The Logic of the Market Economy and the Logic of Politics

Faculty Fellow, RIETI

Two types of criticism of the market economy system

There are two broad types of criticism directed at the market economy system. One type is represented by what Thomas Piketty wrote in his immensely popular book Capital in the Twenty-First Century, and considers the growing inequalities as a problematic phenomenon. The other type is somewhat moralistic in nature, typically arguing that economic activity per se causes moral depravity and decadence, and thus should not be expanded into various aspects of people's lives. How should we understand such argument? Moral criticism, which comes from both the rightists and leftists, has been serving to harden people's antipathy toward a market economy.

For instance, among conservative commentators, Keishi Saeki has been consistently criticizing pro-market economy thinking in a series of books he authored including The Closing of Americanism and Keizaigaku no Hanzai [The Crime of Economics] (both in Japanese). Saeki argues essentially that markets undermine their own grounds by growing in size; and while state support is needed for a market to function properly, the expansion and globalization of the market weaken the state. Similar views have been voiced by those in the periphery of and from within the circle of economies.

For instance, in her book entitled Systems of Survival: A Dialogue on the Moral Foundations of Commerce and Politics, Jane Jacobs argues that moral behavior in commercial activities and moral behavior in guardianship activities are completely different and mutually exclusive (this idea finds an echo in Jack Hirshleifer's arguments in The Dark Side of the Force).

Markets are not equipped with the means to resolve lifeboat dilemmas

Economists and those whose professions are closely associated with a market economy find it difficult to understand the logic behind the moral criticism of market economies. Indeed, it is tempting to disregard such criticism as being irrational and emotional. However, I would suggest one way of understanding such criticism. The inability of markets to resolve Michael Sandel's version of a lifeboat dilemma might be what Saeki and others have pointed to as the shortcomings of a market economy.

The case of a lifeboat dilemma introduced by Sandel in Justice: What's the Right Thing to Do? refers to a situation in which a group of people float adrift on a sinking lifeboat. If one person leaves the lifeboat (i.e., sacrifices his/her life), the lifeboat would stop sinking and all of the others would survive. However, if no one leaves, the lifeboat would sink and all of them would die.

In more generalized terms, this situation can be described as follows: a certain group (e.g., town, company, country) is facing a crisis, and if a proportion of the individuals voluntarily accept disadvantages in a self-sacrificing manner, the remaining majority will benefit. Such situation is not at all unusual and occurs frequently in political decision-making.

Despite the common occurrence of a situation where a group needs to sacrifice some members for its survival in the world of politics, the norms of behavior in the market?which are designed in such a way that each actor seeks to maximize his or her objective function?offer no solution to this dilemma. For instance, in the case of a prisoner's dilemma, the optimal equilibrium can be realized by institutionalizing cooperation as a repeated game. However, such is not the case in a lifeboat dilemma situation. This is because game theories or any other tools available in economics do not allow the design of a social system that would cause rational and self-serving people?i.e., those who follow the norms of behavior in the market?to choose self-sacrificing behavior. Since self-sacrificing people are to lose all of their secular benefits, there is no way to create a mechanism to compensate for the loss that they will suffer, no matter how the game is structured (this can be seen as the key feature of a lifeboat dilemma).

In order for a certain group?which may be a nation, society, or market?to survive, the group needs to have the capability to address a crisis akin to a lifeboat dilemma, which it encounters from time to time. However, the norms of behavior in the market economy system lack the capability for solving a lifeboat dilemma. This is probably the essence of the moral criticism of market economies as represented by Saeki.

Money links the state and markets

Political philosophies, not economics, can resolve lifeboat dilemmas.

We cannot entice someone into choosing self-sacrificing behavior by offering benefits. People choose to sacrifice themselves only when they believe that such behavior contributes to certain values or causes that transcend their self-interest. It is a political philosophy that defines a nation (or community) as a value or cause beyond self-interest. Nations with an underlying political philosophy that strongly promotes self-sacrificing behavior are more likely to survive by resolving their lifeboat dilemmas compared to those without.

J. G. A. Pocock, a historian of political thought, defined "virtue" as the people's will to hand over their nation to the next generation and their spirit of self-sacrifice for that sake, and called "civic liberalism" a political philosophy based on virtue. Civic liberalism is considered to be the norms of behavior that are mutually exclusive with the norms of behavior in the market economy. Accordingly, Pocock defined "nation" and "market" as mutually incommensurable and conflicting presences that represent two different sets of norms.

However, markets are one of those groups that face the aforementioned lifeboat dilemma periodically. If so, while markets need to have their internal norms of behavior (market logic) in order to realize functional efficiency, they also need to be underpinned by civic liberalism (political logic) in order to be sustained as an integrated system. The logic of civic liberalism is pillars that sustain markets from outside, whereas the so-called market logic is a lubricant that maintains the internal mechanism.

The state-market relationship manifests itself sharply in the problem of the value of money and fiscal stability.

Money may be proven effective with the circular reasoning that money is money because people accept it as such (as argued in Kiyotaki-Wright papers as well as by Katsuhito Iwai). However, based on this reasoning alone, we cannot tell to which equilibrium the economy is covering, monetary equilibrium or non-monetary equilibrium, in which the value of money is zero. Realistically, a state needs to guarantee the value of its money. Indeed, the idea that state authority to collect taxes is what guarantees the value of money is known as the fiscal theory of the price level (FTPL). Although real world fluctuations in the price level cannot be explained solely by the FTPL, state authority to collect taxes is necessary in order to keep the value of money at a level above zero.

Challenge for political philosophy in the 21st century

The problem posed by Japan's fiscal deterioration is the risk that the Japanese economy could plunge into chaos as the government becomes unable to maintain the value of the yen with its weakened authority to collect taxes. Here, the situation in which the government becomes unable to maintain the value of the yen is from hyperinflation where the inflation rate is extremely high?reaching a level of several tens of percent per year?and volatile. We can see this as Japan's lifeboat dilemma, in which if the current generation sacrifices itself by enduring austerity and restoring fiscal health, the future generation would have stable economic conditions. Thus, Japan's challenge to restore fiscal health (or stability in the value of the yen) can be defined as the question of political philosophy as to whether the current generation can make a self-sacrificing decision for the sake of the sustainability of the country.

In considering a fiscal crisis, we need to treat the state and markets as a single integrated system, not as two different things that are mutually exclusive. In conventional political philosophy, markets are a means and the state is the ultimate goal. We need to reverse this way of thinking and create new political philosophy that defines markets as the goal. Creating an ethical system under which self-sacrificing behavior for the sake of the sustainability of "state=markets" also would be valuable to individuals may be the challenge for political philosophy in the 21st century.

February 17, 2015

February 17, 2015

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