Too Much Credence to Market Forces?: Why The Economy is What We Make of It
Updated: Mar 11, 2020
By Abhilaksh Verma
Anyone trained in the most basic of economic thinking will know that most economic transactions occur due to the convergence of the demands of buyers and the supply of sellers. Why some things are expensive compared to others or why certain people enjoy a better standard of living can be largely explained by alluding to market forces and thus washing our hands off any moral responsibility for the way the economy functions. However, there are questions much more fundamental that are left unanswered in this approach and that ultimately show that the economy is far more a result of what we make of it with long-term interventions and how we channelize our resources through political and social signals than an ephemeral psychological entity called wants.
To Plan or Not To Plan – That is Not the Question! Let us take the case of technological innovations. Did anyone in the times of the Industrial Revolution explicitly ask for the steam engine or the cotton gin? Or did anyone go and pay the Pentagon to create DARPANET which resulted in the email? This shows that most of the things we consume today or will consume tomorrow will be the result of technological advancements that were not brought about consciously in the economic system by way of prices but instead by a deliberate yet uncertain betting of material and human resources through research programs. This shows how important it is to plan an economy by investing in long-term projects rather than focussing on attaining market equilibrium in the short run. Thus, as the Cambridge economist Ha Joon Chang puts it: to plan or not to plan, that is not the question!
What Happened in South Korea? Further illustrating how our standard of living is determined by conscious market design rather than temporary market signals, let us take the case of rapid growth and industrialization in South Korea which transformed it into an economic giant. In 1960, Ghana’s per capita GDP (constant prices) was 1,053 USD beating South Korea at 944 USD. In 2017, Ghana’s per capita GDP stood at 1,813 USD while South Korea’s stood at 26,152 USD! What led to this miracle on the Han River but not on the Gold Coast? How did a nation of fishermen and farmers become the hub of electronics and manufacturing? It can clearly be seen that the economic power held by the Koreans was not sufficient to express economic demand or produce market signals that may have created novel industries. This is a classic coordination problem or the chicken and the egg problem – one cannot redeem economic value in form of goods and services if one hasn’t produced equivalent value in the first place and one won’t produce it if no one is there to redeem it! How then, does a country endogenously grow?
Park Chung-Hee; Source: Wikipedia
The answer is planning and industrial policy that designs or engineers markets in such a way that optimizes the social function under consideration. And so, the South Korean government under the great dictator Park Chung-Hee invested heavily (whatever they had to invest) in state-supported manufacturers like Samsung, Hyundai, LG and Posco among others, and assisted them in acquiring the technological know-how from Japan in the form of war reparations. The rest is history.
Does the Invisible Hand Need to be Guided? This clearly shows that our standard of living and the relative value of different goods and services is not merely the product of demand and supply but also of deep acting social, political and technological factors largely determined outside of the free market framework. The free market is important in ensuring efficient allocation of goods and services given a certain level of production efficiency and technology. How economic growth happens depends more on these long-term factors which in turn depend on level of economic planning and technological developments. Herbert A. Simon, the winner of the Nobel Memorial Prize in Economics in 1978, in a remarkable paper called “Organisations and Markets” had talked about how, if a Martian looked at Earth from space and if economic activity happening in market transactions was colored in red and activity happening within firms was colored in green, the Martian would see large patches of green connected by red dots. This underscores the fact that most economic activity happens under organisations which base a lot of their decisions on long-term planning and future expectations about the demands of our world.
As much as free market economics may propound the view that economic systems develop primarily on economic signals encapsulated in prices, it is hard to ignore the proposition that a lot of the price signals are not so much determined by the unconscious and decentralised various economic actors working without any nodal coordination but with the aid of large-scale market currents fuelled by a vision of what our economic future should look like. This is something which necessitates long-term strategy, planning and organisation contingent on further exogenous variables like political intent and cultural orientation. It is high time we realised that growth doesn’t happen on the “outside” and the economy is what we make of it.
Chang, H. (2011). 23 things they don’t tell you about capitalism. New York: Bloomsbury Press.
Simon, H. (1991). Organizations and Markets. Journal Of Economic Perspectives, 5(2), 25-44. doi: 10.1257/jep.5.2.25
World Development Indicators (WDI) | Data Catalog. (2018). Retrieved from https://datacatalog.worldbank.org/dataset/world-development-indicators