The Market Economy and Its Limits

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The Market Economy and Its Limits2 May 2009: Draft of Entry for Encylopedia of Islamic Economics

Dr. Asad Zaman

By the Market Economy, we mean a method of organizing economic affairs

within a society so that an un-regulated market is the means for conducting nearly allmaterial transactions within the economy. In such economies, decisions about production

of goods, valuation, trade, distribution, etc. are all settled by individuals or small groups

acting with maximum possible freedom, and a minimal set of legal or social constraints.

Since this is the dominant mode of organizing economic activity currently, it appearsnatural, and alternatives are hard to imagine. In fact, as Polanyi (1946) notes,Previously

to our time, no society has ever existed that, even in principle, was controlled bymarkets. To understand the functions and effects of the market economy, it is necessaryto delve into the history of its emergence and rise to a global system. This analysis,

undertaken below, leads to the following conclusions:

1. A market economy requires supporting institutions, social structures, political

structures, ideologies, and ways of organizing knowledge. Labelling all of these

elements combined as a market society, we can say that market economies can

only exist within market societies.2. Social structures required for market economies conflict with traditional social

mechanisms. This implies that transitions to market economies are accompanied

by violence and destruction of traditional social norms. Recent history is a recordof resistance and conflict between traditional society and market society.

3. The global dominance of market economies has led to glorification and praise of

their virtues. The tremendous damage inflicted on the world and society by theemergence of market economies has been suppressed A realistic assessment

shows that urgent action is needed to rescue man and society from the brink of

disaster to which the market economy has brought all of us.

Because of the damages caused to society by the market economy, Polanyi (1946) in The

Great Transformationforecast its demise following the largest crisis in his time, namely

World War 2. The unexpected recovery and rise to global dominance of the unregulated

market, and its dreadful consequences have been documented by Klein (2008) in STheShock Doctrine: The Rise of Disaster Capitalism . Many of the central elements of the

analysis which follows are borrowed from these two sources, referred to simply asPolanyi and Klein hereafter.


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1. The Emergence of the Market Economy

A confluence of historical forces led to the emergence of a market economy in

seventeenth century England. The most important of these are the weakening of the holdof religion, and also the rise in the power of the landed aristocracy in England. Both of

these forces are conveniently represented in the brief realm of Oliver Cromwell, who

beheaded King Charles I, and also massacred large numbers of Irish Catholics.

1.1: Rise of Secular Thought: The European experience of massacres, violence, and

massive social disturbance due to religious conflicts led even religious leaders to agree tothe use of secular principles to organize society for the sake of social harmony. Release

of the constraints of religion allowed the introduction of values and principles

dramatically opposed to traditional values. The most important of a large number of such

changes was the replacement of the Biblical idea that The love of money is the root of

all evil by Bernard Shaws sentiment that The lack of money is the root of all evil.Traditional society honors those who renounce material possessions, values simplicity

over luxury, and considers gluttony, avarice, covetousness, and greed as sinfulcharacteristics. Market societies honor the wealthy, consider poverty as a vice, promotes

luxurious lifestyles, and consider greed and selfishness as natural and socially useful.

This transition of thought is in accordance with the Quranic verse (2:257) that those whodeny God will move from the light into darkness.

1.2: Rise of Landed Aristocracy: In the long standing battle between monarchs andaristocrats, kings had supported commoners against the nobles, to keep a check on their

power. Efforts of the aristocracy to gain complete control over their landholdings (thecommons, in particular) had been successfully resisted for some time, but Cromwells

victory shifted the balance of power permanently in favour of the landed aristocracy.

They wasted no time in putting up enclosures, which prevented access of large numbers

of the poor to grazing land and other means to eke out a living. The resulting socialcatastrophe has been described by Polanyi as follows:

The lords and nobles were upsetting the social order, breaking down ancient lawsand custom, by violence . They were literally robbing the poor of their sharein the common, tearing down the houses ( of ) the poor. The fabric of societywas being disrupted; desolate villages and the ruins of human dwelling testified tothe fierceness with which the revolution raged, endangering the defenses of thecountry, wasting its towns, decimating its population, turning its overburdened soil

into dust, harassing its people and turning them from decent husbandsmen into amob of beggars and thieves.

2. Consequences of Social Disruption

These events in England had far reaching consequences, both temporally and spatially.We list those most important to our current theme, the emergence of the market economy.


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2.1: Property Rights: Political tussles frequently led to re-allocation of lands in favour

of victors. Utilizing their newly gained power against the monarchs, aristocrats sought toprevent this by developing new theories of property. Instead of viewing land as a sacred

trust, a gift of God to all humans, the idea of ownership and private property as a natural

right was introduced. Philosophers like Locke argued that the right to own property was

prior to the social contract, so that governments could not alienate property.

The effects of this historical change on modern thought can be seen in the concept

of Pareto efficiency. According to this theory, re-allocation of property must commanduniversal support. In a society where a few have all the resources, and the masses have

nothing, modern economic theory prohibits us from recommending a redistribution in

favour of the poor. Instead of seeing this as an ethical commitment to property rights overthe rights of the poor to a decent living, economists view Pareto efficiency as an ethically

neutral and value free scientific idea.

2.2 Changing Conception of Poverty: Poverty is an honourable condition in traditional

societies. Christian monks take vows of poverty, and the Bible states that it is harder for arich man to enter paradise, than for a camel to pass through the eye of a needle. Our

prophet Muhammad s.a.w., refused riches and wealth, lived with very few possessions,and prayed to Allah to be counted among the poor. Poverty emerged as a social problem

for the first time in England, following the first privatization that is, the enclosures.

While the poor have always been with us, traditional societies accept and fulfil collectiveresponsibility for feeding the poor. An essential element of a market society is the idea of

blaming the poor for their poverty, which was first introduced by Malthus. According to

him, it was over-breeding that led to poverty, while poverty led to vice, misery andsqualor. To the natural cures of plague, pestilence, and wars for the reduction of

population, Malthus added birth control as a means of combating poverty.

For reasons to be discussed, the traditional concept of social responsibility for the

poor must be destroyed to allow unregulated market economies to function. Malthusian

ideas created the possibility not only of blaming the poor for their poverty, but also ofarguing that helping the poor would hurt society in the long run. Feeding the poor would

lead only to more over-breeding, which would create even larger numbers of poor in the

long run. This idea, that helping the poor hurts them in the long run, takes many differentshapes in modern economic thought. Reagan and Thatcher reduced taxes on the rich,

arguing that this would increase growth because the rich would invest and increase

productivity. The poor would only consume the tax cuts, reducing savings, investmentsand growth this would hurt the poor in the long run.

3. Essential Requirements of a Market Economy

The many institutions and ideologies required for self-regulating markets to function are

listed below. This section relies fundamentally on the analysis of Polanyi.

3.1 Labour Markets: Production in a market economy depends on the ability to hire

labor and a market for labor. Labor is time or the material from which human lives are


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constructed. It is not normally for sale. England got a fifty year headstart on the industrial

revolution because of the surplus pool of labor created by the enclosures. It was thedesperate condition of the large numbers of people evicted from their homes and barred

from their conventional means of livelihoods, that led to the possibility of a labor market.

Under normal social conditions, people would not submit to the indignity of a labor

market requiring them to sell their labor for money. Massive disruption of the socialfabric created the conditions required for large scale production in factories to come into

existence. A similar catastrophe did not take place in Europe, which caused it to lag

behind.

3.2 The Market for Land: Traditional societies value a harmonious relationship

between man and nature, treating land and all that lives on it as a sacred trust, a gift ofGod to humankind. Yet a market economy must separate the man from the land, and turn

both into commodities freely available for sale and purchase. Strengthening of property

rights and large scale enclosures created the possibility of agricultural capitalism, and the

production of large amounts of surplus food as well as industrial raw materials like

cotton. This coincided with the industrial needs for raw materials as well as the need forfood for large numbers of laborers not engaged in agriculture. The remoteness of the

owner from the land allowed him to view it as merely an input to a production process, ameans for producing wealth. In a traditional society, a labourer invests his life energies

and efforts, and enjoys the reward of bringing valuable products out of dead land. In a

market society, economic necessity compels the labourer to sell his time for money. He isalienated from the land and the produce, both of which belong to his employer. It is the

loss of this sense of mother earth as an organic entity with an intimate relationship to

man that has led to the global environmental catastrophes that threated to destroy us all.

3.3 Money and Financial Markets: The strength of the market economy lies in itsability to produce far beyond the minimal requirements of society. This surplus

production creates its own inexorable demands on the structure of market societies.

Subsistence economies have small self-sufficient subgroups with minimal trading

requirements and hence little use for money. Demand for surplus must be created bypromotion and marketing of luxurious lifestyles. Having large amounts of surplus

necessitates trade and hence also the use of money for trading purposes. Commodity

money functions adequately in non-market societies where trading is marginal andperipheral. Commodity money is not flexible enough be adequate for market economies

which engage nearly everyone in monetary transactions and have large and fluctuating

amounts of trade, conducted over long distances in geography and time, and withunfamiliar trading partners. This accounts for the rapid introduction of token monies in

market economies. Since token money is directly of no use, the best way to understand it

is as a government guaranteed financial instrument it allows trade based on promises topay which are flexible, backed by the government, and (hence) obligatory on all members

of the society.

Fluctuations in the quantities of money as well as the needs of trade can lead tofluctuations in price levels these have been the bane of market economies which require

stable prices to function smoothly. Many mechanisms, including the introduction of


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central banks and other government policies have been tried to smooth out the business

cycle without success. Problems are substantially exacerbated by international trade,which cannot be conducted in terms of token money for obvious reasons. Polanyi (1946)

discusses the mechanisms for price stabilization at the international level, and how their

breakdown led to both world wars. He also suggests that the market economy is

inherently unstable, inflicts tremendous damage on man, society and environment, andmust be replaced by alternative mechanisms for productions and distribution of goods.

4. Market Ideologies and Consequences:

The Quran (104:2) condemns those who gather wealth, and count it, instead of

encouraging the pursuit of wealth. Furthermore, wealth in excess of needs should bespent for Allah that is, on socially useful projects, and on other needy people. In direct

contrast, market economies encourage the pursuit of wealth to the point of being

absolutely irrational, according to Max Weber. Excess wealth is to be spent on personal

luxuries, or to be used to multiply wealth even further, but not on social welfare or on the

poor and needy! Spending on the poor and needy undercuts the labor market, strengthensthe laborers against the capitalists, and results in reduced profits for investment and

growth. Classical economist Ricardo wrote that The principle of gravitation is not morecertain than the tendency of (laws providing relief for the poor) to change wealth and

vigor into misery and weakness (and) universal poverty. Similar sentiments can be

found in contemporary writings of economists. Milton Friedman argued that firms shouldexclusively pursue profits and should not engage in socially beneficial activities.

The relentless demand for profits, the production of surplus goods, the legitimization ofthe pursuit of wealth, and greed and selfishness, has led many disasters and crises both

local and global. Polanyi has documented how the demands of the market economy led toworld wars 1 and 2. Naomi Klein has picked up the story of capitalism from the 70s to

the recent times, and documented the sequence of disasters generated by the market

economy. In the three major dimensions (Land, Labor, Money), replacement of

traditional values by market society based values has resulted in catastrophe:

4.1 The Market for Human Beings: The Collapse of Values

Traditional social transactions are based on a mutuality, and partnership in the service of

community and humanity. The market society replaced these by anonymous arms length

trades of money for services. The gradual erosion of the sense of community, whichaccelerated in the post world war 2 era, has resulted in the destruction of family, in ethics

of cooperation, generosity and trust. The family is the most fundamental unit of society,

where children learn the rules governing social interactions. If the wife cannot trust thehusband and the Clinton-Lewinsky affair demonstrates that this is true from the top to

the bottom then no one can trust anyone else. This erosion of trust has been

documented in many studies. For example, a report on Fractured Families put out by

the Social Justice Foundation(2006) in the UK states that We now have one of thehighest divorce rates in the Western world and the fabric of family life has been stripped

away in the past thirty years.


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Some effects of this breakdown are documented by Josephson Institute survey (2008)

which shows that more than 30% of the 30,000 USA high school students admitted tohaving stolen from a store, parents or friends. According to the Center for Disease

Control, USA also has the highest teen pregnancy rate in the world. The vast majority of

approximately a million such pregnancies per year are unintended and have devastating

social, economic and health consequences for both the unwed mother and the offspring.Promotion of the Invisible Hand idea that individuals pursuing selfish goals will

produce socially beneficial results has led widespread corruption. Leaders like Madoff

pursue Ponzi schemes, and the greed and dishonesty of followers in the finance industryhas led to worldwide financial chaos and collapse. Many sources document massive

corruption in post-Katrina, Iraq war, and recent bailout payments following financial

meltdown. All of these developments can be directly traced to promotion of the core ideaat the heart of market societies: all is fair in the pursuit of wealth.

4.2. The Market for Land: Environmental Disaster

By treating land, its products, and all that lives on it, as merely inputs into the process ofthe production of wealth, the market economy has done large scale environmental

damage, destruction and depletion of forests and other natural resources, and created alooming catastrophe due to global warming. The idea that the market is self-regulating

leads to the delusion that we dont need to worry about these problems; if they matter, the

market will automatically take care of it. The recent financial collapse should be awarning to those who believe this core belief of a market society. Barack Obama states

that All across the world, in every kind of environment and region known to man,

increasingly dangerous weather patterns and devastating storms are abruptly putting anend to the long-running debate over whether or not climate change is real.

Environmentalist Daniel Quinn writes that Upwards of two hundred species.. mostly of

the large, slow-breeding variety.. are becoming extinct here every day These species

are being burnt out, starved out, and squeezed out of existence. The endless production of

radioactive wastes and other poisons are hazardous to the future of life on this planet.For the first time in the history of the world, every human being is now subjected to

contact with dangerous chemicals, from the moment of conception until death. With great

difficulty, consensus has been reached on global warming and how it threatens humanlife on the planet. Market societies have prevented a solution, which requires shared

sacrifice and cooperation. Leading capitalist countries put self-interest and profits above

cooperation for survival. Instead of proportionately sharing the burden of environmentalcleanup and costs of anti-pollution measure, they attempt to put all the blame and the cost

of adjustments on the poor and powerless countries.

4.3 The Market for Money: Financial Crisis and Collapse

As discussed earlier, commodity monies impose discipline and constraint which

unregulated market economies cannot cope with. Token monies are able to adjust tochanging market conditions and keep prices stable. However, use of token monies

involves a crucial element of trust. Even when backed by gold or other commodities, no


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one is in a position to detect over-issuance of paper. For a large number of different

reasons betrayals of this trust are common, and result in financial crises which have beenextremely common in the twentieth century. Among the big ones, Taleb (2007) in The

Black Swanwrites that In the summer of 1982, large American banks lost close to all

their past earnings (cumulatively), about everything they ever made in the history of

American bankingeverything.

Can we trust the invisible hand which guides selfish profit seekers to produce socially

beneficial outcomes? The deep financial crisis currently enveloping the globe suggestsotherwise. Even if the global economy recovers, which many pundits doubt, should we

continue with a system which delivers shocks disrupting lives and livelihoods of vast

numbers of people on a regular basis? There is ample evidence to suggest thatalternatives which provide more comfortable lives for all human beings can readily be

devised.

5 Concluding Remarks

The market economy is a European experiment with an alternative method of organizing

society. Instead of intrinsic values of cooperation, trust, generosity, and other socialvirtues, many of which go against the natural grain of man, they sought to built a society

with maximum freedom. Everyone is allowed to do whatever he desires, with a minimum

of rules and regulations. The outcome of this experiment has been a complete failure onall fronts. Lane (2005) in The Loss of Happiness in Market Economiesdocuments the fact

that this freedom has not resulted in happiness. Numerous studies in the emerging field of

well-being studies provide evidence for this. At the same time, crucial social structureslike family, communities, as well as social values like cooperation, generosity and trust

have been substantially depleted more so in the heartland of the market economy, butalso, to a lesser extent in the periphery. In addition to eating up social capital, the natural

resources of the planet have also been depleted at an astonishing rate by the market

society. Many have noted that a sure recipe for complete collapse and disaster is to

simply continue in our present ways.

Fundamental and radical change is an imperative at this time. Islamic economics provides

a radically different system which remedies the fundamental difficulties of marketeconomies. A detailed analysis of the differences between the two, and how Islamic

economics can deal with problems generated by market economy concepts is provided in

Zaman (2008) Islamic Economics: A Survey of the Literature .

Documents

The Market Economy and Its Limits