Stefan Merten discusses the characteristics of markets, and also directly ties this within the context of free software:
* Distribution of goods
Probably one of the most obvious functions of markets is the distribution of goods. Goods that have been produced in a separate process are brought to a market and there they can be distributed.
This function of markets is certainly something which we generally need in a society which includes separation of labor - i.e. in every society which can be wished for.
In Free Software this distribution can be seen - see (Linux) distributions or countless web sites of Free Software projects or SourceForge or ... However, this is not something I'd call a market but a flow of goods.
* Connection of otherwise separated social entities
If those social entities would not be separated from each other they could cooperate in the first place and would not need to distribute there separately produced good afterwards.
This separation is probably a result of large societies where you can not have this type of connection in each instance because the costs for such a connection are simply too high. This is BTW the end to all these backward oriented types of Utopias where people are connected on a level of knowing each other. No, separation of social entities is not reversable in any society which can be wished for.
In a typical market transaction the connection vanishes as soon as the good is distributed. This maximizes your freedom because you don't need to cope with all these difficulties which human relationships can bring with them.
In Free Software we see this connection when one Free Software project uses other Free Software products. Inside of a project where the developers are connected by being in the same project this type of connection making is not necessary. The developers build up a social entity in itself.
It might be notable that in Free Software sometimes the connection is deeper than only in the moment of distribution. This is when users contribute to the project they are using in one or another way.
To me these would be the key characteristics of markets. Please note that scarcity plays no role until here. However, probably usually this is also understood by markets:
* Exchange based distribution
The goods are not simply distributed to those who need them but exchanged by a general exchange system. I.e.: You can only take if you give at the same time something which is considered equal to the good you are taking. Because goods are not equal - otherwise it would not make sense to exchange them at all - there must be a common third which makes them comparable. In capitalism this is the price of the labor which went into the product plus the surplus.
This is the point where alienation comes in because the exchange system abstracts from the concrete use of goods. Even the production process is changed because suddenly it may make sense to produce for a market.
This is also where the notion of quality of a produced good shifts. When you are producing for yourself or socially related people or because of your Selbstentfaltung then you are heading for absolute quality: Creating the best product you can think of. When you produce for a market it totally suffices to produce a quality which is just high enough to be sellable.
How the market economy is always already embedded and connected to non-market forms and sharing
"There are, however, three major but inconvenient truths that seem to get glossed over when we talk about the market economy. The first is that market systems feed off an extensive, underlying gift economy in which people transfer ideas, goods, services, and emotional support to each other without requesting money. Unpaid childcare is one example. If your mother watches your two children while you’re at a job, that’s the gift economy in action. In fact, without friends and family it’s unlikely that you could even maintain the desire to go to work. Even in professional settings we share common resources with business colleagues. Companies rely upon this internal collaboration to produce the very products they then competitively exchange in markets.
The second inconvenient truth about the market economy is that its products are not really desirable unless we can use them within non-market systems. What’s the point of all this stuff getting produced if we can’t share it, compare it, gloat about it, or enjoy it with others? Friends, family, and various community systems make having material goods meaningful.
And third, many commercial market exchanges are actually hybridized with non-commercial elements that add richness. Take, for example, flirting with a bartender as they serve you drinks, or having a discussion about politics with the stylist you’re paying to cut your hair. Not only do market systems rely on non-market influences in order to work, but their products feel pointless and empty without them. Recognition of this, however, is uneven. In small community settings it’s often easy to see a balance between market and gift economies. The shop owner gives a spontaneous discount to a retiree, or allows friends to lounge in a coffee shop long after they’ve finished drinking. Commercial exchange is but one element in a broader set of relationships, and this means the exchange takes longer. Economists call this inefficient; we call it enjoying life.
Meanwhile, in megacities such as London or New York there’s a tendency to strip all non-commercial elements from market interactions. This is the hallmark of what we refer to as commercialization. The large-scale mall and corporation are designed to maximize exchange while offering only a shallow appearance of sociability. The McDonald’s employee is forced by contract to smile at you, but prohibited from taking time to have a true conversation. This phenomenon is even more acute in faceless internet commerce, where clinical, transactional precision dominates. While hyper-efficient exchanges play into our short-term impulses — initially feeling exciting, convenient, and modern — they gradually begin to feel empty. Sure, it’s frictionless commerce, but it’s also textureless.
When detached from a community foundation, markets can bring out people’s most anxious, petty, arrogant, and narcissistic sides, encouraging them to fixate on their individual strands of the overall economic picture, as if it were the whole. The defining qualities of a market economy — like uncertainty and unequal monetary reward — get exalted, and in this frame, everyone else is either a stranger to do battle with or a temporary ally to assist in your personal gain. Socializing becomes “networki"ng.” Non-commercial ties such as friendship, sex, love, and family are either rendered invisible, or presented as kitsch advertisements designed to promote more commercial exchange." (https://howwegettonext.com/reversing-the-lies-of-the-sharing-economy-a85501d14be8)
A critique of markets as optimal
From [email protected]:
"Broadly speaking, there are four fundamental flaws in the theory that private greed reliably creates social good. The financial crisis highlights the fourth and least familiar item in the list, involving access to information. But it will be helpful to begin with a brief review of the other flaws.
First, the theoretical defense of market outcomes rests on Pareto optimality, an absurdly narrow definition of social goals. A proposal to raise taxes on the richest five percent and lower taxes on everyone else is not “optimal” by this standard, since it makes only 95 percent of the population, not everyone, better off. Important public policies typically help some people at the expense of others: pollution controls are good for those who value clean air and water, but bad for the profits of major polluters. The invisible hand won’t achieve such non-consensual results; public goods require public choices.
Second, market competition only leads to the right outcomes if everything that matters is a marketable commodity with a meaningful price. Marxists and others have objected to the treatment of labor as a mere commodity; environmentalists have likewise objected to the view of nature as something to buy and sell. This is not a new idea: in the words of the 18th century philosopher Immanuel Kant, some things have a price, or relative worth; other things have a dignity, or intrinsic worth. Respect for the dignity of labor and of nature leads into a realm of rights and absolute standards, not prices and markets. It doesn’t matter how much someone would be willing to pay for the opportunity to engage in slavery, child labor, or the extinction of species; those options are not for sale. Which issues call for absolute standards, and which can safely be left to the market? This foundational question precedes and defines the legitimate scope of market competition; it cannot be answered from within the apparatus of economics as usual.
Third, the theory of competitive markets and the proof of their optimality rest on the assumption that no enterprise is large enough to wield noticeable power in the marketplace. Adam Smith’s butchers and bakers operated in a relentlessly competitive environment, as do the small producers and consumers of modern general equilibrium theory. In reality, businesses big enough to wield significant power over prices, wages, and production processes can be found throughout the economic landscape.
Big businesses thrive, in part, thanks to economies of scale in technology and work organization: bigger boilers and furnaces are physically more efficient than small ones; assembly lines can make labor more productive than individual craft work; computers are often more productive when they run the same software used by everyone else. Economies of scale are also important in establishing and advertising well-known brands: since no one ever has complete information about the market, as discussed below, there is a value to knowing exactly what to expect when you walk into a McDonald’s or a Starbucks.
Bigness can also be based on unethical, even illegal manipulation of markets to create monopoly or near-monopoly positions. Manipulation constantly reappears because the “rules of the game” create such a powerful incentive to break the rules. The story of the invisible hand, and its formalization in the theory of perfectly competitive markets, offers businesses only the life of the Red Queen in Alice in Wonderland, running faster and faster to stay in the same place. Firms must constantly compete with each other to create better and cheaper products; as soon as they succeed and start to make greater profits, their competitors catch up with them, driving profits back down to the low level that is just enough to keep them all in business. An ambitious, profit-maximizing individual could easily conclude that there is more money to be made by cheating. In the absence of religious or other extra-economic commitments to play by the rules, the strongest incentive created by market competition is the search for an escape from competition, legitimately or otherwise.
Opportunities to cheat are entwined with the fourth flaw in the theory of perfect competition: all participants in the market are assumed to have complete information about products and prices. Adam Smith’s consumers were well-informed through personal experience about what the baker and the butcher were selling; their successors in conventional economic theory are likewise assumed to know the full range of what is for sale on the market, and how much they would benefit from buying each item. In the realm of finance, mortgage crises and speculative bubbles would be impossible if every investor knew the exact worth of every available investment – as, stereotypically, small-town bankers were once thought to know the credit-worthiness of households and businesses in their communities.
So many choices, so little time
The assumption of complete information fails on at least two levels, both relevant to the current crisis: a general issue of the sheer complexity of the market; and a more specific problem involving judgment of rare but costly risks. In general terms, a modern market economy is far too complex for any individual to understand and evaluate everything that is for sale. This limitation has inspired a number of alternative approaches to economics, ranging from Herbert Simon’s early theories of bounded rationality through the more recent work on limited and asymmetric information by Joseph Stiglitz and others. Since no one ever has complete information about what’s available on the market, there is no guarantee that unregulated private markets will reach the ideal outcome. Regulations that improve the flow of information can lead to an overall improvement, protecting the unwary and the uninformed.
When people buy things about which they are poorly informed, markets can work quite perversely. If people trust someone else’s judgment more than their own – as, for instance, many do when first buying a computer – then decisions by a small number of early adopters can create a cascade of followers, picking a winner based on very little information. Windows may not have been the best possible microcomputer operating system, but a small early lead in adoption snowballed into its dominant position today. Investment fads, market bubbles, and fashions of all sorts display the same follow-the-leader dynamics (but without the staying power of Windows).
When people have to make excessively complex decisions, there is no guarantee that they will choose wisely, or pick the option that is in their own best interest. Yet in areas such as health care and retirement savings, individuals are forced to make economic decisions that depend on detailed technical knowledge. The major decisions are infrequent and the cost of error is often high, so that learning by experience is not much help.
The same overwhelming complexity of available choices exists throughout financial markets. The menu of investment options is constantly shifting and expanding; financial innovation, i.e. creating and selling new varieties of securities, is an inexpensive process, requiring little more than a clever idea, a computer programmer, and a lawyer. Such innovation allows banks and other financial institutions to escape from old, regulated markets into new, ill-defined, and unregulated territory, potentially boosting their profits. Even at its best, the pursuit of financial novelty and the accompanying confusion undermines the traditional assumption that buyers always make well-informed choices. At its worst, the process of financial innovation provides ample opportunity to cheat, knowingly selling new types of securities for more than they are worth. Information about the reliability of many potential investments is ostensibly provided by bond rating agencies. One of the minor scandals of the current financial crisis is the fact that the rating agencies are private firms working for the companies they are rating. Naturally, you are more likely to be rehired if you present your clients in the best possible light; indeed, it might not hurt your future prospects to occasionally bend the truth a bit in their favor. The Enron scandal similarly involved accounting firms that wanted to continue working for Enron – and reported that nothing was wrong with the company’s books, at a time when the top executives were engaged in massive fraud." (http://www.paecon.net/PAEReview/issue48/Ackerman48.pdf)
Related book: Frank Ackerman and Lisa Heinzerling, Priceless: On Knowing the Price of Everything and the Value of Nothing (The New Press, 2004)
Infinite Growth Mechanisms
Stefan Merten on the infinite growth aspect of capitalist markets:
"WC: Within capitalism we have M-C-M'
The really important sign here is the apostrophe, which you forgot. It indicates the entirely different dynamics of pre-capitalist markets and capitalist markets. Lets look a bit into it.
BC: Goods are generally produced for self-suffiency. To obtain goods someone is not producing, the overplus of the produced goods are brought to market: Either to exchange them directly with other goods or via money being the mediator. At the end, there is not a "surplus good", but only an "other good". There is no (effective) driver for progression. Things develop slowly and under circumstances of personal dominion.
WC: Roles and relationships of C (or G) and M have completely changed (ignoring why and how). When BC the good and thus the needs are starting and end point of the cycle, now money takes this place, and commodities are in the roles of the mean. From the standpoint of the cycle logic, the purpose concerning needs aren't of interest at all. The products may be food or bombs, it doesn't count. The only purpose is to make money.
However, the purpose is not simply to make money, the purpose is to make _more_ money than invested before. This more-logic comes from competition of those producers who want to sell the same commodity on a limited market. A single capitalist can't say "my way of production is ok, I'll do it for the rest of my live", because the competitor doesn't sleep and produces the same commodities cheaper to overtake market share from the competitor. Why overtaking market share? Because of the economics of scale: On a bigger scale you can produce cheaper (more efficient in terms of value). Conclusion: All participants have to strive for increasing the productivity of work to make their products cheaper - by punishment of downfall. They have no choice if they want to stay inside.
"Having no choice" means a coercion to follow the rules of the things (the commodities). This leads to a reversal of the relationship between the social and the things. In capitalism it is no longer the case, that we organize socially what things we want to produce to satisfy our needs, it is reversed: The things seem to have a life of its own, they move and say to us, want we should do, to satisfy their "needs". They say: Produce me cheaper or you're out of the game. This really weird behavior was named "fetishism" by Marx, and this was one of his most important discoveries (and not the exploitation stuff, which of course it true anyway).
Marx in his own words: "Thus the participants in capitalist production live in a bewitched world and their own relationships appear to them as properties of things, as properties of the material elements of production."
StefanMn uses another term addressing the same topic: alienation. Production in capitalism is alienated, we don't do it for us, we do it for M' in M-C-M'. Thus the "C", the products, are only a by-product of an alienated logic, they are not the aim. Being only a by-product also means, that it cannot be controlled, what they are (food, bomb, etc.), because they all serve M'. And moreover, other externalities cannot be controlled too: CO2-emission etc. Ok, states try to implement some controllings via prices, however, this doesn't really help. Stop.
Conclusion: The built-in infinite growth feature of capitalism finally eats the planet -- and us." (Oekonux mailing list, January 2008)
What are markets good for
Paul Cockshott is a planning advocate, and was asked for what particular type of goods markets may be necessary or optimal:
"The labour used in communal free software is part of the social surplus labour. It is only possible for it to be produced insofar as there are people who are either able to put time into it because they are in an academic environment where they have surplus paid time, or because the advance of technology has reduced the working week sufficiently that people have time after paid work to do it.
As I said in an earlier post, goods whose marginal costs of reproduction tends to zero fall into one of the categories for which even indicative markets are not appropriate.
I specified that I thought that the role of a consumer goods market was limited to those goods whose labour of reproduction remained considerable, and for which no objective assesment of need can be arrived at. Where either of these criteria are absent, a market is not appropriate. Information goods -- scientific laws, mathematical theorems, software, electronic copies of music, etc should be distributed freely. Goods that require substantial labour input but for which need can be objectively assesed, should be free but not ad libitum, distribution has to be rationed on the basis of need: examples would be surgery, speech therapy, communal childcare etc." (email, August 2008)
Different Markets are good for different things
"The free market, in theory, is the closest we've come to solving the supply and demand issue: under the right conditions the market tends toward pareto optimality or better; exchange chases market equilibrium (I assume that's what you mean by "unity"). However, as Yogi Berra says, "In theory, there is no difference between theory and practice. But, in practice, there is." It turns out that there are classes of markets that humans find market equilibrium in easily and naturally (even with imperfect information!), and ones they do not: they're not so good at asset markets, such as the stock market. This opens an area of continuing debate between theory and reality, which is huge, and outside this email.
The problems of information asymmetries and externalities--essentially, the absences of pieces of information that are needed for good decision-making--are present in the modern day economy, just as they are present in your proposal. These factors make sustainability hard. However, it's no easier in either your proposal or the modern day economy. You've essentially found that, no matter how you shuffle the backing of the units of exchange, the same problems pop right back up. If you don't see that as a big problem yet, you eventually will.
A common solution is calling for "regulation." However, this doesn't solve the problem, it just gives it a name and puts in into the hands of an authority. Each component piece of regulation--with the overall goal of resource management, as identified by people such as Elinor Ostrom, and others in the field of common pool resources--has a practical cost.
A quick list (from Ostrom, via Wikipedia, edited a little):
- Clearly defined boundaries
- Congruence between appropriation and provision rules and local conditions
- Collective-choice arrangements allowing for the participation of most of the appropriators in the decision-making process
- Effective monitoring by monitors who are part of, or accountable to,
- Graduated sanctions for appropriators who do not respect rules
- Conflict-resolution mechanisms
- Recognition of the rights of agents to organize