SOCIAL, NOT FREE, MARKETS

In Enlightenment's Wake, John Gray gives a 6 point definition of social market theory (pp. 54-56) and I think it could also be called reality-based economic theory.   I know this is a lengthy excerpt but I think it's important.

What are the key ideas that define the social market perspective? There are, so far as I can see, six ideas that animate this intellectual tradition, as it is found among the German Ordoliberals who are its principal intellectual progenitors, and as it is echoed in other, kindred thinkers such as Maynard Keynes.

First, the social market theorists reject the view that markets are, or should be, the unplanned outcomes of cultural or institutional evolution. For these thinkers, market institutions are not forms of spontaneous order, which we receive as gifts from history, but instead human artefacts, created — in all their varieties beyond the most rudimentary — by legal artifice and political intervention.

Second, and following from the first point, market institutions are not to be theorized, as they are commonly in the United States and by those who think of themselves as Lockeans, as being constituted by a structure of fundamental rights. Market freedoms are not best theorized as shadows cast by basic human liberties, and market institutions are not justified by their embodiment of any structure of supposed fundamental rights. Rather, market institutions are justified by their contribution to individual and collective well-being, and their structure — unlike, presumably, any structure of fundamental rights — is perpetually open to revision and reform.

Third, on this view, market institutions must be complemented by other institutions, and by modes of public policy, which confer on market participants forms of security that market institutions by themselves cannot, or do not adequately, provide. Market institutions are not free-standing, but come to us — if they are at all stable — embedded in such other institutions, which both define their limits and confer legitimacy upon them. Among these institutions and policies are not only welfare institutions conferring entitlements on people but also macroeconomic policies designed to secure a stable economic environment — of both employment and prices — within which market participants can effectively operate. In some national and historical contexts, the policy framework may legitimately and desirably encompass an industrial policy which seeks to confer a measure of concertation on the research and development and on wage-bargaining. Market institutions are not then free-standing but part of a larger nexus of institutions from which they derive whatever stability and legitimacy they possess.

Fourth, and as an implication of the last point, market institutions have as their matrices particular cultural traditions, without whose undergirding support the frameworks of law by which they are defined are powerless or empty. Such cultural traditions are historically very diverse: in Anglo-Saxon cultures they are predominantly individualistic, in East Asia solidaristic or familial, and so on. The idea that there is a special or universal connection between flourishing market institutions and an individualistic cultural tradition is an historical myth, an element in neo-conservative folklore, especially in the United States, rather than the result of any disciplined historical or sociological investigation. Moreover, among the Scottish thinkers, such as Adam Smith and Adam Ferguson, who not unreasonably generalized from their own historical experience to such a connection, this result of their inquiries evoked anxiety as to the eventual fate of market institutions, since — like later thinkers such as Joseph Schumpeter — they feared that individualism would consume the cultural capital on which market institutions relied for their renewal across the generations. Our experience suggests that such fears as to the ultimately self-defeating effects of market institutions that are animated by individualist cultural traditions are far from groundless.

Fifth, market institutions legitimately and necessarily vary according to the diverse national cultures of the peoples who are their practitioners. There is no universal or ideal-typical model for market institutions, but instead a variety of historical forms, each rooted in the soil of a particular common culture. In the modern age, this common culture is that of a people or nation, or a family of such peoples. Market institutions which do not express, or accord with, an underlying national culture will be neither legitimate nor stable; they will mutate, or be rejected, by the peoples that are subject to them.

Sixth, and as a consequence of the last point, market institutions will not have popular acceptance or political stability if they do not meet standards of legitimacy set by their underlying cultures. In East Asian cultures, they must be compatible with the maintenance of social consensus and communal harmony. Among European peoples, they must —contrary to neo-liberal ideologues such as Hayek — satisfy vague, but pervasive and deep-seated norms of equity and fairness; and they must be reconciled with the political demand for forms of common life, and a public environment, that are rich in choice-worthy options, that is recurrently generated through democratic institutions. This last point is generalizable, and of considerable importance. In all those cultures where democratic institutions are themselves elements in the common conception of legitimacy, market institutions will be stable and flourishing only in so far as their forms and workings are acceptable, ethically, culturally and economically, to the underlying population. Contrary to neo-conservative messianism about 'democratic capitalism', there is nothing to suggest that the combination of market institutions with political democracy, particularly in their Anglo-American forms, is at all universal. In China, and perhaps in parts of the post-Soviet world, market institutions may exist, and flourish, in combination with non-democratic regimes, for generations. They will do so, however, only if they accord with the cultural traditions of their practitioners. In countries where democratic conceptions of legitimacy are deep-seated, and democratic institutions themselves stable, market institutions will flourish only in so far as they match conceptions of fairness, community and for that matter of efficiency which find expression in democratic political life. Projects of market reform which are insensitive to the cultural norms of fairness to which democratic institutions give political expression are fated to ignominious failure. Whether or not democratic norms are deep-seated, projects of market reform in which governments relinquish overall strategic direction of the economy, and in which the course of rapid economic change is for that reason uncontrolled, will fail, and the regimes that preside over them will fall. In the post-communist world, weak democratic regimes which sponsor projects of market reform that result in economic dislocation that violates popular standards of acceptability will be swept away, and replaced by regimes whose commitments are neither to market reform nor to democracy.