Monday, May 08, 2017

The free-market cycle

As a student of social cycles, I am always on the lookout for new instances of social cycle theories. And in writing my current book review, I have come across one: the free-market cycle. Here is the author of The Invisible Hand?, Bas van Bavel, describing this cycle:
The three main cases analyzed in the book, and also the three modern cases that are more tentatively discussed, show a similar pattern in the interaction of society, market institutions, and economy. In this pattern, an originally positive feedback cycle -- between increasing freedom, growing factor markets, and economic growth -- turns into a negative one, with the increasing social polarization, institutional sclerosis, markets that become increasingly skewed towards the interests of market elites, and economic growth stagnating and turning into relative or absolute decline. (251)
The cases being analyzed are ones in which factor markets -- for land, labor, and capital -- come to increasingly dominate the allocation of those resources. At first, the process yields good results: "these markets acquired favorable institution organization which offered security, transparency, and broad accessibility" (252). An important factor in these favorable results was that non-elite actors "had access to alternative mechanisms of exchange outside the market and therefore were free to choose whether to use factor markets or not" (253). (Such mechanisms included guilds, strong family institutions, networks of barter exchange, and production for home consumption from one's own land.)

But as factor markets began to eliminate such alternatives, often through "outright attacks" (254) on them -- e.g., enclosure laws, or anti-guild legislation -- "wealth inequality rose to high, or even unprecedented levels" (255). To preserve their wealth, the new elites "tied it up in family foundations, religious foundation, or fiduciary entails" (258-259). Despite the fact that such events often prompted an artistic florescence, they indicated "a tipping point in the cycle had passed, together with other signals including a highly skewed distribution of property, the increasing volatility of financial markets, big public indebtedness, the increasing application of non-economic coercion, and the freezing of capital" (259).

"For Iraq... in the early tenth century, after three centuries of intense market development, it had become one of the most unequal societies recorded in history" (261). Similar results hold for Italy around 1400, for the Low Countries in the 1500s and 1600s. And the less rigorous studies the author offers for the UK and the US more recently show the same dynamic at work.

Van Bavel offers a number of reasons for this result, e.g., "the wealthy usually have more access to information or legal expertise. With the growing scale and complexity of markets, the advantage this offers them also grows" (263). This factor weighs heavily against the anarcho-capitalist antidote to crony capitalism: there is no reason to believe that a financial elite cannot dominate the anarcho-capitalist "market" for law even more thoroughly than they can dominate the "production" of law in purportedly democratic societies.

Van Bavel asserts there is a predictable feedback mechanism at work here: "in all the cases of market economies discussed [increasing wealth inequality] became translated into inequality and political influence and decision-making power, which in its turn was used to adapt the institutional organization of factor markets to the interests of the wealthy" (264).

In short, "mature market economies as a result of this feedback cycle change from being open and equitable to become unequal and distorted" (265).

This is what we actually see in every single case where "free markets" come to dominate a society. It is all well and good for libertarians to bemoan "crony capitalism": but if this is the predictable outcome of their polices, they bemoan in vain.

The moral principles that market advocates often posit as counter-balances to the rise of crony capitalism are also ruled out in van Bavel's analysis:
Moreover, the elements that reduce or compensate for negative externalities of market exchange they mainly be supplied by nonmarket organizations and by norms and values generated outside the market. In the course of time these norms and values, and the associated organizations, are instead eroded, as this book shows, their roles are usurped or superseded by the market. (266)

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