Academic journal article Journal of Markets & Morality

Controversy: Do Market Economies Allocate Resources Optimally?

Academic journal article Journal of Markets & Morality

Controversy: Do Market Economies Allocate Resources Optimally?

Article excerpt

Introduction

As we begin, let me offer some explanation of why I--someone who sees a market economy as a central institution within a free society--am not only willing, but eager, to oppose what is arguably the linchpin concept in free-market ideology: the claim that a market economy makes an "optimum allocation of resources."

The first reason is purely intellectual: The concept is based on an elementary fallacy. The claim of optimum allocation has compelling rhetorical and ideological appeal, but, I believe, the theory underlying a free society should be based on the soundest possible foundation. Most supporters of free-market ideology do not see the fallacy in the claim. I do not doubt that their desire for a sound theoretical foundation is as great as my own, but we differ over what is required for a sound theory.

The second reason is functional in the context of competing ideologies. (There, the theory underlying global free trade is one of the more influential today.) I have become persuaded that the system of free-market thought as we know it--which is essentially a self-contained system that provides an answer to all possible objections--will rapidly become a liability to classical liberalism as an overall theory of a free society. The world is changing so fundamentally that it is becoming necessary to rethink virtually all aspects of social, political, and economic thought. The astonishing technology of computers, robotics, materials sciences, and biotechnology is such that the future offers the prospect of a near-utopia, while at the same time there will be a move to a near-workerless economy. Both aspects will shake societies to their core. When work is largely replaced as a source of income, a catastrophe will result in less-developed economies, where income from work is almost the sole source of support. In the more-advanced economies, the high incomes of those who own or manage the technology and of those who possess high skills may be enough to provide auxiliary service employment for everyone else, but the level of inequality will become so great that a free society will not be able to accept it. Consequently, arising out of technology rather than from anyone's lack of market virtues, this inequality will not be the kind that free-market supporters have been willing to accept as a necessary concomitant to economic freedom.

The world is only a small fraction of the way into the new age. The "old economy" still prevails, for most practical purposes. But the vision of Jeremy Rifkin in The End of Work and The Biotech Century is real, and unfolding quickly. Those who do not begin to think in terms of it will find themselves holding positions that will not only be untenable but that may even become despised among the billions of people to whom the policies will be ill-suited.

In the following discussion, we shall analyze what is meant by the postulate that a market economy makes an optimum allocation of resources. Furthermore, we shall inquire into how this postulate serves as the linchpin to a self-contained theoretical system supporting a laissez-faire view of the market, including a brief excursus on how the concept is fallacious. Finally, before concluding, we shall describe briefly what sort of free-market theory may be called for by future conditions.

What the Claim of Optimum Allocation Means

It is sometimes alleged that the claim of optimum allocation has a purely technical meaning in economics, and that it has nothing necessarily to do with a value judgment of good or best. That is not the way the concept is used, however, in the most common form of free-market, free-trade ideology. In that context, value judgment plays an essential role, and it is in that form that it is problematic.

A point is first made about consumer sovereignty as a description of how a market works. "Neither the entrepreneurs nor the farmers nor the capitalists determine what has to be produced," the great Austrian economist Ludwig von Mises wrote. …

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