Editorial
Confessions of a Market Fundamentalist
by Fred E. Foldvary, Senior Editor'Market fundamentalism' is the belief that free markets provide the greatest possible equity and prosperity, and that any interference with the market process decreases social well being. The term, evidently coined by the Nobel-prize winning economist Joseph Stiglitz, is now widely used by those who disparage market fundamentalists. They want to associate market fundamentalists with religious fundamentalists who rigidly and blindly stick to a creed.
In his book published in 2002, Globalization and Its Discontents, Stiglitz believes that the prevailing economic ideology today is a flawed 'free market mantra' that he calls 'market fundamentalism,' which came to dominate policy thought during the 1980s. This doctrine, according to Stiglitz, calls for the immediate elimination of trade barriers, maximal privatization, and the full liberalization of markets, i.e. eliminating price controls. Stiglitz claims that the model that free-marketeers work with is flawed, presuming perfect competition and perfect information, which does not apply in the real world.
But the situation is really the opposite. The advocates of intervention excuse intervention because competition and knowledge are not perfect. But true free-marketeers are not idiots; they know that perfect knowledge does not exist. Indeed, free-marketeers argue in favor of markets precisely because no central authority can know everything about the economy. Dispersed, incomplete, and changing knowledge implies that it is better to have decentralized decision making, where errors create only local and temporary trouble such as a failed enterprise.
Moreover, the term competition in 'perfect competition' has a peculiar meaning in economics. 'Competition' in this context means 'an absence of pricing power.' 'Perfect competition' means only that there is a complete absence of an ability to set a price, as happens when a typical investor buys 100 shares of a widely traded company. If you want to buy the shares now, you have to accept the price of the market; you have no power to set a different price.
This is a totally different meaning than what most folks think of as competition in the market or in sports. In sports, a competition implies rivalry -- if one team wins, the other must lose. If one firm gains market share, the others lose market share. Economic rivalry exists also when firms do have pricing power. Where there are a few firms, there can still be rivalry, as each firm tries to maximize its profits and market share. This is the real competition in a market economy.
Stiglitz, who was the chief economist at the World Bank, quite rightly criticizes the policies of the IMF, but he confusingly believes that the IMF's ideology is 'market fundamentalism.' The IMF is inherently governmental. The IMF bails out bankrupt governments which have huge budget deficits. The financial instability treated by the IMF is caused by the monopoly control of fiat money by governments. The IMF intervenes to treat problems caused by intervention.
Following Stiglitz, many market critics now label free-marketeers as 'fundamentalists' who are allegedly as inflexible as religious fundamentalists. For example, financier George Soros in his book The Crisis of Modern Capitalism says the chief danger to global economic stability is 'market fundamentalism.' According to Soros, market fundamentalists believe that the common interest is best served by individual decision making, and that collective action distorts the market process. Soros believes that financial markets are inherently unstable, and that market fundamentalism has made the global economy unsound and unsustainable. To remedy this, says Soros, we need global decision making by an international authority.
Such critics don't really understand the free market, however successful they may be in their financial enterprises. Much of the decision making in the market is collective. Partnerships, cooperatives, corporations, and associations make their important decisions in groups such as a board of directors or by a vote of the owners or members. The important individual decision is whether to join a club. If one voluntarily joins, one agrees to the rules and the collective decision process. This is voluntary collectivism rather than that imposed by government force.
Are financial markets inherently unstable? Economies are indeed unstable, as we saw with the crashes of East Asia, Russia, and Argentina during the 1990s, and the Great Depression of the 1930s. But the world's economies have not had truly free markets. Markets have been distorted, twisted, and skewed by government intervention. Restrictions and imposed costs pervert market signals such as prices, interest rates, and profits. In a pure market, such signals create stability by allocating scarce resources to where they are most wanted. But today's signals are altered to reflect government fiat. That is why today's markets are unstable and also larcenous. A global authority that intervenes into markets could make the instabilities even more destructive.
Critics of the free market are confused, thinking that today's markets are free. An example is the article, 'Poverty, Market Fundamentalism and the Media' by Palagummi Sainath, AlterNet (www.alternet.org) June 19, 2001. He criticizes the activities of the United Nations, the World Bank, and the IMF for failing to eliminate poverty. But these are institutions whose members are governments. Critics of markets call for international decision making, and then blame the outcomes of such international institutions as the IMF on market fundamentalism! In a truly free market world, there would be no governmental IMF or World Bank.
In his review 'The straw man of market fundamentalism' in Economic Affairs 12/01 of Just Capital: The Liberal Economy by Adair Turner, Samuel Brittan observes that 'market fundamentalism' is a straw man, because true market fundamentalists have little political influence. Government officials call the system a 'free market' when in fact there are massive interventions that have a huge impact on the economy.
My belief that unhampered markets work well, and that intervention makes outcomes worse, is based on the logic and evidence of real economics, not the straw-man doctrine of perfect knowledge and zero pricing power.
Critics of markets confusingly believe that governments need to correct market failures, and that the policies of governments are free market! In contrast, true market fundamentalists have the consistent and clear belief that markets are voluntary, and so the imposed policies of government are interventions and not part of the market. My mind rebels against cognitive dissonance, the belief as true of contradictory ideas.
That is why I proudly confess to being a market fundamentalist.
Copyright 2004 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.
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