There is so much excellent analysis at the Crooked Timber website these days, I never get around to linking to all of it. But a comment made by Bruce Wilder on a post by Henry about the strange Non-Death of neoliberalism is so well crafted, I'm going to have to quote it here. And the whole thread is worth reading too.
I do sometimes argue that the static allocative efficiency of markets, which economists traditionally focus their attention on, is less important in practice than the dynamic technical efficiency of adminstrative organization and technology-embedding capital. And, I am wont to point out, for example, that the recent breakdowns in mortgage origination and mortgage-backed securitization were, at their cores, breakdowns in administrative processes and procedures; as such, trying to force these square pegs into the roundholes of the canonical catalog of “market failures” risks misunderstanding the problems and mis-prescribing remedies.
In the comment above, though, I was using a much broader form of this complaint. (I really only have the one opinion; it’s just a very elaborate opinion.) I wasn’t saying that adminstrative organizations have advantages over markets. I was saying that theimplicit neoliberal claim that markets exist, is, itself, objectively false in many cases, where neoliberals advocate “market-friendly” or “market-oriented” policy. There’s no actual market there. We are so used to the market as metaphor, we cease to recognize that it is a metaphor (and not a very good one, in many cases).
Markets—actual markets—exist, but they are rare. There are financial markets, commodity markets and auction markets, but most of us don’t have much contact with these. We go to the supermarket, and that is a definitely a metaphoric use of “market”. In most of our economic interactions, price is not a variable optimally digesting information and resolving conflict, it is a strategic instrument, held fixed as part of a scheme of administrative control and information discovery.
I am not making a claim about the efficacy of central planning. I am making a claim about the Hayekian vision of an economy radically decentralized by markets—I claim that it is a lie. Hayek lied about the feasible set of responses about to the problems of limited knowledge and information. He asserts that markets can overcome these problems, optimally. It is the origin of “the two-step of terrific triviality”, in which claims of weak rationality by individual actors in constrained optimization alternates with claims of super-rationality for “market” players engaged, supposedly, in global optimization.
It is not possible to deductively model the optimal response to incomplete information. The inability to arrive at an optimal solution by deductive means is what defines incomplete information. The insistence on exclusive reliance on deductive methods is what leads back, again and again, to super-rationality. The real world of practical attempts is imperfect, but it will be the real world of imperfect attempts. In that world—the real world—global maximization of profit cannot be defined. All rational maximization is constrained maximization, which is to say, constrained by rules.
The actual, decentralized “market” economy is not coordinated primarily by market prices—it is coordinated by rules. The dominant relationships among actors is not one of market exchange at price, but of contract: implicit or explicit, incomplete and contingent. (Yeah I know incomplete and contingent is contradictory in the abstract, but all actual contracts are both; welcome to the messiness of the real world.) The contingencies are the important incentive feature, not the marginal rate of income. You take a job, and the risk of being fired (or promoted) is what shapes your behavior.
Rules rule, you might say, even in the absence of central planning. The rules of game, whether in actual markets or metaphoric markets, are what constitute the game as a game, and those rules are a public good, whether the state does an adequate job of making and enforcing good rules or not.
The political process has to produce the public good of rules for economic interaction. There’s no option or alternative, where rules are not instituted. The only questions are whether the rules will be fair and the process they institute, dynamically efficient, in resolving conflict and organizing cooperation.
Neoliberalism, it seems to me, uses the myth of the market, to rationalize rule-making, which serves the rentiers (is dynamically inefficient) and which promotes authoritarian, and therefore unfair, resolution of conflict.