How do markets tell the truth? Between competition and efficiency

One may wonder then how markets tell the truth or how their “sincerity” can be guaranteed. Indeed, one can find many ways that markets can be “sincere”. First of all, in the most traditional version of liberalism, prices are the best measure of truth: within a context of competition “natural prices” are the result of sellers’ asking prices matching buyers’ bidding prices. As noted by Adam Smith, while the enlargement of the market “may frequently be agreeable enough to the interest of the public ... to narrow the competition must always be against it, and can serve only the dealers, by raising their profits above what they naturally would be” (Smith 2007: 200). So the notion of “natural” price was strictly linked to competition. Prices also play a central role in Hayek’s theory of the market as a spontaneous order (Hayek 1979), in which they are providing information enabling coordination (Hayek 1935) in that special kind of spontaneous order that he calls “catallaxy” (Hayek 1979).

During the globalization process markets changed their way of telling the truth. Only “open” markets came to be seen as sincere. The enlargement of the market became a key issue and a guarantee against rent positions, monopolies, oligopolies, and high prices. Thus, the ability of the markets to cope with competition had to be strengthened in the name of openness through important liberalising reforms. In this shift, the stability of prices, one of the main goals of the previous political economy, had to be sacrificed. The markets’ sincerity based on openness required a wide range of liberalisations through different legal measures and international treaties. The enlargement of markets was specially supported by the creation of the World Trade Organization in 1995, replacing the General Agreement on Tariffs and Trade (GATT), with its mission of promoting free trade among different countries in a world of circulating merchandise. Of course, the markets’ enlargement through globalisation was also crucial in changing their relationship with states.

The liberalisation of financial markets, allowing the shift from an economy centred on industrial production to one centred on speculative finance, was another important step in the markets’ sincerity narrative. In the industrial economy, floating capital was for the most part reversed into productive firms through national stock markets and securities investments. From the 1970s a great deal of cash money, particularly from petrodollars, was circulating in the world in search of its own best reward. This generated a season of widespread mergers and acquisitions in the United States during the 1980s and 1990s. At the same time, at least two new possibilities of using cash were available. On the one hand, Foreign Direct Investments, promoted by some national statutes and international agreements, encouraged productive off-shoring. On the other, a flourishing industry of speculative financial instruments appeared very appealing and promising, launching what Strange called “Casino Capitalism” (Strange 1986), which was full of risks and more and more detached from industrial production. Both of these subjects will be addressed below. For now, we shall examine some of the different ways to tell the truth.

An “open” market required competition to become the new flag under which it could work “truthfully”. A new competition regime became central for globalising markets, “one key area for the changing relations between the private, and the public, in the context of globalisation and for the competition between different models, notably those of the United States and Europe” (Sassen 2006: 237). Every phase in capitalism’s transformation calls for more competition. Competition, however, is a paradoxical subject: it becomes an especially popular subject in debate when it is under attack. This is what happened at the end of the nineteenth century when tensions between a model of “economic democracy” based on widespread small enterprises and one based on large highly-specialised enterprises emerged in the United States (Ferrarese 1992). After the great Merger Movement between 1895 and 1905, Louis Brandeis, faithful to the old notion of competition, blamed industrial mergers as being “the sign of Cain”. Originating in 1890 with the Sherman Act and consolidated by the Clayton Act in 1914 antitrust legislation became a milestone in American progressive politics and an important issue in a programme to strengthen economic democracy. Outlawing “each contract in restraint of trade”, antitrust measures claimed the mission of fighting every monopolist practice and dominant positions in the market.

During the years of globalization, under international governance guidance, antitrust culture encouraged a great number of legal reforms, administrative procedures and judicial and quasi-judicial means for protecting competition. It enjoyed rapid growth in the 1990s and was an important pillar in building “super capitalism”, a concept brilliantly analysed by Reich (2008), which favoured consumers with low prices while reducing consideration of citizens’ rights. It was also important for Europe because after the fall of Eastern Bloc countries the enormous differences between countries had to be reduced or overcome. For European states familiar with monopolies (Olson 1982) and weak constitutional guarantees for markets (Amato 1992), antitrust principles and legislation were something new and very promising. For instance, under the Treaty on the Functioning of the European Union, any State aid was prohibited except when justified by common interest. So states and international organisations not only performed diligently the job of promoting legislation and reforms to ensure competitive markets, but also became agents of the competition credo, transforming themselves into economic subjects searching for a “competitive advantage” (Porter 1989). In the end, antitrust came to be much more than an institutional arrangement to avoid monopolies and rent positions, or to lower prices and improve the quality of goods and services. In fact, it became a general philosophy, a guarantee of the “transparency” and “cleanness” of the market. In other words, it was a pillar for the truth narrative of the market gaining moral status as an impeccable model of Organization that respected everyone’s merits, so the “winner” would be the best, not the strongest. Moreover, it was presented as a guarantee of fair balance between traders and consumers, even though competition law and consumer protection had grown independently of each other (Cseres 2005).

In the history of the truth of the market, however, antitrust did not have the last word. Together with competition, efficiency rose as a new guiding light in global markets advocating a new way to tell the truth. The search for efficiency had been theorised by the Chicago School since the 1970s as an attribute of every homo oeconomicus, who was supposed to be the “natural” inhabitant of any market. Believing in a rational subject, “naturally” pursuing his interests and maximizing his utilities, was an act of faith, that was also made by “public choice” theories, which introduced the idea that the very same economic rationality inhabits political and institutional places (Buchanan and Tullock 1962; Zumbansen and Caliess 2011). Faith in such a self-interested and maximising subject as the foundation for efficient markets was partially challenged by Simon’s research on “bound rationality”, proving the homo oeconomicus to be less a master of his rationality than he was supposed to be (Simon 1983). Yet the success of the theory was enormous in real markets and financial markets. Its core was well summarised in the so-called efficient market hypothesis (EMH) (Fama 1970), which claimed that all public information is incorporated into asset prices, so that, while investors are seeking under- and over-valued securities to buy and sell, any deviation from “true” prices is quickly exploited by well-informed traders who attempt to optimise their returns and thereby restore an equilibrium price.

EMH can be challenged on several fronts, especially after the crisis of 2008 that highlighted a number of anomalies and failures in its basic assumptions. As illustrated by Keynes (1936), the crisis confirmed financial markets’ tendency toward instability and “irrational exuberance” (Shiller 1995). Following Keynes’s lesson, Minsky also developed the financial instability hypothesis (FIH), theorising that financial markets require even more controls in order to be reliable (Minsky 1985). The latest crisis confirmed once again what is “natural” in financial markets is their instability since they are “naturally” inclined to bubbles, booms and crashes (Kregel 2007, 2010; Rapp 2009). Moreover, the short-termism of financial markets (Rappaport 2011) not only makes prices considerably unstable and competition even stronger, but challenges the regulative core of institutions, making them too dependent on the present and insensitive to future needs (Ferrarese 2002; Ost 1999). On the other hand, standard economic views “seem to ignore that current capitalistic economies are characterised by complex and more and more sophisticated financial systems driven by the fundamental activity of money-managers” (Sau 2010) and obscure algorithmic intermediations. Financial markets, where derivative contracts, especially CDS, have played a predominant role in creating fragility and instability at a systemic level go hand in hand with an uncontrolled “debt economy” (Rossi 2008), fostering the idea that one can make a fortune through debts. At the same time, the celebration of debt as a means of enrichment implied the reversal of the “austerity” ideal that monetarist theories had imposed on public budgets, so while private debt is to be praised, public debt has to be damned!

Let us return to centrality of efficiency. It is worth noting that theorising efficiency as the first goal of markets was conflicting not only with stability but with competition itself. The rise of efficiency to the Olympus of economic values implied that any other conflicting value, including competition, could be sacrificed. The story of the uncomfortable relationship between competition and efficiency originated well before the Chicago School of the 1970s, with the transaction costs theory. Coase’s seminal work on the “theory of the firm” (Coase 1937), among others, had reduced the ambition of the market always to be the ideal place for achieving efficiency. Coase did not believe in utility maximisation through markets: rather it was the corporate hierarchies with their authority who could be more effective in organising firms’ production efficiently (Ouchi 1980; Williamson 1979,1985). Therefore, if competition, on the one hand, was seen as the truth teller for excellence in the market and as a guarantee of openness and democratic economy, on the other hand, when it was too costly and threatened efficiency it could be sacrificed. The Chicago School consistently theorised that restrictions on competition could sometimes be more efficient than a full display of competition: this was the “paradox of antitrust” illustrated by Bork (1978). From the Chicago School, the idea that even monopolistic practices should not be viewed as necessarily anticompetitive (R. A. Posner 1978) in the end conquered even the U.S. Supreme Court. In 1977, it finally upheld a “rule of reason” criterion in antitrust in Continental Television v. GTE Sylvania, which allowed illegality to exist only when conduct is manifestly “anticompetitive” or promotes “inefficiency”. The highly restrictive Schwinn doctrine was overruled, opening the way to firms’ horizontal as well as vertical “restrictive” agreements (Amato 1997: 46 ff.). More and more, as we shall see later, such agreements and other means of weakening competition increased rapidly during the years of globalization (Cucinotta et al. 2002) and cancelled the idea of per se illegality in firms’ anticompetitive measures (Ahlborn et al. 2004; Krattenmaker 1988).

 
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