From Ethical Politics
Markets cannot function for long without trust, transparency and contract law, and are usually created by governments as a social contract. This contradicts the idea of an invisible hand proposed by Adam Smith in his Wealth of Nations (1776).
Markets are not part of the natural world, analogous to the forces such as gravity, studied by physicists. Neither do markets derive from God. Instead, markets are a creation of humans, as part of our "propensity to barter" since ancient times, as described in The Politics of the Solar Age (1981, 1988, pages 160-162). Exchange and trading by humans is a recurrent activity throughout our history (e.g., the Kula Ring described by Bronislaw Malinowski in his Argonauts of the Western Pacific,1922). Karl Polanyi describes in Primitive, Archaic and Modern Economics (1968) how early markets used mediums of exchange, e.g., shells, cattle, tally sticks and other forerunners of money. Barter is becoming more prevalent in today's Information Age as facilitated by websites such as Craigslist, Freecycle and many others.
Move from local markets
Markets were local and decentralized until they were nationalized in the 1600s by the British Parliament in the Enclosure Laws, as described by Polanyi in his The Great Transformation (1944). (see also Creating Alternative Futures (1978, 1996)). Kirkpatrick Sale in Human Scale (1980) traces the effects of expansion of markets in industrial gigantism. Once markets became de-coupled from the social and cultural bonds of small-scale communities in local village squares and town centres, they lost their ethical moorings provided by face-to-face contacts and personal relationships. The more the scale of markets grew, the more abstract their dealings, the greater the temptations grow. Players could hide the social and environmental consequences of production and exchange of commodities, and these social costs grew in lockstep. This was a key insight of E.F. Schumacher in his Small is Beautiful (1973) as well as Mildred Loomis, a leader in local community renewal, in her Decentralism (1980) published by the School of Living Press, York, Pennsylvania.
Markets were free from the moral constraints of community and the empathy humans can feel due to the mirror cells in our brains that allow us to experience what others experience (codified by all major religions in the Golden Rule). As Adam Smith noted, markets must operate under two conditions:
- buyers and sellers meet in market places with equal power and equal information
- no harmful effects be inflicted on any innocent bystanders not part of the transaction.
In today's industrial societies, there are very few markets where these conditions are met.
Clearly, markets outgrew Adam Smith's conditions, and in the 1980s, financial markets were de-regulated by US President Ronald Reagan and British Prime Minister Margaret Thatcher. This began our current form of globalization. These new global markets not only for goods, but also for services – even the bogus "services" of finance – were inherently unstable. A global casino emerged – devoid of any regulations, since even UN agencies, the World Bank, the IMF and international trade agreements lagged behind the speed of electronic communications, satellites and the internet. Today, formerly paper and now electronic assets are traded in nanoseconds. Fifty percent of all Wall Street trading is now done by computer programs, and $4 trillion of currencies are traded everyday on computerized currency exchanges. No wonder these runaway markets exploded and led to financial collapse.
It has been no surprise to analysts (see Paradigms in Progress, Building a Win-Win World, The United Nations: Policy and Financing Alternatives and "Foreign Exchange Transaction Reporting System (FXTRS)" Futures, Elsevier Scientific, UK, 1996, as well as recent articles like "Tax to the Rescue" Asia Times Online, March 24, 2009, and Policy Innovations, March 18, 2009) that this global casino would collapse of its own absurdities. The extent of abstraction from reality of these computerized markets is illustrated by the staggering errors in modeling markets by mathematicians. These so called "quants" ran hedge funds and dreamed up "financial innovations" like credit-default swaps (CDSs) and collateralized debt-obligations (CDOs). The insane size of these credit derivative contracts reached $685 trillion in December 2008 (Bank for International Settlements, Basel, Switzerland, December 2008) compared with real world GDP of only $69.5 trillion (CIA World Factbook, based on purchasing power parity (ppp) for 2008). After the financial collapse of 2008-2009, the reality of how markets must return to the real production and exchange processes still occurring in millions of communities and villages around the world became apparent.
A return to ethical markets
The need for ethical markets, embodying those original values of trust, transparency, contracts and providing actual products and real services to consumers, is clear. While governments are limited in their ability to allocate resources, their role as norm-setters, rule-makers, enforcers and overseers of markets is essential. Markets cannot govern themselves. In truth, all societies are mixtures of markets and regulations: rules and markets are two sides of the same coin.
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Author: Hazel Henderson