The Truth About Markets

‘We who live in rich states are not rich because those who live in poor states are poor. It is simply not true that the market economy and the world trading system are structured in ways in which the rich gain at the expense of the poor. If the nineteen richest states traded only with each other, and had no economic dealings with the rest of the world, their standard of living will not fall by much. Most of the trade is already among themselves. The most important consequence would be a rise in energy costs. Rich states are rich because of the high productivity which results from their effective exploitation of the division of labour and their own modern technology, skills and capabilities.


The difference between rich and poor states is the result of differences in the quality of their economic institutions. After four disappointing decades, development agencies have recognized this and used their authority to demand reforms. But the prescriptions have often been facile. What was offered to Russia was not American institutions, but the nostrums of the American business model. The institutions of the market -- secure property rights, minimal government economic intervention, light regulation -- were supposed to be simple and universal. If these prescriptions were implemented, growth would follow.

The truth about markets, however, is far more complex. Rich states are the product of -- literally -- centuries of coevolution of civil society, politics and economic institutions, a coevolution which we only partially understand, and cannot transplant. In the only successful examples of transplantation (Australia, Canada, USA) entire populations, and their institutions, were settled in almost empty countries. The appeal of the American business model today, as of Marxism yesterday, is the suggestion that the history of economic institutions, the structure of current society and the path of future development have a simple economic explanation and an inevitable outcome. This is as misleading a view of political economy as the Marxist one.

There is no grand narrative, only little stories. But the need for grand narrative is so firmly ingrained in human thinking that the fruitless search for it will never end. This book is dedicated to those for whom a partial understanding of complex reality is better that the reassurance of false universal explanations.’ -- John Kay, ‘The Truth About Markets’

I used to be so sure of myself. I had thought Europe became rich because of its exploitation of workers and slaves, our comfort today ensured by the ruthlessness of our ancestors. Nope. It turns out that people were exploited everywhere throughout history. Europe simply had more developed civil institutions, greater freedoms, bigger ideas and better technology. I had thought we lived off that exploitation today, only that globalization had removed it to the other side of the globe. No again. Turns out that we would be just fine without our sweatshops. I had thought that state control of the factors of production would internalize the externalities capitalism created. The state is, after all, on our side; corporations only answer to their shareholders. Wrong. Planning stifles the forces of pluralism inherent in markets that lead to rapid technological advance and better standards of living. This was what broke the Soviet Union. Markets provide a cacophony of ideas and a multitude of approaches. Many of these will be worthless and fail, but a precious few will be valuable and succeed. This was why America got ahead. There wasn’t one plan (no one person invented the PC), but many: the best of which survived and changed the world.

But most of all, I was adamant that people had to believe in something greater -- what John Kay here calls a ‘grand narrative’ -- even if it isn’t strictly true, because only then can they be inspired to act on their beliefs, to bring the world closer to the ideal in their heads: Heaven, Utopia, Plato’s Realm of the Forms. Turns out ideas can be dangerous, even if they are humanitarian. You end up justifying means by ends. It was why Lenin (and many others) became monsters.

I was wrong. Fantasy isn’t as important as reality. We need what works: what makes people materially comfortable enough so that they can get on with being happy and fulfilled. A thesis or system obscures this. It is the easy way out. That’s the thing with reality. It is really, really hard.

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