PATRICK M.

BOARMAN
Beyond Supply and Demand: The
Framework of the Market Economy
The search for "a capitalism with a human face" and the institutions
needed to secure it could become the dominant concern of the last years
of this century and the first years of the next for economists everywhere.
Among the lasting accomplishments of neoclassical
economics is its theory of the market economy, in
both its micro and macro dimensions, including the
famous laws of supply and demand, upon which an
elaborate scientific stmcture has been and continues
to be erected. Economists can look back on fairly
long periods of stable acceptance of this structure,
notwithstanding periodic intermptions by epochal
events such as the Great Depression, World War II,
and the end of the Cold War.
Is what we have always believed and taught still
tme? Is our economic mind-set still in accord with
reality? Once again, an historic conjuncture is at
hand, the result not just of the collapse of
Communism but of the total reconfiguring of the
world economy now under way. It is a conjuncture in
which the market economy is uniquely positioned to
become the universal economic model. But is our
(the West' s) version of the marketone which
largely takes for granted its institutional supports,
and therefore largely ignores themadequate to the
mission to which it is called?
The market mechanism as abstraction
For decades, the focus of attention of Westem econo-
mists has been the market mechanism in abstracto.
Traditional economic theory has examined the market
mechanism, in both macro and micro contexts, in
ever more minuscule detail, at ever higher levels of
abstraction, and in ever more abstruse terms. This
work has undoubtedly yielded rich dividends in
respect to the understanding of how markets function.
But it has been carried on largely in a conceptual vac-
uum. There has been minimal attention to the institu-
tions extemal to markets, and to the interplay of the
markets with these institutions, even though these
determine the character and the specific outcomes of
the world's real market economies, historically and
today.
Neoclassical economists and we, their legatees,
have long been the beneficiaries of the market mech-
anism. And we have long focused our attention on
this wondrous device and determined that the expli-
cation of its mysteries is the highest of callings. But
we have tended to forget that, taken out of the living
tissue of beliefs, practices, habits, mores and behav-
iors, informal and formal, that surround it, it is and
remains an abstraction. To imagine that the dense,
complex, multi-layered reality of the modem suc-
cessful market economy can be reduced to an ideo-
logical epithet"the free market"and then
purveyed as such to those (the inhabitants of the ex-
Communist states, among others) in search of a ratio-
nal and humane socioeconomic order is simplistic
and very possibly prejudicial to a successful outcome
of such a search.
The Nobel Prize in economics
A welcome jolt to the prolonged Westem preoccupa-
tion with economic abstraction were the awards of
this year's Nobel prizes in economics to two institu-
tionalists. Professors Robert Fogel and Douglass
PATRICK M. BOARMAN is President of Patrick M. Boarman Associates, Inc., an economics consulting firm in San Diego,
California.
March-April 1994/Challenge 31
North. The emphasis given by these economists to
political, legal, and moral institutions, and to the
changing historical environment of the market as
major determinants of market outcomes, and of eco-
nomic performance generally, helps redress the
obsessive attention to the market mechanism as a pri-
marily mathematical and geometrical constmct that
is distinct from the institutional matrix from which,
in the real world, it is physically inseparable. The
selection of these economists as Nobel Laureates is,
in fact, a reflection of the urgent need of our time not
only for understanding of the market mechanism per
se, but for a market economy that will work in real
time and in settings that are, institutionally, substan-
tially dissimilar.
Professor Fogel is the co-author of a controversial
study of the institution of slavery. Time on the Cross.
(See For Further Reading.) It showed that, contrary
to orthodox opinion, slavery was economically effi-
cient and that it was abolished only because of moral
and political objections to it. Douglass C. North, in
various volumes of economic history (see Structure
and Change in Economic History in For Further
Reading), has defended the equally unorthodox view
that institutionspolitical, legal, culturalare as
important as market activity itself in generating eco-
nomic growth and in determining the growth paths of
particular economies.
For North, institutionsbe they the U.S.
Constitution, the common law, informal codes of
behavior, or traditions and customsare the mles of
the game in a society. "[They] are the humanly
devised constraints that shape human interaction. In
consequence, they structure incentives in human
exchange, whether political, social, or economic.
Institutional change shapes the way societies evolve
through time and hence is the key to understanding
historical change." (See Institutions, Institutional
Change and Economic Performance in For Further
Reading.) It follows that a socioeconomic order is
one comprised not only of universally valid, perma-
nent economic elements (e.g., the laws of supply
and demand) but of the institutions peculiar to a
particular culture or society.
Institutions and economic performance
The ultimate determinants of the economic perfor-
mance of a nation, assuming that market processes
guide the use of its productive resources, are its his-
tory, its religion(s), its laws, and the character and
culture of its people. Extended discussion of these is
not within the scope of this article, but selected facets
of these grand infiuences (insofar as they appear as
institutions) do warrant identification and brief
examination.
Specifically, the question of what kind of institu-
tional framework is most appropriate for the success-
ful functioning of a market economy is being asked
everywhere in Eastern Europe and in the former
Soviet Union, as the centrally planned economies
there disintegrate or are dismantled. It is also being
asked in China, where the leadership, openly sup-
portive of a market economy, is seeking to fill the
institutional void inherited from Communism with
some elements of a Westem-oriented legal system,
the opening of stock exchanges in major centers, and
a revival of the concept of property rights. And
socialist India, whose population augurs to overtake
that of China in the 21st century, is witnessing a
growing consensus among businesspeople, politi-
cians, and academicians that its hopes for the future
are tied to the adoption of some form of capitalism
and of the infrastmcture necessary to support it. It is
a question that continues to be posed (in more or less
imperative tones) even in countries that have known
the market form of economic organization for a very
long time. In the unified global marketplace now
emerging, in which some market economies appear
to be doing very well (even extraordinarily well),
while others are faltering (some badly), a knowledge
of the kinds of government policies, management
philosophies, legal arrangements, or fiscal and mone-
tary measures that are best calculated to give one
economy a competitive advantage over another has
become as prized as the secrets of the atom in the era
of the Cold War.
Varieties of capitalism
A visitor from another planet, having matriculated at
an American college and been obliged to take
Economics 101, might acquire from his textbook,
with its etherealized presentations of market mechan-
ics, the impression that the modem economy oper-
ates in a vacuum. But he would be mistaken. In fact,
the real economy is comparable to the heart of a liv-
ing organism. It does not exist apart from that organ-
32 Challenge/March-April 1994
ism. It incorporates and is itself wholly a product of
the extra-economic mores and values of the societal
matrix in which it is embedded. The market, that is to
say, will yield one result within one particular institu-
tional framework and subject to one particular mix of
economic policies, and another and possibly signifi-
cantly different result in a society with different
values, different institutions, and different under-
standings of what is appropriate economic and/or
social policy. In this context, the label "capitalism,"
when applied uniformly to existing or historical
socioeconomic systems, is misleading. Compare, for
example, the different meanings of "capitalism" in
Victorian England and in Germany (prior to unifica-
tion) in the post-Wodd War II period. In the first
case, "capitalism" was the rubric under which the
British Empire witnessed an unparalleled expansion
of its power and prosperity. But it was also, in the
eyes of many, then and since, equated with a system
of dog-eat-dog, in which the weaker members of
society were abused and exploited by the powerful.
In postwar West Germany, the heart of whose extra-
ordinary economic revival was the free market, the
government assumed, and continues to assume,
major responsibility for addressing an array of social
problems. So far, indeed, have the Germans, in their
own estimation, distanced themselves from historic
capitalism that the word has fallen into virtual disuse
there. Instead, the combination of market forces and
institutional arrangements (many of them post-1948
innovations) that spawned the German economic
miracle is commonly described as die soziale
Marktwirtschaft (the social market economy). (See
Germany's Economic Dilemma in For Further
Reading.)
Likewise, to describe the economy of the United
States merely as a "market economy" or as "capital-
istic" is not very helpful when it comes to comparing
it with other so-called capitalistic states. In the case
of the United States, a complex fabric of institutions
undergird the economy and determine its special
character and performance. Some of them are physi-
cal, such as the communications and transportation
systems. Many are organizational in nature, such as
the dense network of fiduciary relationships in the
fmancial community. Most (e.g., the antitrust laws,
the laws regulating the securities markets, and the
food and drug industriesto name but a few) are the
product of decades of patient evolution. This compli-
cated whole is summed up most inadequately in the
frequently applied labels "capitalism" or "the free
enterprise system." To equate this complicated reality
with, say, the "free enterprise system" of El Salvador,
with its radically different history, its egregious dis-
parities between poor and rich, and its primitive
institutional framework, does disservice to an accu-
rate portrayal of both economies.
Note that the American version of capitalism also
comprehends the peculiarities of the American style
of management, with its predilection for short-term
thinking (the obsessive attention to quarterly earn-
ings) and for "the bottom line." It also includes the
unhappy intersection of historical and cultural forces
that has mired much of public elementary and high
school education in a rut of mediocrity, given rise to
a national antipathy to saving, and engendered a ritu-
alistic hostility among the primary social actors
business, labor, and government. This is a "capi-
talism" which, with all its positive and negative
attributes, is extremely complicated and uniquely
American. It functions as well (or as poorly) as it
does not only because it is "free," but because of all
the other elements in which it is enveloped.
In the case of the capitalism of modem Japan, the
market is the core of a unique constellation of institu-
tional and cultural factors that, in extraordinary syn-
ergy, has permitted that nation to establish and to
continuously extend its unprecedented role in the
world economy. The ingredients of Japan's success
have become cliches. They include a high propensity
to save; cooperation instead of confrontation among
the major playersgovernment, corporations, the
banks; intense competition among companies (e.g.,
in the automobile industry with its ten fiercely com-
peting firms) but unity in the pursuit of national eco-
nomic goals; the favoring of long-term over
short-term perspectives; "lean" production, group
decisionmaking, and emphasis on zero defects in
preference to Western-style mass production with its
top-down command structures and toleration of
errors; and many others.
It is also clear that in bad economic times, like the
present, the Japanese economy is not invulnerable to
the diseases which afflict market economies else-
where. Furthermore, Japanese business culture
embraces what many would see as a pervasive uni-
formity, a lock-step mentality that penalizes individ-
uality, and an obsession with work that leaves little
March-April 1994/Challenge 33
time for the pursuit of the things that lie beyond sup-
ply and demand. To be sure, the Japanese way of
doing things is not forever frozen. But the manner
in which it evolves will itself be determined by a
context which is peculiarly Japanese.
Impacts of institutions
It is, in any case, evident that the institutional influ-
ences operative in market-based economies may
have beneficent effects that confer competitive
advantage upon a particular nation. But others may
exercise a malign influence and, unless corrected or
eliminated, will tend to inhibit the optimal function-
ing of the market and will lead eventually to deterio-
ration in its performance at home and abroad. If, for
instance, it can be shown that govemment has a vital
role to play in the provision of an effective regulatory
framework for the market economy, it is no less
demonstrable (and the history of this century has fur-
nished abundant evidence of it) that there are limits
to the functions of govemment which, when trans-
gressed, lead to the death of the market. It follows
that a critical prerequisite for the successful installa-
tion of a market economy is the clear definition of
those limits (i.e., the careful and unambiguous
spelling out of the functions of government in its
many qualitative economic rolesmonetary, fiscal,
regulatoryand in its quantitative roles as a supplier
of public goods and as a provider of essential infra-
structures).
Institutions, in addition to the effects noted hith-
erto, perform a major socioeconomic role, in that
they reduce uncertainty. They constitute "mles of the
game" that directly affect the costs of exchange and
of production, and thereby affect economic perfor-
mance. The "game" in question is market activity
that arises from timeless and universally applicable
assumptions about human behaviormost notably
the laws of supply and demand. The strength of
microeconomic theory, as Douglass North has
pointed out, is rooted precisely in these assumptions.
So that to the extent that institutionsthe rules
within which economic activity is carried onare
stable and predictable, economic efficiency is
increased.
But it is also true that institutions are human arti-
facts, that they are evolving, however slowly, and
that these changes continually alter the choices open
to economic agents. The fortunate part of this
process is that institutions that are inimical to eco-
nomic efficiency or are undesirable on other grounds
(e.g., the institution of slavery) can be changed or
eliminated. While the fundamental behavioral
responses of market participants in the United States
(as postulated, for example, in the law of demand)
are presumably the same today as they were a cen-
tury ago, the institutional environment of the U.S.
economy has undergone decisive transformation
through the years in the name of economic reform.
Much of the change may be presumed to have had
positive impacts on economic performance.
Conversely, other institutionsthose rooted in invet-
erate traditions or beliefs, and hostile to economic
efficiencymay be resistant to change. They may
give way only under the application of concerted
pressure and at the cost of temporary or prolonged
social disorder.
Lodestar ofthe ex-communist states
The issues raised here have taken on especial signifi-
cance in light of the disintegration of the communist
ideology in Eastern Europe and in the constituent
states of the former Soviet Union (Russia, in particu-
lar) and the accompanying, near desperate search for
a new economic and social order. That order, from
what little of it is now visible, will logically seek to
merge the liberating and creative forces of the market
economy with the social, environmental, and ethical
imperatives of a good and just society as ex-
Communists understand them. A few years ago, then
Senator Albert Gore described his moving encounter
with Yevgeny Yevtushenko, the Soviet poet of con-
science, who warned of the risks of a search for
something in between freedom and slavery in his
poem, "Half-Measures":
" . . . There is no semi-fatherland,
nor can we fathom semi-conscience,
half-freedom is the trek to jail,
and saving our fatherland halfway
would fail."
And yet, the search for something in between cap-
italism (raw, unalloyed, uncivilized capitalism) and a
centrally planned economy is absolutely crucial to
the success of any effort to install or reinstall a mar-
ket economy in the states of the former Soviet Union,
or elsewhere in Eastem Europe. Both the poet and
34 Challenge/March-April 1994
Mr. Gore wrestled with that inescapable problem in
their encounter. Among other things, they talked of
the possibility that then President Gorbachev might
choose to follow a "third path" to lead the Soviet
Union to safety. Such a third path, noted Mr. Gore,
would be "an economic transition from the discred-
ited 'command' model to something approximating a
free market, yet not quite capitalism." Exactly so.
The centrally planned economy may be done with,
but "capitalism," with its historical baggage of nega-
tive associations, is still feared. So it is the "market
economy with a conscience" that is likely to find pre-
liminary acceptance among many still hoping to dis-
cover "a socialism with a human face." Such a
socially conscious market system remains, in fact,
the lodestar of the erstwhile hard-line communist
statesBulgaria, the Czech Republic, Romania, and,
not least in the wake of recent elections which
restored former Communists or intransigent anti-cap-
italists to power, Poland and Russia. In these states,
there is continuing and, lately, increasing anxiety
about the social traumathe unaccustomed exposure
to unemployment, inflation, and economic uncer-
tainty of all kindsthat the transition to a market
economy may entail.
The importance of competition
The market economy (as more than two centuries of
experience with it witnessed) stands or falls with
competition. It is the device that transforms the pur-
suit of self-interest into an increase in the general
welfare. Competition ensures reciprocity in
exchange. It also keeps prices close to the costs of
production and, by that very pressure, minimizes
such costs. It is the goad that triggers invention and
innovation. Additionally, it makes possible the
expanding array of choices of goods and services that
are associated with a high standard of life. On
another level, competition is congruent with the dis-
aggregation of economic power that favors democra-
tic forms of government. But absent the estab-
lishment and enforcement of rules to prevent monop-
olization, competition tends to decay. This was the
case in all of the advanced economies toward the
close of the 19th century. In the United States, there
were the "robber barons" and the great trusts of the
day, whose misdeeds were memorialized in works
such as Upton Sinclair's The Jungle, a searing indict-
ment in fictional form of the meat industry, and Ida
Tarbell's A History of the Standard Oil Company,
that encapsulated for many the real meaning and
fragile structure of competition. (See For Further
Reading.) And it was an exercised public and its rep-
resentatives in Congress (not the economists of the
time) who determined to end the abuses by enacting
and consequentially enforcing the Sherman and
Clayton Antitmst Acts. These acts, and subsequent
additional modifications of the legal and regulatory
environments within which business was permitted
to operate, imparted to American capitalism a more
interventionist aspect as contrasted with the capi-
talisms of Europe in the pre-World War I era.
Comparing the concurrent evolution of capitalism
in Europe and in the United States in the period lead-
ing up to World War II, one notes the increasing
opprobrium heaped upon it in Europe, the displace-
ment of market forces by the state in key sectors of
the economy, the emergence of state capitalism under
the Nazi and Fascist regimes in Germany and Italy,
and the rise and growing influence of European
Socialist and Communist parties. In contrast, capital-
ism in the United States not only survived, but did so
without serious challenge from any competing ideol-
ogyan outcome attributable in no small measure to
the passage of the antitrust laws and related reforms
of the markets. It was due also, and in even greater
degree, to the fundamental changes in the market's
institutional framework which were accomplished
during and after the Great Depression. They included
Social Security legislation, a panoply of regula-
tions in the banking, securities, and labor markets,
and an increasingly sophisticated employment of
the new macroeconomic tools of monetary and
fiscal policy in the pursuit of growth and stability.
Advent ofthe social market economy
If capitalism in the 1930s and 1940s was increasingly
seen as "the enemy" by intellectuals in Europe
(including clerics on the left and on the right), its
future at the end of World War II appeared precarious
indeed. Labor or socialist governments were in
power virtually everywhere, with Italy on the verge
of electing a communist government. In occupied
Germany, the Social Democratic leader, Kurt
Schumacher, appeared poised for certain victory in a
renascent German democracy. Yet, in spite of the
March-April 1994/Challenge 35
overwhelming dominance of left-wing and socialist
sentiments in the immediate postwar period, capital-
ism had an astounding rebirthfirst in West
Germany, and then in the neighboring nations. That
rebirth, baptized as the "social market economy,"
was rooted as much in a newly conceived institu-
tional infrastructure of the market as in the market
mechanism itself. In retrospect (so Germans would
argue), it was not the market economy as such (a
neutral device), but an inner contradiction in the pre-
war capitalistic order of Europe that led to the
demise of that order. This contradiction developed
from the mistaken belief that a competitive economy
would be established and maintained by a policy of
laissez-faire. In fact, freedom was used in the "free"
economy to form trusts and cartels and to secure the
welfare of particular groups at the expense of the
general welfare. In short, the market economy would
have had little chance of reemerging in Europe as it
did without the sweeping changes in the institutional
frameworks put in place around it, the intention of
which was to alter the outcomes which an unalloyed,
unregulated market economy would have produced.
Adam Smith, self-interest,
and Ludwig Erhard
Adam Smith, the first and still one of the greatest
theoreticians of the market, bequeathed to us the
enormously fmitful insight that the pursuit by each of
his selfish interests conduced, through an invisible
design that was no part of our doing, to the greater
welfare of all. In the opening pages of Wealth of
Nations, he notes that: "It is not from the benevo-
lence of the butcher, the brewer, or the baker that we
expect our dinner, but from their regard to their own
interest. We address ourselves, not to their humanity
but to their self-love, and never talk to them of our
own necessities but of their advantages."
But even in 1776 it was evident that if the maxi-
mizing of one's own interests were pursued in an
inappropriate or conflicting context of the larger
society (e.g., under the threat of war, or where com-
petition is feeble or absent) the postulated benevolent
social outcomes of the market would be fmstrated.
Because Smith, at many points in his great work,
recognized the limits of the market, especially in
regard to the fragility of competition ("People of the
same trade seldom meet together, even for merriment
and diversion, but the conversation ends in a conspir-
acy against the public, or in some contrivance to raise
prices"), it is likely that he would have applauded the
emendations to the market model embodied in the
concept of the social market economy, especially its
two fundamental objectives. The first of these was
the rehabilitation of a competitive market economy,
for so long discredited (in Germany), as the indis-
pensable engine of prosperity. The second was the
emplacement of that engine within a carefully
designed social, primarily govemmental frame capa-
ble of addressing problems such as large-scale unem-
ployment, persistent monopoly, environmental
degradation, and social dislocations and inequities
left in the wake of World War IL At the same time,
the architects of the social market economy were not
so committed to its "social" content as to be blind to
the economic realities. The chief of these architects,
Ludwig Erhard, adjured his countrymen at the time
to remember that, in the infancy of a market econ-
omy, the promotion of welfare by increasing output
as rapidly as possible made more sense than expend-
ing energy quarreling over how the existing product
was to be distributed. In his words: "It is consider-
ably easier to allow everyone a larger slice out of a
bigger cake than to gain anything by discussing the
division of a smaller cake." (See Prosperity through
Competition in For Further Reading.)
It is noteworthy that, thirty-five years after
Erhard's warning, Germans are again concerned
about a possible overstretching of the social safety
net of their economy. Chancellor Helmut Kohl gave
voice to the concem when he denounced those whose
intemperate demands threaten to destroy the incen-
tives that underlie German economic success. "We
cannot," he said, "organize our country like one big
recreation park."
In truth, though Germany remains the econotnic
powerhouse of Europe, its economic perfonnance
has slipped in recent years, partly because of some
significant failures to adhere to the prescriptions of
the social market economy, but more importantly
because the expectation on the part of Chancellor
Kohl and other German leaders that West Germany
could quickly transform East Germany into a replica
of itself was wildly unrealistic. The magnitude of the
task of repairing forty years of German communist
misruleinstitutionally and economicallywas
simply not foreseen. This miscalculation apart, there
36 Challenge/March-April 1994
are vital lessons concerning the construction of an
appropriate framework for a market economy to be
learned from Germany's extraordinary forty-five
years of economic and social progress.
Need for rules
Americans, like Germans, also exhibit a new realism
in the face of a huge and still-mounting national
debtthe legacy, in part, of the national tax-cutting
binge of the 1980s. It is now abundantly clear that,
with respect to public goods, there is indeed no such
thing as a free lunch. They must be paid for, if not
through increased debt, then through higher taxes. To
these concems must be added the consequences, still
unfolding, of another major undertaking of the 1980s
specific to the American model of capitalism
namely, the dismantlement of a number of important
govemmental stmctures and functions. In effect, sev-
eral key past reforms of the market economy have
been undone. There was, for instance, the rush to
deregulate the economy that began in the late 1970s
and continued through the 1980s. While there is no
doubt that a not inconsiderable number of govern-
ment regulations were either unnecessary or perverse
in their effects or were accompanied by costs in
excess of their benefits (and still are), not all regula-
tion can be so labeled. A great deal of it, in fact,
remains critically needed. The dilution or abrogation
of regulations affecting the U.S. savings and loan
industry has already cost the U.S. public hundreds of
billions of dollars, and the tab is still mounting.
In a literal sense, laissez-faire was always an illu-
sion. The principal institution affecting the market
economy on a daily basis is and must remain govem-
ment. Its infiuence is exerted in three major ways: (1)
quantitatively, as a supplier of public goods (national
defense, fire departments, etc.) and of essential infra-
structures (roads, prisons, sewage systems, etc.),
which the market cannot or will not supply; (2) quali-
tatively, as a gyroscope holding the economy to a sta-
ble growth path, to the extent possible, through an
uncertain and often tempestuous future, using mone-
tary and fiscal policies for that purpose; and (3) again
qualitatively, as a rule-maker and enforcer. It is this
regulatory function which merits especial scrutiny
here, as it is a chief source of contention between
modem-day champions of laissez-faire who are per-
suaded of the self-sufficient and self-policing attrib-
utes of the market mechanism, and those who support
an active interventionist role for government (for
example, in the safeguarding of competition or in the
abatement of pollution). What is often not taken into
account in this argument is a critical distinction
between government interventions which are con-
stmctive (such as the antitmst laws) and those which
are harmful (such as protectionist policies).
Interventions which conform to the market (e.g.,
taxes, antitmst laws, regulation of public utilities, reg-
ulation of the securities markets, and regulation of the
food, dmg, and other industries exhibiting substantial
market imperfections) are to be distinguished from
nonconformable interventions (e.g., price controls,
exchange controls, import quotas, agricultural price
supports, etc.) which vitiate the supply/demand mech-
anism. The former simply add data to the decision-
making process. They alter the mles of the game or
add new mles. But they do not intmde into the inter-
nal mechanics of the market. In a forthright acknowl-
edgment on the part of one who had inherited the
deregulatory mantle of the Reagan Administration,
former President George Bush declared in the second
year of his Presidency that, "In some cases, well-
designed regulation can serve the public interest."
Dark side ofthe capitalist moon
The future of the market economy, will, in the end,
depend directly upon the desire and the ability of its
beneficiaries and advocates to surround it with an
appropriate institutional framework. That framework
will differ from place to place and from time to time.
What must be avoided in the discharge of this task
are the two extremes of, on the one hand, an econom-
ically ignorant moralism or do-goodism which, in
denying the laws of supply and demand, produces
economic disorder and the impoverishment of the
people (doctrinaire socialism, for example) and, on
the other, a morally obtuse economism (the idolizing
of a disembodied "free market") which, oblivious to
the most important concerns of man, those that lie
beyond supply and demand, ends by fomenting a tide
of resentment that is capable of sweeping the market
economy away.
Giving up on the market before giving it a chance
to work would be an unimaginable disaster for
humankind in the East and in the West. But the act of
will required not to give up on it will be affected in
March-April 1994/Challenge 37
critical degree by how the ex-communist states (or
those nominally communist, but in transition) judge
the capitalisms in place around them. Contributing to
that judgment in Russia and in other Eastern
European nations will be not only the impressive and
highly visible successes of the contiguous societies
(such as Germany, Austria, Switzerland, Norway,
and Sweden), but the less pleasant, less reassuring
features of the capitalist landscape as well. How will
those who have known only communism react to the
dark side of the capitalist moon, so to speak? It is a
fact that economic anomalies in some parts of the
capitalist world (e.g., a spreading blight of homeless-
ness in more affluent nations, pervasive and enduring
poverty in some of the less developed ones, and
growing gaps between rich and poor in both) are pro-
voking renewed questions about the inherent good-
ness and justness of the capitalist model. In the
United Statesthe quintessential capitalist nation
critics note these proclivities of the extant economic
culture: an unabashed practice of sleaze in places pri-
vate and public; an obsessive cult of the self coupled
with a penchant for unalloyed greed; and leveraged
buyout artists and merchants of junk bonds taking on
the status of folk heroes. Considering all this and the
fact that other capitalist nations have hardly exhib-
ited immunity to ethical lapses in the highest and
lowest places, some are asking: Has the moral bot-
tom dropped out of capitalist society?
Morals and the market
Despite Karl Marx, the economic system under
which a society functionsbe it central planning or
the marketis not coterminous with the society. The
life of the society extends significantly beyond things
economic. It is thus fortunate that the economy, as a
subordinate part of a larger social whole, can be
fixed when it is cormpted or broken, instead of need-
ing to be extirpated root and branch, together with
the society from which it is indistinguishable.
Fortunate, too, is the circumstance that art, architec-
ture, literature, and religion lie beyond economic
arrangements, but nevertheless infuse them and may
be refiective of them (as, for example, the novels of a
Charles Dickens, Sinclair Lewis, or Aleksandr
Solzhenitsyn). But it is worth noting that, whether a
society is hedonistic or puritanical, or some admix-
ture of the two, whether its life-style is materialistic
or ascetic, is to a considerable degree the outcome of
the freedom of choice that a market makes possible.
And though the market, in one sense, is ethically
neutral (where competition is present and the bene-
fits of exchange thus roughly equal), the choices of
the things or actionsgood or badwhich it makes
possible and which are within its ambit, involve it in
a moral debate. Do people determine the character of
markets, or markets the character of people?
One notes, in any case, a sharply increased public
awareness of the moral lacunae in market-based soci-
eties, and specifically in the United States. Books,
films, talk shows, and legislation-in-process devote
substantial time and attention to the nation's per-
ceived moral and spiritual malaise. Serious social
ills, which are clearly not ameliorable by giving free
rein to the laws of supply and demand, clamor for
solution, among them the emergence of a seemingly
permanent underclass of the poor and uneducated,
nourished by crime and dmgs.
But the moral and social blight that afflicts not
only the United States but a number of the advanced
capitalistic regimes of the present is not unique to
them. The rise in crime rates and other indices of
socially destmctive behaviors in Russia, China, East
Germany, and other places where communism is in
the process of giving way to market-oriented activity
raises troubling questions about a possible immanent
deficiency of the market model. Is moral insensitivity
or obtuseness an inherent part of a market-based
society? Or, conversely, is a market economy a lux-
ury affordable only by a society that has attained a
certain degree of moral maturity, including near uni-
versal commitment to such core values as the Ten
Commandments? How these and similar questions
are addressed will certainly affect the future of the
market economy in traditional capitalist societies.
And this will apply with even greater force in the
newly liberated states, where the perceived costs of a
market economy in social and moral terms have yet
to be exceeded by the perceived benefits. Should this
asymmetry persist, the general disenchantment with
various aspects of the market system may swell to
the point where the search for "a capitalism with a
human face" and the institutions needed to secure it
(as distinct from a market economy as abstraction)
could become the dominant concem of the last years
of this and the first years of the next century for
economists and their patrons everywhere.
38 Challenge/March-April 1994