The Beginning of Economic Wisdom

The Beginning of Economic Wisdom

Mini Teaser: Two primers on economics reveal a lingering philosophical divide in the intellectual imagination of our time.

by Author(s): Michael Novak

To enter the world of Charles Lindblom's The Market System is to breathe quite different air. Whereas Sowell operates pretty much within the first realm of economic questions, dealing with some of the perennial realities facing any economy, Lindblom operates rather more in the second realm, the comparative realm, trying to understand "the market system" as one device among others for achieving economic coordination. Although Lindblom has by now given up on his earlier pining for something like a democratic socialist system, in the third and final part of this work he is still inclined to seek "alternative market systems." He even retains a forlorn hope that "an alternative to the market system" can still be found. Unlike Sowell, who emphasizes scarcity and constraints, Lindblom stresses imagination, freeing one's thinking from constraints, and a remarkably rosy ideal of "democracy" within which choices, trade-offs and limits--while they must be faced--are mourned as defects.

Lindblom distinguishes "the market system" from markets, which every form of economy, even socialist ones, must employ. He defines the former as a system of society-wide coordination of human activities, not by central command but by mutual interactions in the form of transactions. He contrasts such a system with the household economy, which may organize the domestic life of an entire extended family but does not extend to the whole of society. He also contrasts it with the isolated black markets a visitor some years ago might have encountered on the streets of China. It is not enough that buying and selling occur; market transactions must coordinate an entire society.

In choosing the "market system" as the heart of capitalism, Lindblom makes a fundamental mistake. It is not the market, nor even a market "system", that most distinguishes the contemporary form of economy we call capitalism. The market is surely an indispensable mechanism of coordination for capitalism but, as Lindblom notes, markets are found in all economic systems. To see why the market system is not the central dynamic, consider Poland after the fall of communism. Suppose that the Sejm (as it did) decreed the abolition of the National Planning Board and determined that, henceforth, prices would be set by the market. Suppose further that it guaranteed private property rights, chartered banks, permitted private accounts, and recognized the legitimacy (even necessity and public benefit) of private profits. Still, if the Polish people had continued to be as economically passive as socialism from 1948-88 had taught them to be, and had waited for the state to tell them what to do next, all these measures together would not have sufficed to engender capitalism. No, capitalism began when, in the first six months of 1990, more than 500,000 Poles started new private business enterprises, and in the next six months a commensurate number did the same. Capitalism begins with the creative act and the habit of enterprise. Lindblom's whole account would have differed dramatically if he had begun with this point. As it is, his account proceeds with a certain impersonality, lack of human feeling and absence of human drama.

Yet it is not fair to tell an author which book he should have written, and there is a great deal in Lindblom's book for which to be grateful, particularly so for readers of Lindblom's earlier, more anti-capitalist books. For instance, in Politics and Markets (1980), a much-discussed book published during the Carter Administration, Lindblom wrote that "the large private corporation fits oddly into democratic theory and vision. Indeed, it does not fit." Coming at a time when the U.S. government had no political difficulty in confiscating hundreds of billions of dollars (styled "windfall profits") from the oil industry, and in bringing the nuclear power industry to a standstill, his book provided a spur, in the name of democracy, for bringing private economic activities under increasing governmental control.

In those days, Lindblom was even willing to lean over so far backwards in his sympathies that he could write:

"A communist intellectual asks: 'What are people free from in the Soviet Union? They are free from exploitation, from all moral oppression, and consequently their thinking and deeds are free from age-old shackles created by the economic, political, and moral rule of the exploiters.' It is not a ridiculous argument."

(My reaction when I first read this was to wish that Lindblom might explain this argument to Anatoly Scharansky.)

Now, however, Lindblom begins by noting the thorough discrediting of communism after 1989 and the subsequent abandonment of socialist economics by democratic socialists in Europe. He confesses that for many years he did not really understand the market system, nor did many of his teachers, and he takes as his present theme many "puzzles" about the market system that still trouble him. In a way, this book can be read as the effort of an intelligent man of the Left to reconcile himself to his ancient antagonist, and to make of that what he can. The reader easily detects the old socialist impulses, however--the tugs, the siren song of the old standard objections. But on the whole his attempt at self-reconciliation is a success.

Socialist ideologues, Lindblom concedes, "have realized that aspiring for a better society is not enough. They have to face the complexities of constructing one." Nonetheless, Lindblom keeps the socialist option open. He even imagines that some nations of the old Soviet Union "may return to old ways rather than continue to suffer the hardships of transition. . . . The end of the story has yet to be written." Since Lindblom approaches political economy as a task for "constructing" a better society, he worries that the success of the market system is too great: "Mainstream economics still stumbles because the market's dazzling benefits are half blind to its defects." He rejects extremists who "perceive in the benefits of the market system only the smoke of their burning disapprobation", for he has lately learned that market successes prove "the obsolescence of tired old attacks" on it. But every time Lindblom is forced to concede merit to the market system, his mind instinctively drives for a debit: "We cannot simply ignore the many highly informed dissenters who believe that experience with the market system has already shown, to anyone who cares to look dispassionately at the evidence, that it has put us all on the road to disaster."

Lindblom also concedes that such democracy as the world has yet achieved exists only in market systems: "Is the market system ally or enemy of democracy? What we call democracy does not exist except in market societies; yet the influence of money in politics arouses suspicion that none of these societies are very democratic." The market system "can coordinate human behavior or activity with a range and a precision beyond that of any other system, institution, or social process. But it is a harsh and often cruel coordinator." And again in praising the market system: "Historically, it has supported democracy--there are no democratic nation-states except in market societies--but it has sabotaged important democratic features of ostensibly democratic states." And in his conclusion: "My thesis is that there are great unsettled issues about a place for the market system in the future of any society."

In one sense, this is obviously true. Sowell would feel no need to write Basic Economics and expose scores of public "fallacies" if there were not in the public mind unsettled issues about market systems. But Sowell assigns many of these issues either to the nature of reality itself, which demands ever shifting patterns of choice about scarce resources and alternative lines of action, or to mistakes and illusions in the minds of opinion leaders (probably the same ones Lindblom refers to as "highly informed dissenters"). By contrast, Lindblom still doubts the value of market systems for human flourishing.

Lindblom's short book is divided into three parts: how the market system works, what to make of it, and, as we have noted above, alternatives to it. In less than a hundred pages of part one, he describes how markets "coordinate" society, although he often slips into referring to mere incentives as forms of "control"--trying to stuff market economies into the same mold as command economies. He also struggles to understand how the market system fits into the other social systems of the free society, for he notes that not all matters (science, welfare, religion and the arts) are ruled by markets or market principles. The "domain" of the market system is wisely limited.

Lindblom also devotes a chapter in part one to the role of the corporation and the enterprise. He sees entrepreneurs and corporate executives as the privileged decision-makers regarding "what cooperation is to be attempted and by what means." They choose to use these resources to produce these goods in this particular fashion. Lindblom is anxious to be fair:

"I think we can do better than such popular formulations as that corporations today rule the world (they do and they don't), that enterprises are governed by irresponsible rapacious executives (often the case but of less significance than might first appear), that, for good or bad, corporations have displaced the market system (a wild exaggeration), or that they can be trusted to govern themselves (power corrupts)."

Essay Types: Book Review