Some thoughts on Charles E. Lindblom’s “The Market System”

The Market System: What It Is, How It Works, and What to Make of It is a very good book. Go read it, and enjoy. Lindblom is the epitome of scholarly good faith and rhetorical balance. He presents a fair and intellectually rigorous analysis of just what it is we speak of when we speak of ‘the market’ or, as he calls it, ‘the market system.’ Care is taken to distinguish capitalism from the market system, and to discuss allocative efficiency as something distinct from dynamic efficiency. Lindblom recognises that the market system is a fragile instrument, which cannot work in isolation from a set of other institutions and norms of ethical practice.

This is not intended as a complete review or, God forbid, a precis of the book. It is my understanding that The Market System is by way of being a precis of Lindblom’s life work, and as such the book is as informationally dense as one would expect. It is fairly abstract and theoretical, which I appreciate*, but utterly readable and compelling. There are a few points which I feel need to be highlighted, as they are many important insights I would like to be able to refer back to at a later date. I am going to list some of these insights here, with a short comment:

Markets are about co-ordination.

Society is based on co-ordination. People behave in ways that enable them to achieve common and personal ends. Lindblom distinguishes between two types of co-ordination. One is co-ordination to curb violence inflicted by one person against another. The other, more ambitious form of co-ordination involves people helping each other to accomplish goals.

Co-ordination can be achieved in a number of different ways. One way is tyrannical, that is, it consist of one person telling other people what to do. Another way of achieving co-ordination is democratic, whereby people collectively decide what to do, and which among them shall do it.

Lindblom argues that the market system is ‘a method of social co-ordination by mutual adjustment among participants rather than by a central co-ordinator.’ The market is just one form of social co-ordination, and is not the only form of social co-ordination that takes place without a central co-ordinator. One example Lindblom gives of non-market, co-ordinator-less social co-ordination** is that of people walking down the street without bumping into each other. We observe where other people are heading, we make eye-contact, and adjust our own heading to those of other people, who in turn adjust their heading… und so weiter.

The nature of efficiency

Lindblom defines efficiency as “the ratio of valued output to valued input’. He then presents the argument for ‘efficiency prices’, which was the part of the book I was least happy with. ‘Efficiency prices’ are ratios between different commodities and services determined by good old-fashioned supply and demand, with all the limitations and abstractions of such arguments. I’m not going to discuss it much further here, but I will note that Lindblom is alive to the problems of the ‘efficiency prices’ argument as he presented it. Some of these problems include:

  1. Real market systems contain monopolies that limit the extent to which real market systems can approximate efficiency prices.
  2. Some goods and services are, by their very nature, not amenable to being traded in market systems.
  3. Spillovers, also known as externalities.

Allocative efficiency versus dynamic efficiency.

One way in which markets are about competition lies in their role in dynamic efficiency. This is in contrast with allocative efficiency, which entails that a given set of resources are distributed in a fashion that leads to an outcome superior to the initial condition. Allocative efficiency is about co-ordination.

But Dynamic efficiency, whereby agents change what they supply to the market in response to changes in market demand, is, arguably, about competition. Because it is through competition that those agents that attempt to provide one service at too high a cost are ‘forced out’ and therefore required to provide some other service. The distinction here between co-operation and competition becomes blurred, and might ultimately come down to a matter of nuance and personal values. For example, is it ‘efficient’ if a worker is replaced by a machine that does the worker’s job for less money? Maybe, maybe not, it all depends.

Think social, not economic.

The market system is not something that exists independently of society. The market is one element of the vast and interlocking set of systems that human beings have developed to solve problems of social co-ordination and co-operation. Although we are used to thinking of ‘the economy’ as a separate entity from (say) ‘the Church’ or ‘the state’, all of these institutions impinge on each other in countless different ways. Moreover the way they impinge on each other has changed over time, and this has changed how the market system itself is thought of and (as a consequence) how the market system works.

Islands of hierarchy in a sea of markets.

Lindblom distinguishes between market systems and command systems. He also notes that a great deal of economic activity actually takes place in hierarchical command systems, rather than purely through markets. Corporations exist, and their internal operation is guided through a more-or-less centralised command and control system. Command systems and market systems are two different solutions to problems of co-ordination, and each has their own pros and cons.

Market outcomes are not fair

Because prior determinations (e.g. inherited property, IQ, talent) are randomly allocated, there is no inherent justice in the market system. Market outcomes are as just as the prior determinations that go into them. Because the prior determinations are random at best, or the result of a long history of coercion and violence at worst, then market outcomes are not just.

Elites and mass

Lindblom distinguishes between ‘elites’ and ‘mass’ in both the governmental and market domains. He highlights how the elites – the ruling classes – of both the public and private sector, have successfully obfuscated and manipulated the public, who are rendered ignorant by a constant barrage of advertising and propaganda.

 

This latter point is crucially important. I don’t know if there ever was a golden age of enlightened public discourse, but it is clear to me that the ‘mass’ of the developed world has become more inert and ignorant*** even as it has lost the ability to act as a countermanding power to the interests of elites, whether they be market or governmental. I don’t know what to do about this.

 

 

* I dislike the habit some writers have of peppering their books with Illustrative Anecdotes (Malcolm Gladwell, I’m looking at you Ketchup Boy). Examples are fine, but I’d rather have them presented within a framework of rigorous theoretical argument. Lindblom strikes exactly the right pedagogical pose, at least as far as I’m concerned, but I realise that this fairly abstract approach might not be to everyone’s taste.

** Jesus Christ that’s an ugly sentence. Writing is really difficult.

*** So this is a point that’s been on my mind for some time now. I really, really don’t want to be one of those guys that sits at his computer bewailing how ignorant and stupid everyone else is and how all the bad things in the world are because everyone else is so ignorant and stupid, not least because I recognise that I’m pretty ignorant and stupid myself. Yet here we are.