The Normative Implications of Market Ontology

Few subjects in the study of human societies are as contentious and timeless as the proper division on the life of a nation between the public and private spheres. In examining the proper role of the state in the economy as seen by Smith, Weber, Schumpeter, and Polanyi, first it is necessary to outline the ontological basis upon which these authors base their understanding of the economy. The most pertinent implication of the ontological basis of the authors' arguments is that it may grant what are fundamentally normative arguments the appearance of a foundation in empirical reality.  In the words of a recent article commenting on the impact of contemporary undergraduate economic education on policy preferences, writer Christopher Hayes observed that "normative arguments became positive ones." 1   The resurgence of neo-classical thinking in the wake of the post-war economic slowdown and later collapse of communism represent a shift away from what had been till that time a trend towards consensus on greater state involvement in the economy to mitigate the social impact of market capitalism.

The Anglo-American embrace of the "self-regulating market" in this period and the wider dissemination of the precepts of market liberalism best demonstrated by the Washington Consensus  are largely based upon a Smithian ontology at odds with the Keynesian paradigm dominant in the immediate post war period.  Consistent with the ontological understanding provided by Adam Smith in The Wealth of Nations, the Washington Consensus 2 rejects state intervention in the national economy, arguing for lazziez-faire state policy in order to allow individuals to maximize their utility.  Smith sees the ontological basis of the market economy in what he calls "the propensity in human nature to exchange" and the division of labor derived as a consequence. 3  In Smith's understanding of human behavior man by nature seeks to maximize utility, and it is through the aggregation of individual utility maximizing behavior that human economies develop.  The ontological basis of economic behavior and institutions as enunciated by Smith is endogenous, deriving from individuals acting of their own volition.

    This ontological understanding, that economic organization derives from the aggregation of individuals acting to maximize their utility, grants the unregulated functioning of the market democratic legitimacy.  As democratic regimes are legitimated because they function through the aggregation of preferences freely expressed with ballots, so does the market. And in several important aspects the market supercedes the election as a measure of public preference, making it a more liberal institution through which to order society than an election. First, measures of public preference captured through the use of egalitarian elections incompletely capture the preferences of a population because they represent a punctuated estimation where the market allows public preference to be expressed on a near real-time basis.   Second, where elections as measures of the aggregated preferences of a population account only for dichotomous preference, markets are able to account for intensity of preference through the price mechanism rendering a far more transparent estimation of the true preferences of a given population.  Third, where the election bind minorities to the will of majority, markets as the product of voluntary exchanges between legally equal parties, allow individuals to be free of external coercion as exercised by the democratic state.

In accepting the ontology presented by Smith, the measurement of public preference through democratic elections becomes illiberal, at least in reference to the superior mechanism provided by the market, thus state intervention in the economy represents unnecessary coercion.  Because the basis of the market in Smith's understanding is the aggregation of individual preferences, the construction and maintenance of economic institutions is endogenous, and "self regulating."  Exogenous interventions by the state interfere with the operation of the market decreasing the economic output of a population, inhibiting the liberty of individuals, and making them less well off.  Expanding upon the notion of the endogenous organization of economic life, inherent in Smith's ontology is the assumption that man in a state of nature would organize economic life solely around his acquisitive nature. That more is better than less, ceterus paribus; man will prefer economic institutions that provide him more material possessions rather than less.

Smith operates on the assumption of the liberal organization of collective institutions that all men are of equal stature and possess equivalent information, and it is in this that Smith concedes to state intervention in order to ensure the children of the common man are granted rudimentary education.4  Intervention by the liberal state is only justified in cases where the foundations of liberal order are imperiled. Under the free operation of the market, the autonomous and egalitarian intercourse of individuals allows them self-determination more so than under market regulating institutions created under the guise of the democratic state. Personal liberty is instrumental rather than intrinsic, thus Smith's final objection to state intervention, that the labor of the state is unproductive and must be supported by revenue.5  

    The conception of personal liberty, and the consequent perfection of the liberal order, as instrumental rather than intrinsic lays the foundation upon which the perceived illiberality of the state is constructed.  State intervention in the economy is illiberal not only because it inhibits the natural tendency to exchange, diminishing the total output of a nation, making all less well off. Also, because capital and labor employed under the aegis of the state is unproductive, the revenue needed to support state institutions must detract again from the total wealth of a nation. Thus, the expense of state intervention is not only the opportunity cost incurred by the restriction of the natural propensity to exchange, but also the revenue subtracted from the wealth of the nation in order to sustain the state. By subtracting from the wealth of the nation, the extraction of revenue by the state detracts from the utility of citizens, this when personal liberty is seen as instrumental the extraction of state revenue is by default illiberal. When personal liberty is instrumental, the diminution of the state results in the increase of personal liberty.  The ideal liberal state is that which intervenes least in the endogenous, democratic operation of the marketplace, imposing the least demand for revenue, constituting something akin to feudal corvee obligations as labor is believed the basis of value, upon its citizens.  Inherent to the ontology of Smith is the belief that the construction of economic institutions, and progress, is inherently the result of endogenous action.

    While taking issue with the social sustainability of the unregulated market system, Schumpeter accepts as a first principle the endogenous construction of economic systems.  Schumpeter identifies capitalism as an evolutionary phenomenon defined by the process of creative destruction, the fundamental impulse of which is driven by endogenous innovation as found in the application of new methods, markets, and materials to the underlying natural structure of the market. 6  Schumpeter takes issue with the operation of the capitalist system not on economic, but rather on social grounds.  While not seeing exogenous social constructions as running through the capitalist system, Schumpeter does see that capitalism is sufficient to increase the total output of a population, thereby increasing liberty as this is defined in instrumental terms, but unable to overcome the exogenous collapse of protective institutions.  The death of capitalism results not from economic incapacity, instead resulting from exogenous social revolution derived from the social consequences of economic dislocation.7  

Schumpeter is a reluctant socialist, believing that in order to preserve the core of capitalism, i.e. the process of creative destruction, it is necessary to ensure that it not generate within concurrent social process such antagonism as to cause its destruction.  To allude to a biological parallel, in order to survive the human body must process glucose to generate the energy essential to life through a process of creative destruction however the excessive consumption of glucose causes the other organs of the body harm.  As the body is exposed to excessive levels of glucose, it self regulates through the production of insulin, this corrective response, if excessive, makes impossible the processing of glucose, causing the slow shutdown of body functions.  In extreme cases, death ensues.

It is in order to prevent this sort of autonomic response that Schumpeter argues not only for state intervention in the national, but also the integration of various aspects of economic life into the machinery of the democratic state.  Where Schumpeter willingly accepts that economic life is constructed endogenously with the autonomy of utility maximizing rational actors constrained only by market imperfections and imperfect information, he calls into question the classical model of democracy whereby the electoral action is seen to represent the same manner of preference revelation as in the market.  The inference that Schumpeter draws from the modeling of electoral action in democracies as being constituted more transparently of the act of delegation rather than preference revelation is that democratic practice falls far short of the classical democratic ideal. 8  

Electoral action in representative democracies is not constructed from the aggregation of fully actualized preferences of the constituent members of a population, rather electoral life is constructed as a competition for leadership in which individuals delegate their authority to those they believe will grant them the greatest personal gain.  In this sense the essence of justice in a political system is not the liberal ideal of personal freedom to choose but the more mundane realization of personal gain by whatever means that may come. Thus, through the conceptualization of personal freedom in instrumental rather than intrinsic terms, the ideal of classical liberal democracy yields to benevolent technocracy.  Personal freedom constructed in instrumental terms is concerned less with agent than outcome, so long as individuals are able to maximize utility they are perceived as free.  State intervention in the economy is necessary to save the soul of capitalism, the process of creative destruction.  According to Schumpeter, while preferences are formed endogenously to the individual, it is possible for the execution of individual preferences in the economy to occur exogenously to mechanisms operating at the individual level.  Where Smith and Schumpeter accept that the market economy is the result of endogenous action, the development of the market economy resulting from the structural "propensity to exchange" and utility maximizing effectively creating a single equilibrium that is determinative, Weber contests this presentation.

In describing the "economic sociology" outlined by Weber in his Theory of Social and Economic Organization, Talcott Parsons writes that Weber believed that multiple equilibria are possible in the construction of social institution, and further than human institutions are inherently instable. 9    Weber studies institutions in order that he might through a comparative method distinguish social phenomena that are fundamentally invariable, which are in a sense structures, from such variations as exist in the empirical world, these being constituted as institutions.  Where the ontology of Smith and Schumpeter operated from the first principle that the market as an institution derives from a structural tendencies to exchange and the rational action of utility seeking individuals, Weber sees underlying social institutions, not structures, as the causal mechanism behind the rise of the market economy.  In Weber's understanding, the rise of the market economy results not from the propensity of exchange, but rather from the exaltation of the money unit, facilitating the social adoption of formal rationality. 10  

Weber disputes the presumption that individual economic action results from the utility maximizing behavior of individuals, believing that individual preferences are to some degree socially constructed by the prevailing values of a society.  Further markets as human institutions are constructed exogenously to individuals, resulting not from the democratic aggregation of individual preferences, but rather from the subjugation of substantive rationality to formal rationality due to the exogenous influence of the development of capital accounting. Weber distinguishes between formal rationality and substantive rationality by identifying formal rationality as that which is calculable either in money or in kind, while substantive rationality is constituted of non-calculable values, such as social justice or equality. 11  Weber holds that there is no original economic state of nature, thus negating the notion created by Smith and Schumpeter that political control over the economy, as in intervention by the state in the operation of the market, constitutes the illiberal imposition of coercive institutions over the liberal state of nature.

Quite the opposite of imperiling the liberal ideals of equality and justice exemplified in democratic order, state intervention in order to prevent the destruction of substantive rationality though the overzealous application of formal rationality to social life maintains the liberal order.  As the ontology presented by Weber views the formation of the capitalist system as exogenous to the individual, built upon the exaltation of the money unit of account and ascendance of formal rationality in human life, the intervention of the state on economic life while impeding liberty as cast by formal rationality, preserves liberty as presented in substantive rationality.  The capitalist order as constructed in the reductionist logic of the unencumbered marketplace, thus does not rise to the ideal of democracy through endogenous aggregation of interest, rather being constructed exogenously the market imposes its sparse logic upon individuals, rendering the richness of human life into simple money units of account.  Polanyi builds upon the ontology of exogenous construction of the economy, expanding upon the rigorous theoretical analysis of Weber through the use analytic historical narrative to build an empirical case against ontology of endogenous construction as presented by Smith.

Polanyi depicts the conflict between state and market as an Oedipal struggle in which the contemporary conception of the market, empirically resulting from the marriage of state and society, has through exogenous passage of time and the creation of an ontology of endogenous construction lost knowledge of its true lineage.  Denied the knowledge of its patrimony, the market seeks to overthrow its father, the state, and take its own mother, society, in unnatural matrimony.  Confronting the construction myth presented in the ontology of Smith et al in which the market naturally arises from a "propensity to exchange", Polanyi traces the origin of the Industrial Revolution and modern capitalism to the triumph of the formal rationality of the enclosures over the substantive rationality of feudal order presented in the commons. 12  This is the great transformation, the subjugation of substantive rationality to the demands of formal rationality, the diminution of the intrinsic value of man and nature to their instrumental value in the market economy.   Thus, the market is transformed from the salvation of the liberal ideal of personal freedom and the value of the individual, to its destroyer.  

Far from the market representing an economic state of nature, in which the principle of self interest dominates, Polanyi in studying pre-modern economic orders finds two foundational principles: reciprocity and redistribution. 13  Nonexistent is the endogenous construction of economic life deriving from the aggregation of individuals seeking to maximize their personal utility.  Rather, the self-interested formal rationality presented by Smith et al as the ontological basis upon which human economies are sustained, is subjugated in a state of nature to substantive concerns in order that society might survive. The market does not represent an approximation of man in a state of nature, it represents the overthrow of the natural order resulting from the exaltation of the money unit of account to the detriment of the substantive state of society.  In the state of nature, substantive concerns triumph over those of formal rationality, thus the intervention of the state in the economy does not represent the unnatural imposition of coercive order over the liberal nature of man.  

Dealing more specifically with the reason for which state intervention in order to maintain the substantive state of society, Polanyi takes issue with the notion of the "self regulating market", attributing to the Welsh utopian Robert Owen the discovery that the market, left to its own devices, would create enduring evils in society. 14  The ontological foundation of the endogenous construction of the economy, and its subsequent integration into the ideology of liberalism is called into question.  In the ontology of exogenous market construction cast by Weber and Polanyi, the aggregation of individuals acting to maximize their utility does not result in the maximization of societal utility. The reason for this lies in the recognition that even in the case that capitalism can be shown to maximize formal utility, the triumph of formal rationality in the self regulating market requires the commodification of so that humanity is valued instrumentally rejecting the intrinsic value of the individual.  Chronicling the impact of the Speenhamland and related legislation, Polanyi notes that the effect of the commodification of labor is detrimental to the substantive reality of society, impacting those who labor for wages in ways that are fundamentally illiberal, denying their individual value. 15  Economic liberalism, as typified by the triumph of formal rationality, by necessity destroys political liberalism, as typified by the triumph of substantive rationalism.   In order for liberal democracy to be saved, the liberal market must be subject to state intervention so that the intrinsic value of the individual may be maintained.  

To conclude, while the differing ontologies of the endogenous and exogenous construction of economic institutions are presented as empirical theory, they carry, as Hayes noted, normative implications embedded within them.  Thus, the application of these differing ontologies to contemporary discussion of the proper role of the state within the market carries normative implications.  By accepting the formal rationality presented as the basis of liberalism by those who adopt an endogenous ontology of the market, the substantive rationality of society is rejected. In disposing of substantive rationality as an antecedent to formal rationality, we relinquish the intrinsic value of the individual, whether conceived spiritually as a soul or as a secular notion of humanity, to the dustbin of history.  Such it is that the contemporary dominance of the ontology of endogenous market construction imperils the liberal order.  Historically, societies have either adapted protective mechanisms by which the substantive reality of human life is maintained, or the intrinsic value of the individual having been stripped away, they fall to illiberal orders.  In order to maintain the liberal state, the state must intervene in the economy, so that the substantive basis of society thus saved, the fruits of formal rationality may enrich human life.

Citations:

1.  See Hayes (2006).  This article greatly influenced my own approach to the assigned writings
   
2.  See Williamson (1990).  10 in total, the policy prescriptions suggested by Williamson aim to reduce the role of the state in Latin American economies, with the notable exception of educational and healthcare spending.
   
3.  See Smith, Book 1, Chapter  II.
   
   
4.  See Smith, pgs 990-991.
   
   
5.  See Smith, Book 2, Chapter III.
   
   
6.  See Schumpeter, pgs. 82-83.
   
   
7.  See Schumpeter, pg. 61.
   
   
8.  See Schumpeter, Chapter XXIII.
   
   
9.  See Weber, pgs. 27-28.
   
   
10.  See Weber Chapter II, in particular pgs. 164-176.
    
    
11.  See Weber pgs. 170-171.
    
    
12.  See Polanyi, Chapter 3.
    
    
13.  See Polanyi, Chapter 4, in particular pgs. 49-55.
    
    
14.  See Polanyi. Chapter 11.
    
    
15.  See Polanyi, Chapters 7 & 8.
    

Hayes, Christopher. (2006) "What We Learn When We Learn Economics" In These Times.(Nov.) Accessed online: http://www.inthesetimes.com/article/2897/ on Feb. 11, 2007.

Polanyi, Karl.  (2001) The Great Transformation. (Boston: Beacon Press)

Schumpeter, Joseph A. (1950) Capitalism, Socialism, and Democracy.  (New York: Harper
Perennial)

Smith, Adam. (2003) The Wealth of Nations. (New York: Bantam Books)

Weber, Max. (1947) The Theory of Social and Economic Organization. (London: William
Hodge and Company Limited)

Williamson, John (1990), "What Washington Means by Policy Reform", in J. Williamson, ed.,
Latin American Adjustment: How Much Has Happened? (Washington: Institute for
International Economics)