Competitive Markets are Democracy

A couple of days ago I posted about how the "Free market" and the values on which it is based are opposed to the U.S. Constitution and the values on which it was based. I suggested that one has to choose which is more important: the selfish desire for money fundamental to the "free market" or the cooperative intent at the heart of Constitution.

In that discussion (and here) I have put "Free market" in quotes, because "free market" is a loaded term that is understood in many different ways by many different people. One common understanding is that for a market to be "free", we need to eliminate all regulations. As I have argued in the past, markets can't exist without regulation. If there are no regulations that keep people from cheating, lying, and stealing, then we don't really have a market at all. Certainly there is no version of free market theory that suggests that the best social outcomes will result from allowing one producer to undersell another by virtue of selling a toxic product. But without regulation, how do we know which product is the bad one? It is regulation that allows us to discover which firm packed salmonella-laced food.
So I want to stay away from the idea of "free markets" which has been so badly polluted.

And yesterday, I was also critiquing free market theory as an unrealistic fantasy. All of which might lead one to believe that I'm really hostile to the theory. But I'm not; I'm just hostile to out-and-out blindness to obvious issues.

What I want to write about today is how important the notion of competitive markets is in a democracy, and how, indeed, democracy itself is a form of competitive market.

Adam Smith's invisible hand operates, I have argued, because markets, when operating properly, use the supply/demand dynamic to set market prices that force efficient use of resources and encourage innovations that allow even more efficient use of resources. This is, I believe, not just a beautiful idea, but one that plays out well both theoretically and empirically.

Theoretically, I wish to note, also, how this idea of the efficiency of a competitive market is the same kind of efficiency that underlies the notion of a democracy: through the exchange of ideas, the polity is able to make the best possible decision; it is the competition of ideas that allows the best plans to be made.

One theoretical aspect that I won't go into here is the body of theory about the processes of design and planning that argue for the importance of incorporating diverse opinions (and I'll admit to bias here, since this is what I studied in graduate school and this is one of the basic premises of the book that I co-wrote with my mentor about the work of his mentor (The Universe of Design)).

The theoretical aspect that I will discuss here is that markets do a good job of disseminating information: this is a common notion in "free market" theory is almost all its forms. A diversity of options allows for consumers to choose, and the market then reflects the emergent wisdom of the multitude. Thus the market's diversity allows freedom of choice, and this freedom of choice allows the market to capture the diverse opinions of all people. In principle democracy should operate in a similar fashion: the interests of all people are considered when making a plan.

Empirically, I will note that the US economy was its strongest in a period that the Sherman Antitrust Act was strongly enforced (the 40s through the 70s).

I will also note the parallel with diversity of biological populations: diverse biological populations are much more stable; monocultures are much more liable to boom and disastrous bust.

In short, competitive markets--where buyers and sellers have a number of real options--allow for a diversity of opinions to be heard and tested and ultimately adopted in a way that suits the needs and desires of the many. In short, it is a system by which the allocation of resources is determined by the people for the people. When competition is eliminated--whether that is through a political totalitarian government, or through the consolidation of monopoly power in some market--then the emergent wisdom of the marketplace is eliminated, along with the corresponding freedom of choice.

Wouldn't it be great if the markets supported a diversity of opinions? Wouldn't it be great if democracy was reflecting the needs and interests of the majority of people?