Third, the market will go wrong if market agents do not take the prices at which they buy and sell as given but rather have some control over the prices at which they transact. The belief that the market is efficient hinges on the absence of market power...
In a fair market agents have no influence over prices. Price is determined purely by the interplay between marginal cost and demand elasticity
First, the market will go wrong if the wealth distribution is wrong. The market judges value by willingness to pay, and the rich are much more willing to pay them the poor, and those without wealth or income have no willingness to pay at all. If your wealth and income are zero, then the market literally does not care whether you live or die--it is of no interest to it at all.
I count seven ways that market economies can and do go badly wrong:
If cows were money (a response to Brad DeLong) [+ Sunday Morning Monetary Theology]
Model Complexity and Prediction Error in Macroeconomic Forecasting (or, Statistical Learning Theory to the Rescue!)
On to your last choice, Karl Polanyi’s 1944 book, The Great Transformation.
The Great Transformation is the sort of book that you will only get after reading it three times. Well, that’s what happened to me. It’s one of these books that have the greatest reputation, but are in some sense hardest to read. But it’s worth reading. It’s really a history of the spread of markets, the spread of the gold standard. It makes a rather important point, especially if you have spent a lot of time studying economics. You tend to think of economics, or the economy, as an independent sphere of society, that economies tend to be self-standing and self-supporting, almost independent from the rest of society. Then you start to say ‘Politicians shouldn’t interfere in the economy, because it worsens resource allocation’, and things like that. What Polanyi’s work underscores is that this is never how an economy has actually worked historically. To use his terms, the economy has always been embedded in society, and that when we try to disembed it from society and treat it like an independent institution – ie not dependent on societies, values and other institutions – then we’re really going to run into trouble, political conflict, social and economic instability and some kind of backlash. I think the big lesson from Polanyi’s work is that, as we keep rethinking the institutions of economic globalisation, we need to ensure that those mechanisms are fundamentally responsive to the values and demands of society and that if we lose track of that, then we risk another set of instabilities and an eventual collapse of globalisation.
Do you want to give a specific example where this is particularly relevant right now?
I think the financial crisis we just went through is a very good illustration. For too long we lived off this fiction that financial markets could exist independently, that they could regulate themselves, and in this fashion they could be a foundation of wealth and well-being. What we found is that actually financial markets, left to themselves, are a very dangerous weapon. They need to be built on top of some very strong regulations and the moment you start talking about regulations then of course you have to ask: what are regulations for? That requires figuring out all sorts of questions. What are society’s values? How much income inequality is desirable or feasible? What should earning differentials be, how much is OK? How much should financiers/bankers earn that is OK? What role should finance play – supporting the real economy, as opposed to the real economy supporting finance? What is the right trade-off between financial innovation and financial stability? The more we allow finance to innovate, the less stability you’re potentially going to have because of the risks that are generated. And each society may have different answers to these questions, and that has very important implications, going forward, as to how much financial globalisation we’re going to have.
I would say that we are making a very big mistake to assume that we can go back to a world of extreme financial globalisation, because that’s inevitably going to leave the regulatory underpinnings of the system very weak; it’s going to set us up for another financial crisis in the future. I’d much rather see us being much less ambitious on financial globalisation and have much more sound regulation at the domestic, national level. So I think Polanyi’s book has very real implications for how we think about the future of financial globalisation.
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