For years, I've been telling anyone who's willing to listen (and a few who probably weren't) that markets don't exist. Really, they don't. Not in the sense that many refer to them.
Richard Denniss has a fantastic piece in The Monthly debunking the mythology about “The Economy” that dominates contemporary politics like the arcane dogma of a medieval priesthood. He largely covers the points in this blog, but in a broader context. You should read the whole article, but in discussing the mystifications of economics, he says this:
Like the gods of cultures past, “the markets” can be angry. They can be vengeful. And they can punish non-believers. We must consult them cautiously. To simply inquire into the fall in the iron ore price, for instance, might spook them.While markets are real, it is absurd to suggest that they have feelings, needs or demands. A market is a place where buyers and sellers of a product come together. It might be a physical place, like the fish markets, or a virtual place, like eBay or the stock market. But markets never have feelings.
Appeals to “let the market decide” are frequent in discussing technological innovations, such as renewable energy. Conservatives have often declared that governments have no business in “picking winners” when it comes to wind farms and solar – because it is the job of “the market” to choose. Of course that's their rhetoric for public consumption; in private they are backing the incumbent “winners”, fossil fuels. But it also illustrates their worship of the mystical market-gods quite well.
Is the “free market economy” a thing?
The reason this logic is so ridiculous is, of course, that a market can't “choose” or “decide” anything because it does not think, it is not a person. I'd be a bit more direct than Denniss: it is not even a thing.
Sure, “the market” can be shorthand for a bunch of people, organisations, businesses, and the sum of their financial transactions and interactions. It's a collection of things, at best, but a lot of very different things. Calling it a collection by a common name doesn't necessarily help us to understand it. You markets are as “real” as any abstract category – but you definitely can't say they are a “thing”.
This is just really basic philosophy; category definitions. Think of it like that other collection of things known as dinner. Let's say we categorise your dinner as “unhealthy”. Does that tell you much about it? Not really. It might be that your dinner is fine, except the extra-large slice of cheesecake for dessert. Or it could mean you decided that the extra-large slice of cheesecake was dinner, and had that alone, with extra chocolate sauce.
So “the market” is a shorthand that often leaves us in the dark about the nature of the thing that it describes (somewhat more than the clumsy dinner analogy, probably). But when we start talking like this abstract category is a thing that can do stuff, even make decisions (or feel), we're beyond skating on thin ice and plunging into the icy depths below.
No doubt this omnibus collection of things we call a market will end up going one way or another. You can metaphorically say that is the market deciding or doing something, but it's not what is literally happening. Like the term market in general, such a metaphor conceals more than it explains. It also leads on to the logical fallacy of misplaced concreteness*, where people forget that they are only using a (clumsy) metaphor, and start to make other decisions and analysis based on the assumption that the market can actually make decisions for us.
This is probably just philosophy 101, but it's necessary to state it plainly because the fallacy of misplaced concreteness is especially common in popular presentations of economics. It's one of the key mystifications that is used to bamboozle and exclude the public.
Does the market innovate?
In technology, I've heard many enthusiasts for renewable and energy efficiency technology make claims that the market drives efficiency and improvements in technology or drives down costs. In this case, what they are saying is that the imperative for corporations to compete forces them to improve products. It's still a poor metaphor, because it's not actually “the market” making those improvements. It's probably a bunch of people in white lab coats in a R&D centre who are actually doing it.
When it comes down to it, most economics is about people making choices and other people doing the work to put those choices into action. The jargon and crap that politics layers over those choices and workers makes economic pronouncements appear scientific, inevitable, or even that it wasn't the people but “the market” that made the choices. Which is all crap.
When you uncover the people who make the choices, and the actual decisions they are making (as Denniss does for the rich minority currently driving our national political circus) you can make a more objective assessment.
In a lot of cases, the choices being made to enable products to compete on the market are not actually increasing productivity or efficiency. They are, no doubt increasing market share and profitability, but these are not the same thing. Built-in obsolescence, like where you need to buy a new phone after a year or two because the old one no longer works, is one example.
Genuine increases in energy efficiency, durability and so on are not made in any sense by an abstract entity like a “market”. They are made by managers who pass on their decision to some researcher or technician who does research, and passes on a new design to the manufacturing department and the marketing department... and so it goes.
Of course the motivation for doing all this often is competing in the market, but these same processes also go ahead for other reasons, for example when new safety or environmental regulation leave manufacturers with no choice but to make significant changes. Ascribing everything to the market is convenient for those who are making a lot of money out of their interactions in the market (or hoping to). It is not, however, a reason why renewable energy technology or energy efficiency or cheaper consumer goods is something we should thank markets for.
In fact, a lot of renewable energy technology has its origins well outside the market. Modern wind turbines originated in co-operative efforts by Danish environmentalists to power their communities without nuclear energy. Solar panels owe a lot to the research efforts of Big Government in the US space programme.
Even the massive reduction in solar panel prices in the last five years has been driven, not by the “free market”, but by state and consumer subsidies like Germany's Feed-In Tariff system, a definite intervention into market interactions by government.
The only reason for environmentalists to support “the market” is if we think making a few entrepreneurs and investors richer will itself have positive environmental outcomes. Since that seems unlikely, let's not worry about whether environmental regulation harms “the market” or “the economy” but whether it harms people – and which people. Workers? Neighbouring communities? Or a tiny number of big international capital holders? Most of us care about the environment, not just for its own sake, but for our own and future generations' welfare. If we worried less about following market dogma, we might do a better job of looking after people.
*The fallacy of misplaced concreteness is also known, in a particular case, as “reification” – “thingification” – where abstract ideas and relationships are treated as a thing. This term is common in Marxist analysis of economics and the process of alienation.