagecoaches, and chariots -- to which I could argue that they weren't as efficient forms of transportation as what I listed, that they don't fit the strict criteria I have set, etc. Does that make a horse any less a form of transportation? Of course not.

If you insist on your number 1, a, the U.S. did not have a market economy until sometime in the 20th century.

If you insist on 2, a, then I provided evidence from my text -- parts you managed to leave out that provided much better evidence than the first quote.

If you insist on 3, a, there was no market economy anywhere prior to the 19th century (though your 1, a already restricted it to the 20th century).

Now, I do think we should insist on at least your 2, a and 3, a as being preferably to their alternatives. But I also think you are insisting that horses rarely transported anyone anywhere.

The problem with a too-strict definition of something is that it blinds you to the presence of elements of that thing in other places and other times. I am convinced that market economics is a natural, emergent feature of free human interactions. Thus, we see it when the right conditions occur. Those conditions may be in a restricted group of people (Athenian citizens, for example -- which would not have included women or slaves), but the presence of those conditions for that group nonetheless results in the emergence of a market economy for that group. Is it a pure, utopian market economy? Absolutely not. But utopia is not an option.

Mitch Oliver writes:

I agree with Dr. Camplin that your definition of a market economy is much too strict. By the definition you've given (requiring most goods to be produced by strangers, travel of goods based solely on price, and production by only free labor) we don't have a market economy today. Given the globalized nature of the economy there are undoubtedly goods available on US store shelves that were in part moved by edict and produced by those without a choice.

[hand-waving-a-bit]It might be better to consider "marketness" a characteristic of an economy, rather than an either/or. Using this we could say a that a subset of an historic economy met the market charactersitics. In Dr. Camplin's example, Athens had a market, whereas Dicaeopolis' village did not. Thus the "marketness" of the Greek economy was small.[/hand-waving-a-bit]

I guess that raises the question, does the above tell us anything useful?

JRip writes:

Dear T.C. & A.K>

Why make this an "It is a market economy" vs. "Does Not qualify as a market economy"?

Make yourself a "Market Economy"-O-Meter and rate things as a percent of perfect.

So we are in a 95% (you pick a %) Market Economy today. Not 100%?
Just look at the oil imported by the USA.
How much of the petroleum in world trade today is pumped or not pumped by imperial command?

Bob writes:

Excellent addition, Mitch. The idea of a market continuum provides a bridge between the positions of Arnold and Troy. Nature is rarely either/or on large scales. If markets are the product of a natural, emergent process, then I think a continuum (admitting the possibility of discontinuity at times) offers an aid to understanding the market at various times in its emergence.

Nathan Smith writes:

Let me extend a point made by Mitch:

"Given the globalized nature of the economy there are undoubtedly goods available on US store shelves that were in part moved by edict and produced by those without a choice."

I'd go further and say that just about nothing available on US store shelves doesn't have a bit of coercion in its value chain. Indeed, it may be more likely that the oil, charcoal, and vinegar for sale in Athenian markets was coercion-free than the goods US stores sell (though I'd have to know more about the extent of slavery-- which certainly existed-- in ancient Athens).

The key is to think about supply chains.InsertTextHere It's a key insight of Austrian economics that advancing economies are characterized by increasing "roundaboutness" of production processes. The sellers in the market in Athens may well have been selling oil made from olives grown on their own land. From grove to home-made olive press to market: a short production chain. But it is essential to modern efficiency that production chains are more complex. The olive press is made in China, the bottles and labels somewhere else, and so forth. And these long supply chains give coercion-tainted goods many ins.

Coercion can come from (at least) two sources. First, as international trade extends supply-chain tentacles ever further afield, more and more of our goods can trace at least a part of their varied origins to unfree foreign regimes. Natural resource producers are particularly unfree, and since most stuff has to be made of something, a lot of goods will fail the coercion-free test that way. Second, the US government engages in extensive interference in the economy, subsidizing this and taxing that and providing basic research etc. Most produce will not be coercion-free because farming is so extensively subsidized that some of the value-added in the goods on supermarket shelves will have come from taxpayers.

Arnold's argument has the feel of a sort of Lockean idealism. I don't think he realizes how quixotic that is, but far be it from me to denigrate it. I think his modern/pre-modern contrast is overdrawn and possibly even has it backwards, but an extreme hypothesis may play an admirable role as impetus for a valuable debate, as this one has done.

liberty writes:

You forgot to say whether prices are entirely in control of buyers and sellers or whether they are set, restricted or made rigid by a central force.

But, I agree that it must be a spectrum of sorts - it isn't black and white - for example, there are gray and brown markets!

Anyway, I think some production, prices, quotas, subsidies, restrictions and regulations have almost always existed.

Some portion of the population often was banned from keeping property (and often treated as property themselves, as in slaves and serfs); some prices and production were centrally set, because the ruler determined that it was too important not to be; some quotas were set on foreign trade and often prices too; and often regulations were put on the few firms that had the most freedom and protection of property right and those firms were also subsidized.

Entrepreneurs from outside the certain clan that ran those few firms were often feared. It may have been fine to run a small family business, but grow too large and you become a threat to those historically powerful few, and the ruling elite, and by extension, to society at large.

I actually agree with you, Bob, that there is a continuum. That's actually what I've been arguing. I would love to have a market that met all 3 of his criteria -- but no market does or ever has. Which doesn't mean we shouldn't aim for the best. Still, if we proclaim that we don't have something unless it is completely pure and pristine, then we will never have it, and one can never really understand where the thing you are striving for even comes from (or if it comes from anywhere). One of the main (and important differences between free markets and Marxism is that free markets do emerge naturally, and have their basis in the real world, while Marxism is a fabrication with no basis in the real world. I don't see where it gets us to insist that free markets, like Marxism, must be pure to exist, and thus must appear, like magic, from nowhere.

Mark Koyama writes:

I agree with many of the comments above. A market economy is a continuum. In any given economy, some individuals will be more or less involved in market trade with strangers than others. It makes no sense to have a strict either/or definition of a market economy. In ancient Greece or ancient Rome, some major aristocrats may have been largely involved in plunder economies since much of their welfare may have derived from conquest and because they may have owned land or mines worked by slaves. Nevertheless, within those same economies there were also small farmers and merchants who were primarily engaged in market trade based upon voluntary exchange and guided by prices.

Furthermore, since the emergence of markets was a gradual process and did not occur suddenly or all at once, there may have been more of a market economy in AD 0 then there was in AD 700, and more of a market economy in AD 1250 than in AD 1650. Therefore Arnold's claim that the market emerged with Adam Smith in the later 18th century is arbritrary.

There is an interesting unpublished PhD thesis by a colleague of mine which uses price data to argue that the medieval economy had more integrated prices than did the early modern European economy.

Unit writes:

What about coinage? It seems to me money was freer in the past, i.e. more subject to market forces.
Certainly in the middle-ages, but I don't know about Greek and Roman times.

Also, the drug trade seems to indicate that market forces are stronger than surrounding laws. You mention moscovites selling goods in the 1950, wasn't there a black market?

Lord writes:

Clearly, no agrarian economy can meet the first condition and most people were farmers until the the 20th century, no non-democratic economy can meet the second even if the imperium hired market agents to provide for them, and no traditional society can meet the third even if there were no other occupations to change to.

Now if what you want to say is what Heilbroner said, that before Smith there were no such things as capital, labor, and enterprise, because they did not exist as free independent agents, I wouldn't disagree. That doesn't mean markets didn't exist, money didn't exist, or exchange didn't exist.

Michael Sullivan writes:

I think these are good measures, but I have to agree with Mitch Oliver that by your definition, taken strictly, there has never been a market economy in the US.

Even ignoring outliers and looking at the preponderance of goods, criteria 3 was not satisfied before 1863 at a minimum. I think I can make a pretty good case that jim crow still qualifies as oppressive exploitation marking for a significant portion of the economy, so that brings us up to the 1960s at least before we meet criteria 3 for 99% of our goods, let alone 100%.

So what you're saying is that when Smith wrote, there really weren't any market economies, and wouldn't be for at least another 100 years.

I don't think this jibes with most people's sense of "market economy". I think you need another term for the state you are describing.

Lord writes:

My main complaint is referring to these as plunder economies. Plunder, like robbery, only really works if your neighbor is wealthier than you. Otherwise what you are doing is protecting yourself, and it is easier to produce more than steal it.

These did have some specialization of labor, generally over climate, culture, geography, and resources, Egypt in grain, Greece in wine, olive oil, pottery and statues, etc. Within cultures there was specialization by priest, warrior, and farmer. Craftsmen, merchants and traders were there along with poets, playwrights, and scholars in small numbers. In agrarian civilizations, there is little advantage in specialization. Machines are primitive or nonexistent. The scale of enterprise is small as well as potential markets.

Lord writes:

Better to call them subsistence economies or simply agrarian ones.

Jon writes:

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