The intimate partnership between mainstream economics and right-wing ideology has long trumpeted the wonderful efficiency of markets. In these partners’ fantasy, markets are truly wondrous coordination mechanisms that perfectly match the supply of goods and services to what buyers demand. All this happens, they say with immense self-satisfaction, without the intervention of any government or collective authority (which would, they insist darkly, abuse the power to make such interventions). It must be difficult for these partners now to contemplate how markets first produced and then spread the current financial disasters across the globe.
US markets began the process in 2000 by rapidly generating many more home mortgages and mortgage-backed securities than before. Profit-driven mortgage brokers greatly increased the number of home mortgages. Profit-driven banks saw huge fees in converting these mortgages into securities and selling them to investors in financial markets around the world. To do that, the banks entered the market for security ratings and paid the providers of these, corporations like Moody’s and Standard and Poor’s, to supply high ratings. The rating companies complied and made huge profits in that market. The banks also purchased insurance policies (“guaranteeing” these mortgage-backed securities’ principal and interest payments) in the market for them. The insurance companies made much money selling those policies.
No conspiracy was needed to produce the real-estate bubble nor its current, devastating implosion. Just the normal workings of profit-driven markets sufficed to do the job.
Meanwhile, the labor market in the US since 2000 kept real wages from rising. So, many workers could not keep up their mortgage payments, especially when the market prices for food and fuel soared. They stopped their mortgage payments. The banks, hedge funds, and others who had purchased the highly-rated, insured mortgage-backed securities discovered that the market had sold them bad investments. Trying to sell these bad investments, they discovered that there were few buyers. Mortgage-backed securities’ prices collapsed. That’s how markets work. The lowered prices of mortgage-backed securities reduced the wealth of the banks, hedge funds, and other investors around the world who still owned them. The collapsing market for mortgage-backed securities commenced to terrorize all the world’s financial movers and shakers starting in the second half of 2007.
When banks, hedge funds, and wealthy investors get hurt, they immediately use markets to try to shift the pain onto others. Banks sought to recoup losses from their bad investments by withdrawing credit from individuals and businesses and/or charging more for the loans they provided to them. In economic language, the mortgage-backed securities’ collapse was spread to the credit markets generally. And that brought the disaster to credit-dependent individuals and businesses that had had nothing to do with mortgages or real estate. The market mechanism thus spread terror to vast new populations.
As credit markets extended the mortgage-backed securities disaster, via constricted credit to other borrowers, those borrowers had in turn to reduce their purchases in the consumer and capital goods markets. The linked markets proved to be a very effective mechanism enabling the mortgage-backed security crisis to provoke an economy-wide recession in the United States. Since the US is the largest market in the world for commodities produced everywhere, its recession will spread — by means of the market — to produce economic turmoil and suffering globally. The world’s markets comprise a terror network, a system for producing economic disaster and delivering it to every corner of the planet.
Much like other kinds of religious fundamentalism, market fundamentalism — the dogma that markets guarantee efficiency and prosperity — has wrecked economies and lives. Plato and Aristotle explained the dark side of markets thousands of years ago. They and countless others since then have shown how and why markets repeatedly destroy the bonds of community and undermine social cohesion. Yet the market fundamentalism of recent decades blinded leaders and many followers to the known failures of markets. They and we will now pay a heavy price for their blindness.
I am not saying that markets must never be used as ways to distribute some products and some productive resources. That would simply be a reverse fundamentalism. Rather, lets recognize that markets have strengths and weaknesses and act accordingly. Just as we know government intervention and planning needs checks and balances to avoid its pitfalls, markets need all sorts of checks and balances to avoid their horrors. The worship of markets “free” from constraints and controls is bad witchcraft the world can no longer afford.
In any case, markets, whether controlled more or less, are not our economy’s only basic problem. How markets work is shaped by how we organize production. Our economic system organizes production in ways that do more damage than markets. Production occurs mostly in corporations run by boards of directors (usually 15-20 individuals). Those boards receive the profits made from the goods and services produced by the workers. Those boards decide what to do with those profits. Those boards manipulate markets to enhance their profits and to maintain their position atop the corporate system. In contrast, the workers — the majority in every enterprise — do not get the profits their labor produces nor have they any say in what is done with them. In the market as organized by boards of directors, workers get too little in wages and pay too much in prices.
This system places conflict and conflict of interests right in the heart of production. Boards of directors work to get more out of workers while paying them less; the workers want the opposite. What a way to organize production!
Class conflict on the job spills over into markets. “Reforms” imposed on markets in the wake of their current meltdown will fail if we do not change the organization of production. Suppose we reorganized production so that those who produce the goods are also those who receive the profits and decide on their use. Suppose in this way US workers achieve what polls show they want — to be their own bosses on the job. Suppose every job description obliges the worker holding that job to participate in collective discussion and decision on how to use the enterprise’s profits.
As their own bosses, workers could effectively insist that markets be just as controlled and limited to serve the majority as corporations and governments should be.
Rick Wolff is Professor of Economics at University of Massachusetts at Amherst. He is the author of many books and articles, including (with Stephen Resnick) Class Theory and History: Capitalism and Communism in the U.S.S.R. (Routledge, 2002) and (with Stephen Resnick) New Departures in Marxian Theory (Routledge, 2006).