Richard D. Wolff: The Truth About Markets, Pillar of Capitalist Ideology
August 12, 2022
By Richard D. Wolff
“Market mechanisms” and “market solutions”: politicians, bureaucrats, media pundits, and academics like to refer to them as if they were somehow politically and ideologically neutral, above partisanship. They are not. Or as if they were uniquely fair and optimally efficient, which they are not either. The market is just another human institution invented and reinvented periodically across human history. Just like other institutions, markets were strictly regulated or altogether excluded when human communities rejected their outcomes as socially unacceptable. Philosophers such as Plato and Aristotle shared profound criticisms of markets and debated over efforts to exclude or regulate them. Many more critics and debaters followed, thereby enriching the tradition of market criticism.
Markets are one way of distributing goods and services from producers to consumers. They are established when divisions of labor occur in communities rather than having each person or family produce all that it consumes. Markets involve quid pro quo exchanges between those seeking to sell and those seeking to buy goods and services. Alternatives to markets always existed and also do now. Councils of elders, chiefs, local governmental authorities, religious authorities, and various cultural traditions, separately or together, have distributed products from producers to consumers, deciding who gets how much. Within households or families, kinship rules, including patriarchy and matriarchy, have organized the distribution of products from producers to consumers.
The market mechanism is very simple: People with wants or demands engage with people who own the goods and services. Owners enjoy the right to sell what they own if those who want it—prospective buyers—offer in exchange something the seller seeks to acquire. The two owners, one on each side of the exchange, bargain or negotiate over the precise terms of the exchange: what quantity of one item equals the quantity of the other item being traded. If and when a ratio of exchange (a price) is reached that both sides accept, the exchange is made. The market is thus “cleared.” It has successfully distributed the products to consumers.
The problems with the market system of distribution arise immediately once one asks how the market manages distribution when sellers and buyers arrive with very different plans for what they have to sell and what they wish to buy. If—for any reason—buyers seek to acquire 100 of any item while the sellers have only 50, the markets will respond in a very specific way.
Word spreads that a “shortage” of the item in question exists; demand for the item exceeds its supply in the market. Buyers immediately compete for the item in short supply by bidding up the prices that they can offer for it. As prices rise, the poorest buyers drop from the bidding as they cannot afford the higher prices. If, nonetheless, prices keep getting bid up, the buyers who have slightly more purchasing power than the poorest also drop out because they too cannot afford the higher prices. Eventually, the number of buyers is down to 50, the shortage is declared over, and the price stabilizes at whatever higher level was needed to equate the demand to the supply. Exactly the reverse happens when demand is lesser than supply.
The market mechanism thus distributes any item in relatively short supply (short relative to demand) in a manner that discriminates against those with little or no wealth relative to the rich. Markets are in no way neutral to or “above” conflicts between the rich and the poor. Of course, the seller in this case might have chosen not to raise prices and instead to have produced or ordered more products to sell. Free enterprise capitalism leaves in the hands of employers (under 1 percent of the population) the decision of whether to respond to supply shortages by raising prices (causing inflation) or raising production. Employers make their decision based on what profits they thereby gain or protect. The rest of us live with the consequences of their decision. These days employers seem to be profiting from inflation.
Defenders of markets retort that the rising price is how the market “signals” to producers to manufacture more so that they can tap into the high profits generated by high product prices. However, this “signaling” feature is well-known to all employers. They know that if they were to respond to the signals by producing or ordering more, the high prices and profits they are enjoying would quickly disappear. So the employers often exhibit no rush to produce more. And as high prices proliferate through the market system, more and more sellers begin to explain and excuse raising their prices because their “costs have risen.” The rest of us watch this spectacle of employers profitably using one another as an excuse for the rising prices even as they collectively impose inflation on the rest of us.
Capitalists long ago learned that they could profit by manipulating both supply and demand to create or sustain “shortages” that would enable them to get higher prices. Capitalism created the advertising industry to boost demand above what it might otherwise be. At the same time, each industry organized to control supply (via informal agreements among producers, mergers, oligopolies, monopolies, and cartels). Social conditions and changes beyond the control of capitalists require them to constantly adjust their manipulations of demand and supply. In reality, markets are useful institutions for capitalists to manipulate for profit. In ideology, markets are useful institutions for capitalists to celebrate as somehow ideal-for-everyone pathways to optimal efficiency.
Looking for, finding, and taking a job offer is also handled by markets in modern capitalism. If working-class people looking for jobs outnumber the available jobs, employers can lower wages knowing that desperate people will often take lower wages than risk going without wages. That process repeatedly went so far that it provoked a backlash. Workers demanded and won a legally enforced minimum wage. Employers mostly fought and opposed minimum wage laws and, once such laws were implemented, most employers resisted raising the minimum wage, often successfully. The U.S. federal minimum wage rate of $7.25 per hour was last raised in 2009. Employers also encourage automation (replacing jobs with machines), relocating jobs abroad, and bringing in immigrant workers. These steps involve several levels of manipulations of the job market’s supplies and demands to the end of slowing, stopping, or reversing wage increases. Employers manipulate labor markets, like product markets, for profit.
Another market handles loans. Lenders and borrowers negotiate an interest rate they can agree on to enable the credit to be given and the corresponding debt to be incurred. These days the central bank of the United States, the Federal Reserve or the Fed, is raising interest rates to slow or reverse the inflation it failed to prevent or slow over the last year. That raises the cost of all borrowing (for mortgages, car loans, credit cards, and more). Once again, the poorest among us feel the pain the most, followed by the middle class. Higher interest rates are likely to bother the rich less. Also, the rich, who are themselves lenders in many cases, tend to benefit from higher interest rates.
The Fed could have pressed President Joe Biden to follow former President Richard Nixon, who in 1971 imposed a wage-price freeze to stop inflation then. He decreed and enforced that the market would not be able to influence and set prices for a while. Doing that again now would at least discriminate less against the poor and middle class, instead of protecting the rich. One might have expected that from the Biden regime, which controls both houses of Congress, but market-fetishizing and neoliberalist thinking and policy seem to rule both, the U.S. Senate and House of Representatives.
The employer class itself often suspends and displaces markets. When the profitable manipulation of markets becomes too costly, capitalists often merge with or acquire one another. The external (to each enterprise) market relations between them then disappear. In their place, directly planned internal (to the enterprise) production and distribution of goods and services occur without exchanges.
Markets existed long before capitalism, but capitalism, as Karl Marx noted, made them ubiquitous, almost universal. Capitalism also raised and praised markets—and their prices—to give them an ideological importance, which leaned toward the absurd. As R.H. Tawney so brilliantly showed in his Religion and the Rise of Capitalism, early European capitalism had to fight hard to displace the notion of a “just” price inherited from the medieval Catholic Church. The “just” price—consistent with God’s laws and Christ’s teachings as interpreted by the church—differed often from the “market price” that equilibrated supply and demand. To win in that fight, defenders of capitalism found it useful to build a kind of secular religion around markets and their equilibrium prices, attributing God-like qualities of efficiency, fairness, and other similar attributes to them. However, as capitalism sinks into ever deeper trouble, it is time to topple false Gods as part of the process of finding our way to better institutions, and indeed to a better system.
Richard D. Wolff is professor of economics emeritus at the University of Massachusetts, Amherst, and a visiting professor in the Graduate Program in International Affairs of the New School University, in New York. Wolff’s weekly show, “Economic Update,” is syndicated by more than 100 radio stations and goes to 55 million TV receivers via Free Speech TV. His three recent books with Democracy at Work are The Sickness Is the System: When Capitalism Fails to Save Us From Pandemics or Itself, Understanding Marxism, and Understanding Socialism.
This article was produced by Economy for All, a project of the Independent Media Institute.
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