A Crisis Of Vision: Toward A More Integral Economics

FEBRUARY 2003

A Crisis of Vision: Toward a More Integral Economics Daniel J. O'Connor

A crisis of vision in post/modern economic discourse reveals the outline of a more Integral Economics for a 21st century economy centered on knowledge and values.

A Crisis of Vision: Toward a More Integral Economics Daniel J. O'Connor “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.” — John Maynard Keynes

and limited government as essential to both economic growth and social liberty. For reasons that will become clear in a moment, I call them economic libertarians.2 The best of these economic libertarians seem to think that in pursuing market opportunities they are contributing to the development of a civilization. They are indeed. Their record of entrepreneurship and innovation is unparalleled in history and the simple fact that they create so many of the jobs that fund our way of life confirms their value to society. As for the millions of economic libertarians who have never started a company or invented a new technology, the verdict is still positive. With each new market exchange they are creating some small incremental addition to the overall wealth and well-being of our society. Though some struggle just to survive in the market, they staunchly defend its very real virtues, preferring to lift themselves up by their own bootstraps rather than being, as they see it, hoisted by a social safety net.

“We are ready to accept almost any explanation of the present crisis of our civilization except one: that the present state of the world may be the result of genuine error on our own part and that the pursuit of some of our most cherished ideals has apparently produced results utterly different from those which we expected.” — Friedrich Hayek

At the close of the 20th century, the market economy in America and elsewhere was in the midst of a veritable renaissance. Twenty years of privatization, deregulation, and liberalization had rendered the “stagflation” of the early 1980s a distant memory. During one of the greatest expansions in American economic history, productivity rose to record highs, unemployment fell to record lows, and inflation remained under control. Corporations realigned their strategies and restructured their operations to compete in the new era of globalization. Entrepreneurship flourished through the convergence of innovative new technologies, free-flowing venture capital, and relentless market-ing. The mainstream media regaled us with a continuous stream of economic notions, from the iconic CEO to the freeagent worker to the once-and-for-all transcendence of the dreaded business cycle. For the first time ever, it was actually “cool” to be in business and everybody was following the stock market. The market, both as a system and as an idea, stood vindicated.1 The economists, politicians, and executives behind this renaissance are united by a well-schooled preference for individual and corporate freedom in a relatively unfettered market economy. They pro-claim themselves economic liberals and pay homage to the classical economic philosophy that favors free markets

O’Connor: A Crisis of Vision

Too many economic libertarians harbor a fundamentalist belief in the virtue of the market— a blind faith in this all-knowing, ever-present force for human liberation that borders on a secular religious fervor. Despite the recent recession and the spate of highprofile corporate failures—from the forgettable “dotbombs” to the not-so-forgettable Enron, WorldCom, and Arthur Andersen—economic libertarians remain relatively sanguine about the market system and its future. While making no excuses for the decline in professional standards that led to these corporate failures, they hail the market’s success in eventually fostering the transparency and accountability necessary to right the system. As they see it, the market’s swift justice is driving wasteful and unethical firms right out of business before the government and the outraged public can even begin to make sense of what happened. They’ve seen this before, they assure themselves, and it too shall pass. Nevertheless, their critics contend, too many economic libertarians harbor a fundamentalist belief in the virtue of the market—a blind faith in this all-

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knowing, ever-present force for human liberation that borders on a secular religious fervor. Their faith blinds them to the very real problems with the market, while absolving them of any responsibility for its results. When confronted with evidence of the market’s apparent mistakes, they tend to recite some version of the self-justifying libertarian credo:

rationale. As if believing its own “new economy” hype, the mainstream media failed to acknowledge the harsh new realities of this economy, from the overpaid CEO to the redundant worker to the systematic impoverishment of society and nature by unregulated market forces.4 The diverse authors of this provocative story share a common adversary in the economic libertarians as much as any particular ideology. While some maintain their faith in the contemporary economic philosophy favoring interventionist governments and managed markets, an increasing number seem to be channeling their energies into social activism via global civil society, a self-organizing network of non-governmental, non-commercial organizations. Their various criticisms of the market and its institutions are typically framed within the overarching themes of social responsibility, environ-mental sustainability, and economic democracy. Although they are derided as an “anti-liberal backlash” by the libertarian orthodoxy, these increasingly vocal critics have a decidedly liberal agenda of their own. In fact, they’re challenging the seats of economic power with the same conviction that the libertarians have always reserved for their assaults on the seats of political power. Lacking a name, I call them the economic egalitarians.5

If there is a problem, the market will correct it. If the market does not correct it, then it is not really a problem. In other words, the market solves its own problems. Everything else is commentary.  But this is not the only renaissance that began to take shape at the close of the last century. In what looks like a revival of a movement we first saw toward the end of the 19th century, a multi-faceted counterrevolution has emerged worldwide and coalesced around a critique of the very economic philosophy credited with producing the booming American economy. An unlikely coalition of activists and intellectuals—from labor unionists and environmentalists to journalists and economists—has begun to voice a common concern over a very different economic story.3 As they see it, the closing decades of the 20th century were less a vindication and more an indictment of the market. Financial markets, once considered the servants of free enterprise, revealed themselves to be the masters of that enterprise, allocating technological, human, and natural capital according to the speculative imperatives of global financial capital. Politicians, once considered the servants of a democratic populace, gradually subordinated themselves to these same speculative imperatives, deregulating markets, subsidizing corporations, and bailing out the wealthy losers in one financial disaster after the next. While domestic corporations outsourced high-wage jobs to low-wage economies in order to enhance their profitability, these same corporations managed to reduce their income taxes to a mere fraction of what households were paying. Thus, despite the apparent strength in employment, productivity, and growth, most Americans saw their real incomes stagnate, their debt levels swell, and their prospects for retirement undermined by a Social Security fund that defied all credibility and a stock market bubble that defied all

O’Connor: A Crisis of Vision

Many economic egalitarians display a rather pretentious skepticism about the economy. They insist that market logic somehow undermines social values and that they should be allowed to correct the market’s mistakes, if not through government intervention then through social activism.

The more thoughtful members of this economic culture perform a great service to all market participants by raising our awareness of the unfortunate and often unintended consequences of market-based economic development. Beneath the surface of what may sound like alarmist rhetoric often lies a sound assessment of the specific ways in which economic growth is misaligned with genuine economic welfare. By focusing on difficult issues like wealth inequality, corporate corruption, technological redundancy, ecological degradation, currency speculation, and all manner of economic injustice,

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these highly vocal critics of the status quo can actually serve the libertarian cause by fostering more informed consumers, investors, employees, and entrepreneurs. However, from the perspective of their libertarian critics, many economic egalitarians display a rather pretentious skepticism about the economy. They insist that market logic somehow undermines social values, both at home and abroad, and that they should be allowed to correct the market’s mistakes, if not through government intervention then through social activism.6 They seem to think that the market is the biggest zerosum game in the world, rewarding those in positions of power at the expense of everyone else. However true this may be, it is also a convenient assessment that appears to justify their own zero-sum resistance movements.7 For the egalitarians, the recent recession and the spate of high-profile corporate failures represent prima facie evidence of market failure and the need to enforce greater transparency and accountability from outside the market. They’ve seen this before too, they remind us, and this time something has to change. Unfortunately, a few angry souls among them, like the brick-throwers at recent economic summits, seem to have regressed into an anti-market fundamentalism that threatens not only the market economy, but also the social stage on which their self-righteous dramas play out. When drawing attention to the world’s many problems, they are quick with their own self-justifying credo:

bureaucrats, and lobbyists use the egalitarian credo to justify or the libertarian credo to obscure their efforts to control the market. Without necessarily realizing it, they seem to be enacting a pre-classical economic philosophy that endorses arbitrary market manipulation for narrow political ends—a corrosive political economics that bears little resemblance to the great classical tradition of political economy.8 Despite the irony of the situation, many selfproclaimed corporate libertarians are continuously lobbying the government for more taxpayer subsidies for capital spending, no-bid contracts from government agencies, special tariffs against less expensive imports, industry-specific loopholes in the tax code and regulatory regime, and strict limitations on any regulations that might require greater transparency and accountability with their own customers, employees, and investors. Hiding behind their libertarian rhetoric, many Republicans will do everything in their power to satisfy these constituents and maintain the illusion of genuinely free markets.9 10

By increasing government expenditures as if there was no tomorrow, handing out tailormade benefits to their favorite special interests, and inflating the largest debt bubble in history, the economic authoritarians create the impression of actually addressing the market’s problems and strengthening the economy.

If there is a problem, the market must have caused it. If the market caused it, then the market cannot correct it. In other words, the market is the problem and society is the solution. Resistance is futile.

Not to be outdone, the Democrats will charge the Republicans with promoting corporate welfare, while they continue to promote the welfare of their traditional egalitarian constituents, like the environmental lobby, unionized labor, and the current beneficiaries of Social Security and other welfare programs. Moreover, when it suits them, they will even justify on purely egalitarian grounds some of the same corporate welfare that the Republicans promote under the guise of their libertarian rhetoric. But at least Democrats aren’t contradicting themselves when they intervene in the market. That’s been their stock-intrade since the New Deal. In their combined efforts to systematically subordinate market forces to political forces, even

 These admittedly rough portraits nevertheless portray the two primary economic cultures vying for control of economic policies and corporate strategies across America and throughout much of the world. Their ideological differences might constitute little more than an esoteric academic debate were it not for the fact that both economic philosophies have been politicized by economic authoritarians of the Left and the Right, whose aim is to engineer the economic results they failed to achieve through the market. By extending their mandate well beyond the realm of legitimate market regulation, many politicians,

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while claiming to do so for entirely different reasons, the Republicans and Democrats have been successful in precisely one thing: increasing the size of the government. Regardless of how we slice and dice the numbers, at the federal, state, and local levels, during economic expansions and recessions, in absolute terms and as a share of the total economy, the government’s role in the American economy has increased in nearly every single year since the beginning of the 20th century. In fact, the government-controlled portion of the national income has increased from less than 13 percent in 1900 to about 58 percent in recent years—a statistic that would undoubtedly shock most Americans who imagine their economy to be of the market variety.11 And regardless of whether the unrelenting growth in government expenditures was financed through immediate tax increases or additional borrowing, it always was and always will be paid for by taxpayers, past and future. It is therefore no surprise that the only economic policy on which both parties consistently agree is that the Federal Reserve must continuously inflate the money supply via the credit markets. Through a combination of highly refined open market operations and deliberately ambiguous open mouth operations, the Federal Reserve ensures a seemingly endless supply of new credit to the federal Treasury and, via the fractional-reserve banking system, to highly-leveraged corporations and homeowners—a policy evidently designed to support asset prices, workers’ wages, and tax revenues against significant declines to reflect the economic reality we’re actually experiencing.12 Thus, by increasing government expenditures as if there was no tomorrow, handing out tailor-made benefits to their favorite special interests, and inflating the largest debt bubble in history, the economic authoritarians create the impression of actually addressing the market’s problems and strengthening the economy.13 Unfortunately, the only thing they accomplish with any certainty is the further consolidation of economic power in the government. The mainstream media play into this canard by framing most economic stories as if they were political stories, with the only relevant storyline being the debate between the Left and the Right over how (not whether) to govern the market economy. But instead of a principled debate between libertarian and egalitarian economists, the mainstream media present political pundits just barely Left and Right of the political Center who debate the minutiae of government economic policies—ad hominem, ad populum, ad nauseam— while demonstrating what appears to be an ignorance

O’Connor: A Crisis of Vision

of any economic theory that did not originate with one of the major political parties.

Over the years, the media’s obsession with politics and politicians’ fascination with the economy has created the false impression among many of us that the government is, and should be, managing the market. Over the years, the media’s obsession with politics and politicians’ fascination with the economy has created the false impression among many of us that the government is, and should be, managing the market. Given that understanding, the only relevant consideration for most of us is whether our politicians are managing it for our exclusive benefit. Any suggestion that this Right-Left tug-of-war over managing the market might be part of the problem is evidently beyond the pale in today’s media environment. To contend that presidents and central bankers simply cannot control the market is, it would seem, an academic argument not worthy of current news coverage. Even the slightest implication that we the people might bear some responsibility for the unfortunate market decisions we’ve made is apparently too insensitive for us to handle—politically incorrect, in more ways than one. And we wonder why the government has so much power over our lives. For the economic authoritarians, the recent recession and the spate of high-profile corporate failures represented a political opportunity of the first order. With their own legitimacy as the market’s selfappointed managers in question, the economic authoritarians deftly cast suspicion over the market’s legitimacy, while re-positioning themselves to manage the market’s recovery. A chorus of blind faith in the market’s virtue during the boom years, they sounded more like the preachers of pretentious skepticism during the bust. To follow their line of reasoning, the unmatched wonders of free enterprise had been tragically twisted into the unmatched horrors of crony capitalism, all in a span of just a few years, without any outside influence from the market’s managers.14 And having located the cause of the economic recession in a corrupted market full of crony capitalists, the authoritarians engineered the appearance of an economic recovery through an impressive array of

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what was evidently lacking before the recession: indictments, regulations, deficit spending, and monetary inflation. With each new revelation of corporate misconduct, we saw moral grandstanding from both sides of the aisle, preaching to the choir about the need for greater transparency and accountability in business, while ignoring their absence in the government’s own business. Yet careful scrutiny of this business, from pro-forma budget surpluses that vanish overnight to off-balance sheet liabilities that threaten to destroy the currency, should convince libertarians and egalitarians alike that the authoritarians cannot lead anyone toward a deeper resolution to our economic problems.15 Implicit in their policies, we find yet another self-justifying credo:

philosophies some blend of libertarian, egalitarian, and, yes, even authoritarian sentiments. Who among us has not developed an appreciation for the market’s many contributions to the wealth and well-being of our society? Likewise, who would not concede that the market does, albeit inadvertently, leave some people behind in its quest for value? And despite the many perverse effects of political economics, who would really want to live in a market society without a state to protect our basic rights to own property, work in a job of our choosing, and remain secure from those who would take advantage of our weaknesses? As will become clear in due course, this entire book is a testament to the valid contributions of all three economic philosophies, at least as I regard them.16 That said, the greater task is surely that of clarifying the fundamentalisms—illuminating the shadows, if you will—that lurk within each economic philosophy. If we hope to elevate the economic dialogue, we’ll have to challenge those economic libertarians who, at their worst, deny responsibility for innovation while hiding behind rhetoric about how the market will automatically do it for us. Likewise, we’ll have to engage those economic egalitarians who, at their worst, may weaken society in a misguided effort to save it from the market. Perhaps most importantly, we’ll have to confront those economic authoritarians who, in the name of economic development, systematically distort the market process while systematically stifling even peaceful dissent. And to whatever extent these fundamentalist sentiments are not just out there, motivating the actions of others, but in here, motivating our own actions, we’ll have to engage in some critical self-reflection. We are the market, just as we are society. We bring all our libertarian and egalitarian values into the market with us, to frame our perceptions, guide our decisions, and manifest in the very economic problems we struggle to resolve. But if we do nothing more than politicize our economic philosophies, demanding ends without regard to justifiable means, then we will continue to legitimate those policies of the state that undermine both market and society. This is why the economic dialogue is so very important and so completely unavoidable. What we evidently need is an economic philosophy that makes sense of both the good news and the bad news in the market, while offering something more than either blind faith or pretentious skepticism. Without it, we seem to have no alternative but to entrust politicians to forge compromises between special interests that, despite their claims,

If there is a market, the government must have created it. If the government created it, then the government can control it. In other words, government will take care of everything. We have nothing to fear.  This brief survey depicts the dire state of the economic dialogue across America and throughout much of the world. It is a dialogue in which we are all, whether we like it or not, captive participants, struggling to make sense of the dissonant stories and statistics according to our own personal economic philosophies. Being a fellow captive, I must admit to experiencing more than my fair share of dissonance over the years, as this economic dialogue is both context and content for all my work in the world. To study and practice among uncompromising libertarians and egalitarians, as I have done, is to encounter first-hand that tragic juxtaposition of liberal ideals and lingering fundamentalism that somehow manifests in each opposing, yet strangely complementary, ideology. And to see the way these complementary cultures have politicized their philosophies, reducing them to little more than rationalized coercion, is all the more tragic and alarming. But I trust that I am not alone in the desire to come to terms with this strange and alarming tragedy—to find that elusive route between the Scylla of libertarian faith and the Charybdis of egalitarian skepticism. I suspect that upon careful reflection many readers will, like me, find within their own personal economic

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really do not represent the general interests so many of us share. But what sort of economic philosophy would embrace the valid contributions of the libertarians and egalitarians, while avoiding their negative baggage? What role would it provide for the authoritarians? And even if we could envision such an economics as some sort of academic exercise, how would we actually create the economy that it reflects? What would we have to do to break through the ideological gridlock between libertarian, egalitarian, and authoritarian economics? After all, the last thing we need right now is yet another vision of a better world, curiously devoid of any actionable advice about how it can be realized.

mission—evidently one way to more fairly distribute the benefits of free markets. And the development of clean technology industries, like solar power and hypercars, represents a form of economic growth that may be more sustainable from an ecological as well as an economic perspective. It’s as if the people behind these innovations were deliberately trying to create solutions that bridged freedom and fairness, efficiency and effectiveness, growth and sustainability.17

We are the market, just as we are society. We bring all our libertarian and egalitarian values into the market with us, to frame our perceptions, guide our decisions, and manifest in the very economic problems we struggle to resolve. In my own efforts to come to terms with the economic dialogue, the good news and the bad news, I discovered an interesting pattern. It seems that if we look beneath the surface of the contradictory stories and statistics, they tend to organize around three economic dilemmas: freedom vs. fairness, efficiency vs. effectiveness, and growth vs. sustainability. Think about it. If we look beneath the surface of any economic problem, such as wealth inequality or global warming, we will find at least one of these dilemmas at work, fragmenting perceptions and undermining solutions. After all, what is wealth inequality, if not a lightning rod for debate about economic freedom and fairness in a variety of economic policy issues, from trade to taxation to welfare? And hasn’t the debate about global warming been plagued from its inception by the popular belief that the pursuit of ecological sustainability is inevitably at the expense of economic growth? In fact, these dilemmas are what everyone’s arguing about, at economic summits and in on-line discussions. However, if we look again, we’ll see the same dilemmas underlying such economic innovations as social entrepreneurship and clean technology. Social entrepreneurship may be thought of as a conscious attempt to infuse a commercial enterprise with a social

O’Connor: A Crisis of Vision

So, what are we to make of these economic dilemmas? I submit that they are the economic manifestations of some rather fundamental dilemmas, rooted in the modern/postmodern mind, whose resolution through learning defines the proper function of the market. Moreover, these dilemmas frame a three-fold crisis of vision between libertarian economics—which generally promotes the values of economic freedom, efficiency, and growth—and egalitarian economics—which reliably counters with the need for more fairness, effectiveness, and sustainability.18 This really is what everyone’s arguing about these days. And it is also the basis of authoritarian economics, which derives its legitimacy

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from the widespread belief that only centralized power can forge lasting resolutions to these economic dilemmas. But even while framing the current crisis of vision, these dilemmas epitomize the economic dialogue of the past 250 years and frame a more Integral Economics for a 21st century economy centered on knowledge and values. Central to all the dilemmas between libertarian economics and egalitarian economics is the idea of the market—the market behind all markets. While the libertarians generally believe that the market will guide us toward the world we want, the egalitarians insist that society must guide the wayward market. The egalitarians think the market is inherently unstable, while the libertarians argue that it is only destabilized when people attempt to stabilize it for their own antimarket ends. And while the egalitarians see market error as evidence of market failure, the libertarians see market error, if they see it at all, as a prelude to a more valuable market success.

in the market economy increasing in nearly every conceivable way since the beginning of the 20th century, we might reasonably expect to have seen some lasting resolutions to these economic dilemmas. Instead, they appear to be as intractable as ever. In the midst of the three-fold crisis of vision, one thing seems certain: this singular notion of the market bears a closer look. This book is a critical inquiry into the nature of the market. It is an attempt to shed new light on the surprisingly difficult questions of how the market is supposed to work, why it doesn’t always work as promised, and how we can make it really work for us. It explores these questions through the framework of the three economic dilemmas and their corresponding economic philosophies. To the extent that the book offers answers to these questions, it does so through the presentation of a new theory of how the market really works. That theory is Market Learning. Though it may sound somewhat contrived, Market Learning is grounded in the novel insight that the rules governing market exchange are essentially identical to the rules governing social learning. In other words, the social learning practice that we must use to gain a shared understanding about the state of the world is actually very similar to the practice of market exchange we already use to buy, sell, work, earn, borrow, spend, and invest. Thus, by using each discipline to illuminate and extend the other, we may increase our understanding of both and, most importantly, develop a practical theory of real markets that can help us resolve our economic dilemmas. Should this effort prove compelling to readers, then Market Learning will have implications for how we make sense of the world and how we choose to engage in the market. Likewise, it will have implications for how we make sense of the market and how we choose to engage in the world. In order to establish a basic understanding of the Market Learning thesis, we will have to take a closer look at the fundamentals of market exchange and social learning.

These dilemmas frame a three-fold crisis of vision between libertarian economics— which generally promotes the values of economic freedom, efficiency, and growth—and egalitarian economics—which reliably counters with the need for more fairness, effectiveness, and sustainability. With two economic cultures possessing distinct and largely incompatible visions of the market, the challenge of resolving these economic dilemmas has fallen increasingly to the state. By using the political process to negotiate specific compromises between libertarians and egalitarians, the economic authoritarians hope to forge political resolutions to the economic dilemmas. Even granting them the very best of intentions, there is no denying that the economic authoritarians inevitably distort the work of the market through their endless efforts to control it, thereby raising legitimate questions about the virtue of their interventions and the status of the real market. Just as significantly, they distort the economic dialogue by giving libertarians and egalitarians good reasons to suspect each other of being in a special alliance with the state—suspicions that only serve to enhance the power of the authoritarians.19 And with the state’s role

O’Connor: A Crisis of Vision

Market Exchange

The extraordinary dynamism and complexity of the market economy is the product of a deceptively simple phenomenon: market exchange. The utter simplicity of trading this for that in order to move just a little bit closer to whatever it is we want, whether it’s financial security or personal expression, has nevertheless deceived and bedeviled economists for centuries. While some form of market exchange probably

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dates back to the dawn of human civilization, it was not until the emergence of the modern era in 17 th century Europe that this social practice began to assume anything more than a peripheral role in the organization of economic activity. The emergence of modernity, that grinding transformation of social institutions characterized by the proliferation of rational thought and humanistic values, made possible and perhaps even necessary the increasing emphasis on market exchange as an authentic expression of this new potential. With modernity came the natural science and moral philosophy that eventually, during the late 18th and early 19th centuries, coalesced into the market economics of Adam Smith, David Ricardo, John Stuart Mill, and the other classical economists. In their revolutionary and controversial vision, the economy was a complex, evolving system of interdependent markets in which the factors of production—capital, labor, and land—were transformed into finished product according to the demands of the consumers, whose income was derived from the production processes in which they participated—as investors, workers, and land-owners.20

generate an equilibrium between supply and demand among all market participants. As any former student of economics will recall (perhaps with a groan), this market model is typically illustrated using the obligatory supply and demand curves, whose point of intersection represents the market-clearing price for the particular good being exchanged (Figure 2).21

Market Learning is grounded in the novel insight that the rules governing market exchange are essentially identical to the rules governing social learning. As the market economy continued to evolve throughout the world, there arose in the late 19 th and early 20th centuries a neoclassical school of thought whose analytical power and mathematical precision came to define the central paradigm of market economics. Catalyzed by the concurrent insights of William Jevons, Leon Walras, and Carl Menger in the 1870s, and extended and refined through the following decades by scores of additional scholars, neoclassical economics continues to enjoy a remarkably wide consensus among professional economists. In their highly formal and essentialist vision of the economy, the traditional notion of a market, as a specific forum to exchange goods, became the market, in the sense of a general model of economic action, the universal logic of which applies to whatever particular forms the market might take in the real economy. The generally accepted neoclassical theory claims that market exchange between rational buyers and sellers interested in maximizing their own value will

O’Connor: A Crisis of Vision

The graph is usually accompanied by a story about how the market works to achieve the equilibrium. If the price asked by sellers is too high to attract a sufficient demand for the good, then there will be a surplus in the market. Sellers will then compete with one another to lower their prices until they find the right price necessary to clear the market of the surplus. Likewise, if the price offered by buyers is too low to attract a sufficient supply of the good, then there will be a shortage in the market. Buyers will then compete with one another to raise their offers enough to clear the market of the shortage. This competition among sellers for a given buyer and among buyers for a given seller will move the market toward that point of

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equilibrium where there are no unsatisfied sellers or buyers. Once this equilibrium is achieved, so the story concludes, the equilibrium price rules the perfectly competitive market. That is, unless unforeseen changes in the market should happen to move the supply and demand curves and thereby shift the position of the market equilibrium. In this event, the competitive process will once again, and as many times as necessary, move the market toward that implicit telos of equilibrium. Though greatly simplified, this standard presentation incorporates the basic principles of neoclassical market theory as taught to every student of economics. Unfortunately, the impressive graphs and sensible stories often lull the unsuspecting student into the false belief that orthodox market theory is about the market process. The truth is, the paradigm guiding economists in their research is completely devoid of any market process. Instead, when approaching some real-world economic problem, the standard research paradigm directs the economist to proceed as if market equilibrium already exists on the basis of what is known as constrained optimization—a decidedly idealistic model that assumes all market participants have optimized their respective gains from exchange consistent with their respective resource constraints, such that there is no way to make anyone better off without making someone else worse off.22 At an equilibrium devoid of any surplus or shortage, there is not a single market participant who could, for example, earn a higher wage using the same skill set or get a better deal on a new car, without at least one other participant incurring an unchosen reduction in welfare.

tradable item there may be only one price at any given time, (2) the price must be such as to make the quantity supplied equal the quantity demanded, and (3) every resource owner (trader) must be maximizing his utility. Nothing whatever is said about how the market operates to cause the satisfaction of these conditions.”23 As the term clearly suggests, market equilibrium is “a condition in which all acting influences are canceled by others, resulting in a stable, balanced, or unchanging system.”24 However, this is not to say that economists are unconcerned with change in the real-world market. But when analyzing the effects of some change in the market, such as a technological innovation, the economist will typically make comparisons between alternative equilibria in a process aptly named comparative statics. The results of such comparative statics are illustrated as alternative positions for the supply and/or demand curves of a single market model, with no consideration given to the phase of disequilibrium which the real market must presumably pass through as it moves from one equilibrium to the next. Like a motion picture in which the middle frames have been removed, leaving only the first and last frames to tell the whole story, we are left to wonder just how the market actually moves from one static equilibrium to the next (Figure 3). Despite the fact that most economists would readily acknowledge that the dynamic process of a real market unfolds over time, their static model of the market is premised on the assumption that this process is instantaneous—that it has, in fact, already happened. Thus, orthodox market theory implicitly claims that market exchange between rational buyers and sellers interested in maximizing their own value will instantaneously generate an equilibrium between supply and demand among all market participants. And not just in one market, but in all markets, for all goods, whether they be substitute goods, complementary goods, or as-yet-unconceived goods. Even the factors of production used to create these goods and the money used to facilitate exchange in all these markets would have to conform to the same standard. The implications of market equilibrium have no spacial or temporal boundaries within market theory, because every market decision has implications for every other market decision that will ever be made throughout the entire multi-market system.25 Therefore, the true story of orthodox market theory is not the dynamic pursuit of ultimate equilibrium, as taught to beginning students of economics, but the static assumption of ubiquitous equilibrium.

Unfortunately, the impressive graphs and sensible stories often lull the unsuspecting student into the false belief that orthodox market theory is about the market process. The truth is, the paradigm guiding economists in their research is completely devoid of any market process. As Melvin Reder of the University of Chicago emphasized, “no concept is more basic to [neoclassical economics] than that of ‘the market.’ Yet, as we have seen, the paradigm proper says nothing about how a market functions. All that it says is that (1) for every

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century or more of endless refinements of the central core of general equilibrium theory, an exercise which has absorbed some of the best brains in twentiethcentury economics, the theory is unable to shed any light on how market equilibrium is actually attained, not just in real-world decentralised market economies but even in the blackboard economies beloved of modern general equilibrium theorists.”26 Perhaps we should not be too surprised at the difficulty some economists have had interpreting the dynamics of real markets, particularly the evident disequilibrium of the business cycle, when they begin their analyses with the assumption that real people can move markets toward eventual equilibrium as efficiently as a computer spreadsheet can calculate a mathematical solution. Likewise, we should not be too surprised at the difficulty we’ve had in generating the market results we desire when most economists ignore the practical challenges associated with producing the market results they model. It’s as if they believe that the market’s pervasive presence in our lives is sufficient to convey its subtle dynamics. Yet if it was, then the market would not be at the center of such a protracted controversy.

Perhaps we should not be too surprised at the difficulty some economists have had interpreting the dynamics of real markets, particularly the evident disequilibrium of the business cycle, when they begin their analyses with the assumption that real people can move markets toward eventual equilibrium as efficiently as a computer spreadsheet can calculate a mathematical solution.

We may grant economists the benefit of the doubt that their idealized market model serves a purpose in the analysis and prediction of specific market phenomena. But we must also recognize that this paradigm represents the market process as the solution to a set of simultaneous equations presumed to accurately model the decision making processes of diverse people participating in highly dynamic markets. Thus, buyers and sellers are not real people making tough decisions in the midst of great uncertainty, but mathematical derivatives of a presumed market equilibrium, continuously optimizing their exchanges according to the laws of calculus and probability. This mathematical solution to the market problem under study might, at best, describe the quantitative results of the real market process, in the unlikely event that it was permitted to unfold over a sufficient period of time without any changes in the initial conditions. But as for the qualitative and quantitative details of that process, it offers us nothing but the unstated assurance that it has always already happened. Mark Blaug, an economic historian from the University of London, summed it up as follows: “after a

O’Connor: A Crisis of Vision

So what exactly is the market process? How do we make these exchange decisions? We assume we know how to do it even though we’ve never been taught. Yet we have trouble discerning whether we’ve done it well and just what we would do to improve our performance. We may conclude that we have been successful market participants simply because we live comfortable lives and have few regrets about our previous exchanges. But if asked to account for the systemic consequences and moral implications of our

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market success, we might become rather defensive. Alternatively, we may criticize those who profit handsomely from a single market exchange or take issue with the difference in wages earned by people who seem to be doing the same work. But if pressed to explain what was wrong with the exchanges, we might grasp in vain for some economic justification. And when we look at the overall performance of the market, particularly a stock market that rises 50 percent in just two years and then loses it all again in the next two years, we have to wonder how well we’ve all been making our market decisions.27 Surely there must be some method to this madness. Expecting people to engage in market exchange without providing any instruction in how to go about it is like expecting people to engage in conversation without teaching them how to read and write. By being immersed in a particular culture, they will eventually learn through imitation how to converse reasonably well. But they will not really understand the depth of what they’re saying, nor will they be likely to say anything more sophisticated than what they’ve already heard from the people around them. The point is that we all learned how to engage in market exchange much the same way: through immersion in a market culture. We learned how to swap this for that, how to get more than we give, and how to deal with the disappointment when we discover that we didn’t get what we expected. Other than that, most of us are on autopilot as we buy, sell, work, earn, borrow, spend, and invest.

some general standard from which to critique a particular market exchange or the whole performance of the market system, we are left with nothing but politics. The key to understanding how the market works lies in the distinction between a technical theory that describes what market exchange has already done from the perspective of some detached observer and a practical theory that prescribes how market exchange should be done from the perspective of an engaged participant. By shifting our attention between observer and participant, between static results and dynamic processes, and between ex post descriptions and ex ante prescriptions, we infuse market theory with the consciousness denied by neoclassical economics.28 In our search for a theory of market exchange that prescribes how it should be done rather than presuming that it has already occurred, we can begin with a practical standard used in the real world of corporate finance: fair market value. Fair market value may be defined as:29 The price at which a good changes hands between a willing buyer and a willing seller, where each is aware of the relevant information pertaining to the exchange, neither is under any compulsion to exchange, and both comply with the ultimate terms of the exchange. This is actually a standard used by independent valuation advisors and market regulators in determining the value of privately-held stock and other securities. It is intended to describe the conditions that prevail in an actual public market—conditions that the parties to a private market exchange should be creating for themselves with the help of their advisors. As we take ourselves out of the third-party roles of the advisor or regulator overseeing the exchange and place ourselves into the role of the seller or buyer engaged in the exchange, we realize that what we have here is a fairly detailed prescription for how market exchange ought to be conducted. According to this view, in order to accomplish a market exchange at fair market value, buyers and sellers have to willingly:

The key to understanding how the market works lies in the distinction between a technical theory that describes what market exchange has already done from the perspective of some detached observer and a practical theory that prescribes how market exchange should be done from the perspective of an engaged participant.

(1) disclose and acquire all the relevant information pertaining to the exchange; (2) choose freely whether or not to engage in the exchange; and (3) comply with the ultimate terms of the exchange.

The truth is, if we don’t know how the market is supposed to work in the first place, then we’ll never really know why it doesn’t always work as promised. In fact, we’ll never know whether it’s even valid to claim that it doesn’t always work as promised. After all, how could we possibly validate such a claim? Without

O’Connor: A Crisis of Vision

Therefore, fair market value can be transposed into an actionable theory of market exchange that

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prescribes how it is supposed to be conducted in a real market. For purposes of this introduction, we may simply summarize it as market exchange based on the mutual pursuit of transparency, choice, and accountability.

values they espouse. It was developed over the course of several decades of empirical and normative research by Chris Argyris of Harvard University, Donald Schön of the Massachusetts Institute of Technology, and some additional colleagues.32 Although, to my knowledge, Action Science has never been related to market theory, I believe it offers us the opportunity to improve our understanding of how markets really work and how they might work even better.

Social Learning

Just as the market economy is the ultimate product of market exchange, the more encompassing society owes its constructive blend of stability and adaptability to the inherently subtle phenomenon of social learning. For the history of every society is a story of social learning about the ways of life worth living and the institutions of society worth creating. And while learning always takes place within individuals—who are either learning their way up to, or learning their way beyond, the average level of their society—it must also take place between individuals if it is ever to produce the shared values and knowledge that inform the ongoing development of their society. Jürgen Habermas, a social theorist from the University of Frankfurt, believes that this shared understanding is the implicit telos of all communication and its pursuit through social learning is the driving force of social evolution. For Habermas, “the level of development of a society is determined by the institutionally permitted learning capacity, in particular by whether theoretical-technical and practical questions are differentiated, and whether discursive learning processes can take place.”30 “As learning processes take place not only in the dimension of objectivating thought but also in the dimension of moral-practical insight, the rationalization of action is deposited not only in forces of production, but also— mediated through the dynamics of social movements— in forms of social integration.”31 In other words, it is a combination of technical learning about how to get things done and practical learning about the things worth doing that yields the innovations that are eventually institutionalized throughout society. Further development of the society will then be determined by the extent to which the current institutions, such as markets, corporations, legislatures, schools, churches, and families, foster both technical and practical learning. All of which begs the question of how these discursive learning processes actually happen. One of the most compelling attempts to understand them can be found in the school of thought known as Action Science. Action Science is an approach to social learning that helps people reflect on the social world they create and learn to change it in ways more congruent with the

O’Connor: A Crisis of Vision

It is a combination of technical learning about how to get things done and practical learning about the things worth doing that yields the innovations that are eventually institutionalized throughout society. The central concept in Action Science is the theory of action. A theory of action is a subconscious value system that tells people how to design their actions in order to achieve their intended results within particular social situations, including how to learn from experience to design more effective actions. It represents a taken-for-granted way of perceiving, thinking, judging, and communicating that has been so successful in meeting past challenges that it is now assumed to be the best way to engage with one’s social world. The main reason people develop these subconscious theories of action is because the daily challenge of interpreting real-world social situations and designing actions to achieve desired results would otherwise be very difficult and time-consuming. So people simplify the challenge by drawing on a repertoire of tacit design principles, or action logics, that they have learned throughout a lifetime of moreor-less-effective socialization.33 We each have a theory of action, or perhaps a number of them, sociallyconstructed over many years as we’ve learned to maneuver in the world. As I will argue in this book, each of us probably has a socially-constructed theory of market action, customized to reflect our own particular experiences in the market.34 This idea of the theory of action comes to life in the Action Science model of social learning. The basic structure of the social learning process can be illustrated as a three-step sequence of values, which inform the design of specific actions, which interact with the situation to generate certain results. The

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results feed back into the design of appropriate actions and, in the event that the results do not conform to what was intended, people may design new actions consistent with their original values until they produce the results they desire. This is referred to as single-loop learning because of the feedback loop that facilitates the learning reflected in the newly designed actions (Figure 4).35 In the event that none of the actions generates the desired results, an additional feedback loop may be activated and the values that informed the original selection of desired results and the original set of designed actions may be brought into question. But because these values are largely tacit to begin with and are intertwined with our well developed (yet zealously guarded) story of who we are in the world, they are very difficult to surface, critique, and revise without some dialogue and the pressure that only crisis seems to provide. If successfully revised, new values lead to a new interpretation of the situation and a new set of action possibilities, which, in turn, generate a new set of results. This is called double-loop learning because of the additional feedback loop that facilitates the learning reflected in the new values (Figure 4).36

certain results. Thus, strategic action entails a technical learning process in which the results of previous actions are evaluated on the basis of empirical or positive validity claims.38 Put simply, what the individual claims to have accomplished will be judged as relatively true or false with respect to the function of a particular system. In other words, does it work? This produces the technical knowledge—or techné—we normally associate with physicists, engineers, and positive economists, though it applies equally well to every market participant whose actions are designed to capture some profit or mitigate some risk. Without it, we would know little of the world around us and could scarcely survive a day amid the apparent chaos.

By situating Action Science within Habermas’s expansive social theory, we can begin to appreciate its broadly applicable and refreshingly humane premises.

In contrast, the Action Science model of doubleloop learning is consistent with the practical learning that supports what Habermas calls communicative action, by which he means action oriented toward mutual understanding—not just of the facts associated with strategic action, but also the values that guide strategic action. Thus, communicative action also requires a practical learning process in which the results of previous actions are interpreted on the basis of ethical or normative validity claims.39 In this case, what the individual claims to have accomplished will be judged as relatively good or bad with respect to the norms of a particular culture. Thus, is it appropriate? This produces the practical know-ledge—or praxis— that is characteristic of philosophers, theologians, and normative economists, as well as every market participant who has ever reflected on the moral implications of his or her own market exchanges. Without this more humane knowledge, we would not want to live another day among our fellow humans, despite our technical grasp of the world around us. By situating Action Science within Habermas’s expansive social theory, we can begin to appreciate its broadly applicable and refreshingly humane premises—namely, that people are by nature purposeful individuals who:

Overall, the continuous, rapid, and largely tacit dynamics of a theory of action can produce an extraordinary variety of results, from creative innovations to destructive misunderstandings, all of which can be traced back to the (more or less effective) processes of single-loop and double-loop learning. And because theories of action guide both individual action and collective interaction, it is easy to envision selforganizing systems of action and learning based on this relatively simple model. In fact, this is a way of understanding the socio-technical development of organizations, markets, governments, social movements, and whole societies. Therefore, it should come as no surprise that Argyris and his colleagues consider Action Science to be an exemplar of Habermas’s critical social theory.37 The Action Science model of single-loop learning is consistent with the technical learning that supports what Habermas refers to as strategic action, by which he means action oriented toward the achievement of

O’Connor: A Crisis of Vision

(1) draw on tacit values to make sense of

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themselves and the world; (2) choose worthy goals and design actions to achieve those goals; and (3) learn from experience in order to design more effective actions and, when necessary, develop new perspectives on themselves, the world, and the goals worth pursuing.

agreement.42

They inevitably work with others to address challenges of technical and practical significance, and the methods they use are their own personal and shared theories of action. So how does Action Science relate to our provisional exemplar of market exchange? It seems that Argyris, Schön, and their colleagues, working in collaboration with thousands of clients over the years, have developed their own exemplary method of communication that consistently facilitates both singleloop and double-loop learning. This method of social learning is based on the following rules: 40

The values refer to the specific value systems we use to frame our market situations, determine our desired market results, design our exchange strategies, and learn from our market experiences. They would certainly have to include the preferences, expectations, heuristics, and biases that economists have so carefully studied over the years. But as we shall see, there is no good reason why they should not also include the deeper structures of cognitive, moral, and affective development that economists have so carefully ignored over the years. Nevertheless, for the sake of simplicity, I will generally refer to them as values or value functions, a concept which elevates the neoclassical utility function to a more humanistic level.

(1) valid information; (2) free and informed choice; and (3) internal commitment to the choice and constant monitoring of its implementation in order to detect and correct error.

Both market theory and social theory, at least in their practical versions presented above, are empirically grounded yet ethically compelling theories of how people make effective decisions in real world situations. Understanding one can help us understand the other.

Thus, for now, we may summarize it as social learning based on the mutual pursuit of transparency, choice, and accountability. Market Learning

Both market theory and social theory, at least in their practical versions presented above, are empirically grounded yet ethically compelling theories of how people make effective decisions in real world situations. Understanding one can help us understand the other. And with two methods of decision making based on the same general principles, one focused on market exchange and the other on social learning, we have the contours of a viable new exemplar: Market Learning based on the mutual pursuit of transparency, choice, and accountability.41 We can begin to clarify these contours by reframing market exchange as a specific type of action designed to achieve certain results in the market, from starting a company to finding a job to investing for retirement. In doing so, we highlight the essential role of learning in the proper functioning of the market. As Figure 5 illustrates, the actions in this particular model are all exchanges of property rights between two people based on the simple rule of quid pro quo— trading this for that on the basis of a mutual

O’Connor: A Crisis of Vision

Finally, the results include both the intended and the unintended consequences of our market exchanges, each of which can generate positive feedback for more of the same or negative feedback indicating the need for a change. Both positive and negative feedback are incorporated into the single-loop market learning that either confirms or disconfirms the previous exchange strategy, as well as the double-loop market learning that either confirms or disconfirms the value function from which the exchange strategy was derived. Thus, it is the same general model of social action and learning presented above, but adapted to produce a general model of market action and learning. Taking this a step further, we can create yet

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another model of Market Learning by reconstructing the orthodox market exchange model of supply and demand (Figure 6). This requires that we recognize the market process implicit in the static image of market equilibrium as a process of Market Learning.

competition between sellers for a given buyer and between buyers for a given seller, this individual process of single-loop Market Learning may have the collective effect of moving the market toward an equilibrium price that clears the market, even though this would not necessarily be the goal of any individual market participant. Of course, we need not claim that people ever optimize their exchange strategies or that the market ever realizes this potential equilibrium. It is enough to claim that there is a dynamic process of individual yet interdependent learning that inadvertently moves the market in this general direction, despite all individual efforts to the contrary.

Therefore, this reconstruction reveals that what moves the market between the order of complete equilibrium and the chaos of complete disequilibrium is the dual process of single-loop and double-loop Market Learning governed by the value functions of market participants. Building on that insight, we can now see that the supply and demand curves represent the potential results of the value functions that inform the exchange decisions of all market participants. Therefore, the movement of demand and supply curves, as is often depicted in comparative statics, is actually governed by a process of double-loop Market Learning. As soon as any of the buyers or sellers in the market changes his or her value function, perhaps due to a dramatic technological innovation, then that change would be reflected in the location of the corresponding demand or supply curve and result in a new point of potential equilibrium for the entire market. However, the actual manifestation of this new demand or supply curve would be contingent upon the consummation of actual exchanges and the systematic improve-ment of these exchanges via competitive single-loop Market Learning. Thus, it is double-loop Market Learning that moves the market toward disequilibrium, while simultaneously establishing the new value functions that will guide the subsequent process of single-loop Market Learning that moves the market back toward a new equilibrium. Therefore, this reconstruction reveals that what moves the market between the order of complete equilibrium and the chaos of complete

In this view, the development within the market of supply and demand curves can be thought of as the collective result of single-loop Market Learning by individual market participants. The buyers and sellers who participate in the market on the basis of their own personal value functions would bid and ask various prices for various quantities of goods, the most valid of which would result in the consummation of actual exchanges. Over time, through their own individual yet interdependent processes of single-loop Market Learning, they would acknowledge the results of past exchanges, improve their own exchange strategies, and systematically pursue the best results they can achieve, consistent with their respective value functions and resource constraints. However, because of the

O’Connor: A Crisis of Vision

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disequilibrium is the dual process of single-loop and double-loop Market Learning governed by the value functions of market participants. If we can avoid reading too much into these formalized diagrams, then we can appreciate the simple fact that Market Learning can be understood in terms of the language, logic, and graphical representations of both social learning and market exchange. So, no, this theory of Market Learning is not based on a vision of market participants as mathematical derivatives of a presumed market equilibrium nor as cybernetic systems of learning and action. On the contrary, Market Learning is premised on the commonsense idea that buyers and sellers are human decision makers seeking reasonable outcomes in a market context largely of their own creation. As such, it promises to illuminate some of those subtle dynamics of the market that are obscured by the static neoclassical theory. And as the following chapters will demonstrate, it is based on far more than the guidelines of a relatively obscure valuation standard and a surprisingly similar learning theory. In fact, it seems to be congruent with the essential insights of libertarian, egalitarian, and authoritarian economics, although not necessarily in the most obvious ways.

and social theory suggest that it is governed by the mutual pursuit of transparency, choice, and accountability. However, to suggest that Market Learning is governed by the mutual pursuit of transparency, choice, and accountability is not to imply that markets are actually characterized by maximal, or even optimal, degrees of transparency, choice, and accountability. Indeed, that dubious claim seems to be implied by the basic tenets of neoclassical economics. When orthodox economists adopt the static assumption of ubiquitous equilibrium, they are implicitly claiming that markets are, in fact, always already in a state of perfect transparency, choice, and accountability, wherein single-loop and double-loop Market Learning have, presumably, already happened. My hypothesis for Market Learning is more realistic, yet more subtle. It is that markets are tacitly governed by the mutual pursuit of transparency, choice, and accountability. Therefore, to whatever extent market participants do not intentionally practice this method, for whatever reason, Market Learning will be undermined and market performance will suffer in some fashion. As a consequence, the market will tend to create incentives for people to live up to this standard of practice, if not in the short-term, then at least in the long-term. And as I have just indicated, neoclassical market theory may implicitly support this claim even as it explicitly denies its relevance. For the neoclassical model enfolds within it the full depth and breadth of the market experience, collapsed and condensed into the most fundamental of variables. My task is to unfold this model enough to do justice to the primary features of a truly human market experience. Those who have followed the presentation thus far may recognize some rather humanistic implications of this new synthesis. What if the market system is a system of social learning and action as much as a system of goods production and wealth creation? If so, it would seem to follow that those factors that influence social learning, from interpersonal trust to institutional design, would also influence our success in the market. Likewise, those factors that influence our success in the market, from property rights to monetary policy, would, presumably, influence our efforts to learn about the world and effect positive change. Thus, at a minimum, the Market Learning synthesis would reframe the dialogue about how best to foster learning and action, within the market and throughout all the institutions of society. And all this would seem to relate to Habermas’s interest in the

To suggest that Market Learning is governed by the mutual pursuit of transparency, choice, and accountability is not to imply that markets are actually characterized by maximal, or even optimal, degrees of transparency, choice, and accountability. Those unfamiliar with market theory may have some difficulty appreciating the logical mechanics of this new integration with social theory. But as the dialogue unfolds in the chapters ahead, it will be explored in greater depth and illustrated in a variety of different ways. For now it is enough to know that the market process can be thought of as a process of social learning with two general dynamics: (1) the selection of different exchanges based on previously selected values; and (2) the selection of different values that enfold within them a host of potential exchanges. As for the selection process itself, both market theory

O’Connor: A Crisis of Vision

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institutionally permitted learning capacity and its determinative role in social (and, as I will argue, economic) development. Upon further reflection, more implications come to mind. What if the market could be relied upon to correct its own errors, and not just errors of unexploited profit opportunities, but errors of outmoded values? Wouldn’t that imply that market exchange was some sort of moral discipline and the market itself some sort of ethical system? Then again, doesn’t the market undermine both noble and ignoble intentions? Doesn’t market value automatically trump social values? And what’s wrong with that? Maybe there should be a place in our world for the market’s cold efficiency. After all, isn’t one of the great virtues of the market that it allows us to buy, sell, work, earn, borrow, spend and invest in a values-free system, relieved of the burden of social learning? Isn’t the market a private haven from our over-politicized society? Shouldn’t we restrict our social learning to the domain of public policy and let politicians determine the best ways to manage the market? Such counter arguments are certainly compelling and they form an important part of the economic dialogue among professional economists, who make a critical distinction between positive and normative economics. As Milton Friedman of the University of Chicago famously argued, positive economic analysis is designed to answer the question what is? with respect to economic development. It is concerned with understanding how the economic system has behaved in the past in order to predict how it will behave in the future. Normative economic analysis, in contrast, is designed to answer the question what ought to be? with respect to economic development. Therefore, it incorporates value judgments that are not necessarily grounded in the positive economic theories.43 For example, positive economics might claim that a minimum wage law will tend to increase unemployment among those low-wage workers whom the law was designed to help. We can expect this because when the state intervenes in the market and sets a minimum price that is above the market’s natural equilibrium, this higher price will tend to discourage demand and encourage supply, thereby creating a surplus of the good—in this case, low-wage labor looking for work. However, the question of whether the state should pass such a law to support some low-wage workers at the expense of others who will, according to the positive theory, suffer from unemployment is considered to be a matter for normative economics.

O’Connor: A Crisis of Vision

Therefore, the debates over economic policy are often framed in terms of positive claims vs. normative claims that are difficult to reconcile, because one set of claims calls for empirical validation to ensure the policy works, while the other calls for ethical validation to ensure it is appropriate. Moreover, this framing is typically only implicit as the protagonists often have a difficult time differentiating the positive claims from the normative claims, thereby undermining their attempts at validation. Worse yet, many debates over the state’s economic policy are entirely based on competing normative claims that pit one ethical perspective against another ethical perspective, or one political philosophy against another political philosophy, with little or no recourse to positive theory and empirical evidence. Thus, in trying to follow the political debate over minimum wage laws and other attempts to manage the market, one may never hear the positive economic arguments over the endless din of normative allegations, from the “economic injustice” attributed to the Republicans to the “class warfare” attributed to the Democrats.44

The fascinating thing is, while most arguments about the market are inherently normative, few of these arguments address the normative dimension within the market. That’s because very few economists and politicians acknowledge that the market even has a normative dimension.

The fascinating thing is, while most arguments about the market are inherently normative, few of these arguments address the normative dimension within the market. That’s because very few economists and politicians acknowledge that the market even has a normative dimension. The typical economic libertarian contends that the market’s inherent amorality, its ethical neutrality, is a great virtue. Those who might acknowledge a certain normative flavor to the choice behavior of market participants will nevertheless insist that it can be safely ignored in the quest for a positive social science. Not surprisingly, the typical economic egalitarian sees the market’s inhumane amorality as a terrible vice, the root cause of our economic and social

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problems. Those who might admit to the same normative flavoring will tend to dismiss it as a shallow, selfish morality corrupted by the so-called “market values” of profit, loss, risk, and return. Therefore, it seems that either our values aren’t present when we engage in market exchange or, if they are present, they are either irrelevant or corrupted. One way or another, the question of values within the market has been rendered undiscussable within the mainstream economic dialogue. It is therefore no surprise that the economic authoritarians have claimed for themselves both empirical and moral authority over what so many people mistakenly regard as a purely technical system of economic development. As provocative as it may be to both market theorists and social theorists, Market Learning is premised on the idea that the normative judgments we naturally (and quite tacitly) incorporate into our social actions are also, just as naturally (and just as tacitly), incorporated into our market exchanges. When we reflect on this for a moment it seems reasonable, though perhaps a little embarrassing, that all our market exchanges bear the imprints of our personal and shared values—not necessarily those values we espouse, but evidently those values we actually apply in the market. Therefore, for those of us who are struggling with difficult questions about what we ought to be doing to solve the world’s economic problems, or perhaps just our own personal economic problems, it would seem that Market Learning might have something to say about bridging the chasm between what is and what ought to be in economic development.

but also a rather disingenuous stance that implicitly denies the active role that economists have always played in guiding human affairs. Keynes was right when he observed that economic ideas are more powerful than is commonly understood, and many economists are rather proud of this ideological power. Their positive quest to understand and control the social process of the market is unavoidably normative in its capacity to shape the consciousness and culture of market societies. Moreover, their academic indoctrination of new students, particularly those disciples of applied economics, the self-assured and unreflective MBAs, represents a normative intervention whose impact on society can hardly be overstated. Yet their repudiation of normative interests only empowers those politicians, bureaucrats, and lobbyists whose normative interests and positive methods are demonstrably anti-market and anti-social. Worse yet, it bestows a patina of legitimacy to those misguided market participants who, unaware of their own anti-market sentiments, claim the right to violate the most basic norms of civilized society in the interest of their own hollow brands of business performance and market success. Regardless, if Market Learning is a valid theory of how the market really works, then we will discover that we have little choice about the existence of a normative dimension to the market—only choices about how we want to engage with this normative dimension. Suffice to say that a purely positive approach to understanding the market’s normative reality leaves much to be desired and much more to be explored. If we are to develop an Integral Economics for a 21st century economy centered on knowledge and values, then we must begin with a conception of the market that differentiates and then integrates its positive and normative dimensions through a combination of technical and practical learning— techné and praxis. Market Learning begins with this very conception and offers us the possibility of a critical theory of the market, by which I mean a theory that simultaneously illuminates how the market is supposed to work, why it doesn’t always work as promised, and how we can make it really work for us. The proposed exemplar of this critical theory, the mutual pursuit of transparency, choice, and accountability, may be considered a general statement of how real value is, and ought to be, created in the market.45

To insist, as many economists will, that proper science has no interest in social values, that knowing what is should be divorced from considerations of what ought to be, is not only a self-contradictory paradigm, but also a rather disingenuous stance that implicitly denies the active role that economists have always played in guiding human affairs.

To insist, as many economists will, that proper science has no interest in social values, that knowing what is should be divorced from considerations of what ought to be, is not only a self-contradictory paradigm,

O’Connor: A Crisis of Vision

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The ultimate challenge in creating an Integral Economics is to expand our conception of the market to embrace and resolve those deeper dilemmas of the modern/postmodern mind that have until now most assuredly undermined our pursuit of these most cherished of economic ideals.

Productivity increased by an average of 3.3% per year, with a very strong average of 4.4% per year during the five years from 1996-2000—the highest 5-year average in at least 50 years. From 1981-2000, the Unemployment Rate averaged 6.4%, with a very low rate of 4.0% in 2000—the lowest rate in 30 years. Source: Bureau of Labor Statistics. From 1981-2000, the GDP Price Deflator averaged 3.2%, with a very low average of 1.7% during the five years from 1996-2000—the lowest 5-year average in over 30 years. Source: Bureau of Economic Analysis. From 19812000, the Misery Index, defined as the Unemployment Rate plus the Inflation Rate, averaged 9.6%, with a very low average of 6.3% during the five years from 1996-2000—the lowest rate in over 20 years. From 1981-2000, the S&P 500 Stock Market Index increased by an average of 12.0% per year, with a very strong average of 16.5% per year during the five years from 1996-2000. Source: Standard & Poors.

Market Learning suggests that, given the right conditions, people can reflect on the market they create and learn to change it in ways more congruent with the values they espouse, including, perhaps, the integral values of freedom, fairness, efficiency, effectiveness, growth, and sustainability. It’s an appealing prospect, to say the least. However, in order to preclude any utopian pretensions, we would do well to resurrect Hayek’s sobering perspective that the present crisis of our civilization may be the result of genuine error on our own part and the pursuit of some of our most cherished ideals has apparently produced results utterly different from those which we expected. Indeed, the ultimate challenge in creating an Integral Economics is to expand our conception of the market to embrace and resolve those deeper dilemmas of the modern/postmodern mind that have until now most assuredly undermined our pursuit of these most cherished of economic ideals. If this effort should rise to that challenge, then the mutual pursuit of transparency, choice, and accountability would constitute a market-based, yet socially-conscious method for integral economic development—an authentic third way economics that could justify the libertarian faith and engage the egalitarian skepticism.

Research institutes and other organizations emphasizing what I call libertarian economics include Cato Institute, Competitive Enterprise Institute, Foundation for Economic Education, Fraser Institute, Institute of Economic Affairs, Ludwig von Mises Institute, and World Economic Forum. Popular books that address libertarian economic themes include: Blundell (2001), Friedman and Friedman (1980), Hayek (1994), Henderson, D. (2000), Henderson, D. (2002), Lindsey (2002), Micklethwait and Wooldridge (2000), and Yergin and Stanislaw (1998). Of course, I do not imply that these books or the publications from these institutes are entirely libertarian in orientation, nor that they are guilty of any unwarranted “faith” in the market. 2

For more on the 19th century social movement against the proponents of free markets, see Polanyi (1957). Chapter 2 will address some of Polanyi’s views on the market. 3

The purpose of this paragraph is to sketch the broad contours of an economic story that has been crafted by a particular economic sub-culture, which I refer to as the economic egalitarians. While it is not my intent to defend the empirical validity of the story (that is properly the task of those who espouse the story), there are nevertheless some economic statistics that appear to establish its validity. For example, see Weller (2004) for a report on the trends in corporate profits and taxes. According to Henderson, Lickerman, and Flynn (2000) p. 203, “The breadth of recent wage problems is clear from the fact that real wages fell for the bottom 60 percent of wage earners over the 1979-1989 period, while wages fell among the bottom 80 percent over the 1989-1995 period. That is, only workers in the upper 20 percent of the wage scale obtained real wage growth.” According to Hodges (2004), household debt levels rose from approximately 60 percent of national income in 1980 to over 80 percent in 2000 and over 100 percent in 2003. Personal saving as a percentage of disposable personal income also declined markedly from approximately 10 percent in the early 1980s to approximately 2 percent in 2000 and 0.2 percent at the close of 2004. Although supporting data are difficult to assemble, it would not be unreasonable to hypothesize that the increases in personal indebtedness and the decreases in personal saving since 1980 were most concentrated in those households whose personal income was in the lower 80 percent of all households, a condition which would clearly exacerbate the decline in real wages experienced by most of these households. See Note 13 for more data on public and private sector debt. See Note 15 for more information on the financial condition of the Social Security program. See Shiller (2000) for an analysis of the stock market bubble that peaked in March 2000. 4

© 2003 by Daniel J. O'Connor. All Rights Reserved. The purpose of this paragraph is to sketch the broad contours of an economic story that has been crafted by a particular economic sub-culture, which I refer to as the economic libertarians. While it is not my intent to defend the empirical validity of the story (that is properly the task of those who espouse the story), there are nevertheless some economic statistics that appear to establish its validity. For exemple, from 1981-2000, Real Gross Domestic Product increased by an average of 3.2% per year, with a strong average of 4.0% per year during the five years from 1996-2000. Source: Bureau of Economic Analysis. From 1981-2000, Industrial Production increased by an average of 3.1% per year, with a very strong average of 5.0% per year during the five years from 1996-2000—one of the highest 5-year averages in history. Source: Federal Reserve Board. From 1981-2000, Manufacturing 1

O’Connor: A Crisis of Vision

Research institutes and other organizations emphasizing what I call egalitarian economics, at least in part, include the AFL-CIO, Anti-Capitalist Convergence, Business for Social Responsibility, 5

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Center for Popular Economics, CorpWatch, Direct Action Network, Foundation on Economic Trends, Friends of the Earth, Global Exchange, Institute for Policy Studies, International Forum on Globalization, International Institute for Sustainable Development, International Society for Ecological Economics, Mobilization for Global Justice, Public Citizen, Redefining Progress, Socialist International, United for a Fair Economy, World Social Forum, and WorldWatch Institute. Popular books that address egalitarian economic themes include: Callinicos (2003), Douthwaite (1999), Dyer-Withford (1999), Mander and Goldsmith (1996), Hutton and Giddens (2000), Hutton (2002), Kelly (2001), Klein (2000), Korten (1995), Korten (1999), Reich (2002), Rifkin (1995), Greider (1997), Henderson, H. (1995), Henderson, H. (1996), and Henderson, H. (1999). Again, I do not imply that these books or the publications from these institutes are entirely egalitarian in orientation, nor that they are guilty of any unwarranted “skepticism” of the market.

as the tax rebate checks mailed out in 2001.” It certainly makes one think for a moment. If that one-time prepayment of expected tax refunds was the economic stimulus that Republicans claim it was, imagine the stimulus that would result from a permanent tax cut of twice the size for every taxpayer in the country. And unlike other recent tax cuts, this one would be the result of a corresponding cut in spending. The explicit public sector (federal, state, and local) share of U.S. national income was 12 percent in 1929, and we can reasonably assume that it was lower in 1900, before there was a national income tax. This share increased to 43 percent as of 2003, a 258 percent increase attributable to the growth of the welfare state (e.g. New Deal, Great Society) and the warfare state (e.g. World War I, World War II, Cold War, War on Terror). Furthermore, in 2003, the government-mandated regulatory compliance costs, which are typically hidden in the private sector share of national income, amounted to another 15 percent of national income, thereby bringing the total share of the economy controlled by government to a surprisingly high 58 percent. In 1947, this regulatory share was just 4 percent of national income and in 1930 it was just 1 percent. We can reasonably surmise that it was even lower in 1900. Data source: Hodges (2004). 11

For some background on the attribution of an “anti-liberal backlash” see Henderson, D. (2001a), Henderson, D. (2001b), and Blundell (2001). See for example Hendersen, D. (2001a) and Hendersen, D. (2001b). 6

Based on this information, we can confidently estimate the government’s share of the economy in 1900 at less than 13 percent, with 12 percent being the overt public sector share and 1 percent being the covert public sector regulatory share of national income. We can then see that the growth in the government’s share of the economy has increased from less than 13 percent in 1900 to a well documented 58 percent in 2003. The market’s share of the national economy has therefore decreased from at least 87 percent in 1900 to a mere 42 percent in 2003, including a modest decrease since 1980, the beginning of the alleged “free market renaissance” against excessive government control of the economy. Data source: Hodges (2004).

The assessment of the economy in terms of power relations is a standard of sociological analysis. The “resistance movements” against the “institutions of capitalism” are typically motivated by the belief that the social order that seems to cut against those in the movement is the result of coercion from some other collective. This assessment then justifies, at least to some people, the use of coercion by the resistance movement. For more on this theme, see: Dyer-Withford (1999), Castells (1997), Mittelman (2000), Polanyi (1957), and Gray (1999). 7

I do not mean to imply that politicians, bureaucrats, and lobbyists are simply authoritarians, but rather to convey the essential truth that the state’s only means of pursuing its own economic ends is to coerce otherwise free people to do something other than what they would have done voluntarily within the market—e.g. taxation, tariffs, and even monetary policy are enforced upon, rather than voluntarily chosen by, market participants. As Chapter 1 will describe, regulation intended to establish the “rules of the game” and intervention intended to alter the “outcome of the game” are always imposed by the state on the otherwise self-organizing market participants. In this sense, authoritarian economics is the true economic philosophy of the state and those who lobby the state for special economic favors, despite the fact that politicians typically espouse libertarian and egalitarian philosophies. 8

Therefore, the American economy at the beginning of the 21 st century is less than half market economy and more than half state economy. And recent events clearly indicate that this statist trend is continuing, with the federal government expanding military expenditures for an endless and ill-defined war on terrorism, while trying to hide the $44 trillion unfunded welfare liabilities that will have to be funded out of monetary inflation, increased taxes, and reduced benefits. See Note 15 from this chapter for more on federal government budgets. In a rather humorous reference to his renown open mouth operations, Alan Greenspan, Chairman of the Federal Reserve Board, was quoted as saying, apparently in response to an affirmative comment by a U.S. Congressional Representative, "If I've made myself clear, you must have misunderstood me." Source: The Independent (London) April 7, 1997. 12

At this point, some readers may be wondering why I am using so many references to the American economy and now even the American political parties. The simple answer: it is the easiest way to establish a concise and coherent context for the ideas to be presented in this book—ideas that are being expressed by an American author for what is expected to be a primarily American audience. A comparably concise narrative simply could not be written for the entire global economy because of the very great diversity in economic and political history over these last several decades. So please consider these many references to economic events and statistics as merely illustrative, but certainly not determinative, of the deeper dialogue that is the subject of this book. 9

The systemic connections between the Federal Reserve’s monetary policy and the trends in money supply, debt, saving, investment, asset prices, wages, taxes, and exchange rates will be explored more carefully in Chapter 7. According to Hodges (2004), total American public and private debt as of 2003 was approximately $37.5 trillion, not including the unfunded “off-balance-sheet” Medicare and Social Security liabilities of the federal government, which were estimated to be an additional $44 trillion. Of this on-balance-sheet debt of $37.5 trillion, approximately $8.6 trillion is held on the public sector balance sheet, with $7 trillion on the federal government balance sheet and $1.6 trillion on the combined state and local government balance sheet. The remaining $28.9 trillion private sector debt balance is allocated as follows: $9.4 trillion to the 13

Slivinski (2001) details the $87 billion of federal subsidies to private corporations in 2001, noting that “if corporate welfare were eliminated tomorrow, the federal government could provide taxpayers with an annual tax cut more than twice as large 10

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household sector; $7.4 trillion to the business sector; $11.4 trillion to the financial sector; $0.7 trillion to all other categories. The total on-balance-sheet debt of $37.5 trillion is about 340 percent of the total Gross Domestic Product, a ratio that was only approached once before in recent history: in the pit of the Great Depression.

of retirees. It estimated that closing the deficits would require “the equivalent of an immediate and permanent 66 percent across-the-board income tax increase.” The reports of the study did not mention the third strategy by which the government will attempt to meet its welfare obligations: monetary inflation. By continuously inflating the supply of money and credit, the Federal Reserve will gradually reduce the real, inflation-adjusted burden of these obligations, secretly taxing workers who fund the programs and secretly reducing the real value of the benefits ultimately received by retirees. The critical question is this: how far and how fast can the Federal Reserve reduce the purchasing power of the US Dollar before its managed devaluation becomes a self-reinforcing crisis of confidence (commonly experienced as hyperinflation in prices)? When is the so-called currency of last resort no longer the currency of last resort? When there is a new currency of last resort.

In response to the wave of corporate scandals, the market system has been criticized by politicians from the Democratic, Republican, and Green Parties. It is consistently defended by the Libertarian Party. For examples of recent essays assailing or defending the market, see Anderson (2002b), Anderson (2002e), McCain (2002), Paul (2002), Rockwell (2002b), Rockwell (2002c), Rockwell (2002d), Rockwell (2002e), and Winter (2002). 14

The U.S. Congressional Budget Office reduced its projected budget surplus for the ten-year period 2002-11 from $5.6 trillion as of January 2001 to $1.6 trillion as of January 2002 and then again to $0.3 trillion as of August 2002. In August 2003, after actual figures were known for 2002, the CBO was projecting a deficit of $2.3 trillion for 2002-11. These projections included the surpluses of the so-called Social Security Trust Fund, which politicians will certainly raid to cover the real budget deficits as they materialize. By stripping out the officially “off-budget” Social Security surpluses that should be set aside to fund future Social Security liabilities, the real “on-budget” projections are even more disappointing. The projected budget for 2002-11, net of the projected Social Security surplus of $2.3 trillion, was a surplus of $3.3 trillion as of January 2001, a deficit of $0.7 trillion as of January 2002, and an even more severe deficit of $2.0 trillion as of August 2002. In August 2003, with the projected Social Security surplus having been reduced to $2.1 trillion (presumably due to higher projected unemployment), the ten-year budget deficit had ballooned to $4.5 trillion. 15

Just as interesting, from the perspective of transparency and accountability, is the fact that the study was originally commissioned by former Treasury Secretary Paul O’Neill, but subsequently suppressed when it was realized that the results would impair the Bush administration’s ability to negotiate a new round of tax cuts and spending increases. Although the study was completed and its results were privately circulated to several independent think tanks in Washington, it was kept out of the 2004 annual budget report published in February 2003 and was not reported to the public until just hours after the President had signed the new tax legislation. Source: Despeignes (2003). For more information on the U.S. federal government’s offbalance sheet liabilities and their burden on the market economy, see Walter and Weinberg (2002) and Wallison and Ely (2000). For more general criticism of the federal government’s accounting practices, see Anderson (2002b), Bandow (2002), Brinkley (2002), Edwards (2002). For more information on the astounding growth in government spending, taxation, and debt during the 20th century, see Hodges (2004). To track the growth in federal government debt, visit the U.S. Treasury’s The Debt to the Penny website at http://www.publicdebt.treas.gov/opd/opdpenny.htm.

Therefore, in less than three years, the federal government reduced its projected “earnings” for the period 2002-11 by a total of $7.8 trillion, or an average annual reduction of nearly $800 billion. Even if the August 2003 projections prove to be perfectly accurate (which is unlikely given the fact that the costs for the U.S. military occupation of Iraq were excluded), the only way the government can avoid adding an additional $4.5 trillion to the federal debt, which stood at $5.8 trillion at the end of 2001, will be to raid the misnamed Social Security Trust Fund for its projected $2.1 trillion surplus. Because there is no law establishing a genuine trust fund and no law preventing the government from spending the Social Security tax revenues on non-Social Security expenditures, doing so will create an “offbalance sheet liability” in the amount of $2.1 trillion for future Social Security payments in lieu of an “on-balance sheet liability” in the same amount for future debt service payments. Either way, the people will be taxed, the funds will be spent, and the additional $4.5 trillion liability for future debt service and Social Security benefits will add to the burden of U.S. taxpayers. See Congressional Budget Office (2002a), (2002b), (2002c), (2003).

My decision to use personal labels—like libertarians, egalitarians, and authoritarians—in place of what many would regard as more politically correct ideological labels—like libertarianism, egalitarianism, and authoritarianism—was primarily a matter of rhetorical efficiency. It is just easier to read sentences that take the form of “libertarians believe in the market” than it is to read the more cumbersome “libertarianism includes a belief in the market.” I therefore use these personal labels as short-hand references to economic philosophies rather than heavy-handed attempts to tag specific people with overly simplistic names (notwithstanding the fact that many of them will proudly pronounce themselves as libertarian, egalitarian, etc.). Furthermore, these terms were carefully selected to describe (not to denigrate) the essence of each economic philosophy in relation to the others. 16

In a related issue, in May 2003, while President Bush was signing into law a new 10-year, $350 billion tax-cut package, word leaked of a study projecting future federal budget deficits of more than $44.2 trillion (in current dollars), or roughly seven times the size of the national debt and nearly equivalent to the total value of all US household assets. This is one of the major “off-balance sheet liabilities” that the federal government is reluctant to acknowledge to the American taxpayers. The study concluded that dramatic tax increases and/or massive spending cuts will be unavoidable if the federal government is to fulfill its Medicare, Social Security, and other welfare promises to future generations

O’Connor: A Crisis of Vision

See Hampden-Turner (1990) for an introduction to the use of dilemmas in strategic thinking. For more on clean technology, see Hawken, Lovins, and Lovins (1999). 17

Of course, neither economic culture will deny the importance of freedom and fairness, efficiency and effectiveness, growth and sustainability. After all, who could really argue with these ideals in their pure forms? As the remainder of this book will demonstrate, the dilemmas are rooted not so much in a clash of ideals, but in the limited perspective that each culture has on the 18

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nature of these ideals and the means available for their pursuit. Thus, many economic libertarians see the free market as the only fair way to organize an economy and, therefore, advocate for economic freedom with the assumption that economic fairness is fully incorporated in their perspective. In response, many economic egalitarians see the fair market as the only valid measure of freedom and, therefore, advocate for economic fairness with the assumption that its pursuit automatically enhances economic freedom. As we will see, the root of the debate between the libertarians and the egalitarians lies in the contradictory visions that each holds of the market and, by extension, the incompatible means that each employs to achieve the equally desirable ends of freedom and fairness.

distinguish the three classes of technological capital, human capital, and natural capital. Given that each factor of production earns a type of income from the production process, I find this capital-income, stock-flow nomenclature to be the most useful. My presentation of neoclassical market theory and general equilibrium is based on Reder (2000) pp. 43-65 and Blaug (1996) pp. 277-405 and pp. 549-95. 21

The proof of a welfare maximum associated with general equilibrium was developed by Wilfredo Pareto, whose proof is often referred to as Pareto-optimum. Blaug (1996) pp. 570-74. 22

23

The American Heritage Dictionary of the English Language, Fourth Edition. Houghton Mifflin Company.

The popular libertarian critique of the egalitarian agenda is primarily a critique of the authoritarianism that is often marshalled in support of the egalitarian cause, rather than a direct critique of egalitarian philosophy. Framed in this way, it is a compelling critique that convinces many that egalitarianism is just a disguise for authoritarianism, which is clearly opposed to all things libertarian. For example, if we ask an uncompromising economic libertarian what he thinks of the economic egalitarians, he will probably describe the wasteful expansion of the welfare state, the coercive activities of big labor, and excessive government regulation of business—for want of a better term, the institutions of socialism that are constraining the market and destroying our liberties. For him, the ideals of egalitarianism and the techniques of authoritarianism form a single, integrated, economic policy agenda. 19

http://education.yahoo.com/reference/dictionary/index.html Proof of a general, multi-market equilibrium as a logical and mathematical possibility was pursued most aggressively by Leon Walras, subsequently achieved by Abraham Wald, and later generalized and refined by Kenneth Arrow and Gerard Debreu, who shared a Nobel Prize for their work. Source: Blaug (1996) p. 553. 25

26

Blaug (1996) pp. 569-70.

The S&P 500 stock market index closed at 957 at the end of August 1998. Two years later, at the end of August 2000, it closed at 1,518, for a 59% increase over just two years and an average annual compounded growth rate of 26%. The index closed at 916 at the end of August 2002 (having recently been as low as 798), for a 40% decrease over just two years and an average annual compounded growth rate of -22%. Thus, the average annual growth rate of 26% for the first two years was more than completely reversed by the average annual growth rate of –22% in the next two years. Source: Standard & Poor’s Corp. 27

But the popular egalitarian critique of the libertarian agenda is also in large part a critique of the authoritarianism that lies behind so much libertarian rhetoric, rather than a direct critique of libertarian philosophy. Given such a frame, the egalitarian critique convinces many that libertarianism is really just a thinly veiled authoritarianism. If we ask an uncompromising economic egalitarian what she thinks of the economic libertarians, she will probably describe the insidious collusion of big business with big government in everything from corporate welfare to campaign financing to unfair trade—in short, the institutions of capitalism that are constraining society and destroying nature. For her, the ideals of libertarianism and the techniques of authoritarianism form a single, integrated, economic policy agenda.

I do not imply that technical market theories exclusively “describe what market exchange has already done” nor that practical market theories exclusively “prescribe how market exchange should be done.” As I will carefully explicate in later chapters, there are technical market theories with at least implicit prescriptions for market observers and participants, as well as practical market theories with important descriptions for market participants and observers. For now, my intent is to focus the reader on the distinctions between those very common technical theories that are primarily descriptive of what an observer might see and those very rare practical theories that are primarily prescriptive of how a participant might act. 28

In my opinion, the major obstacle to dialogue between the libertarians and egalitarians is that each firmly believes that the other, and only the other, is in bed with the authoritarians. Unable to turn their critiques of one another back on themselves, both sides fail to see the common conceptual space in which a more integral economics might be constructed.

There are many specific definitions of fair market value espoused by valuation advisors, bankers, accountants, and regulators, all of which are, to my knowledge, consistent with this general definition. For example, in the Internal Revenue Service Revenue Ruling 59-60, fair market value is defined as “the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts. Court decisions frequently state in addition that the hypothetical buyer and seller are assumed to be able, as well as willing, to trade and to be well informed about the property and concerning the market for such property.” 29

These classical terms for the factors of production are still in common use, although each is undergoing a certain revision to accommodate the factors of production associated with the new mode of economic development based on knowledge. For example, information technology is just another form of capital, knowledge work is just the latest form of wage labor, and even knowledge itself, in the form of codified information or intellectual property, can be framed as yet another commodity resource analogous to oil and food (although it must be briefly noted that while oil and food can only be used once, intellectual property can typically be used many times over). The dynamics of the knowledge economy still play out within and between the three factor markets. 20

This definition clearly highlights the first two strands of my composite definition—where each is aware of the relevant information pertaining to the exchange and neither is under any compulsion to exchange—while implying the existence of the third strand--both comply with the ultimate terms of the exchange.

Another revision of these classical terms that seems to be coalescing is the adoption of the term capital to refer to each and every factor of production, with the use of adjectives to

O’Connor: A Crisis of Vision

Reder (1999) p. 59.

24

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The idea that the parties to a market exchange at fair market value are in some sense mutually accountable for honoring the terms of their contract is clarified by simply considering the alternatives in which they are not held accountable by one another or they intentionally avoid accountability. Thus, the fact that this definition exists within the regulatory context of IRS Revenue Ruling 59-60, with its obvious implications for, and frequent enforcement of, ex post accountability, represents the third strand in my composite definition of fair market value.

The subtle distinctions between the two exemplars of market exchange and social learning used to construct the Market Learning exemplar will be explored in considerably more detail throughout the remainder of the book. For example, readers may have noted that the particular version of accountability presented in the market exchange presentation did not specifically mention the detection and correction of error as did the version of accountability presented in the social learning presentation. On the basis of such an observation, one might wonder whether I have glossed over such an important distinction and adopted a fuzzy notion of accountability in a rather hasty construction of the Market Learning exemplar. Rest assured, that I have simply tried to convey the essential hypothesis to be explored throughout the remainder of this book. Before the end of the book, I will examine this and many other subtleties within the proposed exemplar of Market Learning, including a careful look at each and every term used in the summary definition: market, learning, mutual, pursuit, transparency, choice, and accountability. 41

Furthermore, this third strand of ex post accountability is often only implied in market theories which presume either: (1) perfect information and rational choice and, therefore, no need for ex post accountability; or (2) an institutional context of laws and regulations that enforce contracts and property rights, while providing the parties to every exchange with the opportunity to hold the other party accountable via the judicial system. This implied accountability feature of orthodox market theory will be discussed in subsequent chapters. 30

Habermas (1975) p. 8.

31

Habermas (1979) p. 120.

I believe there is much to be gained by framing a typology of economic action that includes exchanges, gifts, transfers, and thefts of property. If such a typology is valid, then the integral theory of economic action for a particular individual or collective would have to account for decisions regarding which type of economic action to use in pursuit of particular economic goals—i.e., the mix of exchanges, gifts, transfers, and thefts that best satisfies the positive and normative criteria—as well as the specific decisions subsequently made within each domain of economic action. This suggests a wider, deeper understanding of the mutual pursuit of transparency, choice, and accountability wherein even the choice of whether or not to participate in the market (and the other economic domains) is made as a part of one’s integral economic meta-praxis. This will be developed over the course of the entire book and presented in full in the Epilogue. 42

Argyris and Schön (1978), Argyris (1982), Argyris, Putnam, and Smith (1985), Argyris (1990), and Argyris (1993). 32

33

Argyris, Putnam, and Smith (1985) pp. 80-1.

I am not aware of any typology of actions created by Argyris and his colleagues, though I have found it interesting to consider the possibility that we develop distinct theories of action for particular contexts in our lives—e.g., market, family, school, politics, religion. Furthermore, we may develop distinct theories of action appropriate to each successive level of psychological development through which we pass over the course of a lifetime. Thus, taken together, we can see that each of us may have a reservoir of multiple, interrelated theories of action aligned with the basic structures of psychological development as well as the different contexts of our lives. Therefore, an understanding of why people act the way they do in particular situations might include elements of both developmental and contextual theories of action. I explore the implications of these ideas for economics in Chapters 5 and 9. 34

For now, I will simply suggest that this model might contribute to an Integral Economics capable of embracing the valid perspectives of libertarian, egalitarian, and authoritarian economics. For example, at the risk of over-simplification, we may find it useful to describe libertarian economics as a preference for the use of exchanges via the market sector to accomplish our individual and collective economic goals—e.g., promoting entrepreneurship and dynamic markets for technological, human, and natural capital. Egalitarian economics might therefore constitute a preference for the use of gifts via the civil sector to accomplish our economic goals—e.g., promoting non-governmental, non-commercial enter-prises with a social mission or perhaps just promoting a more altruistic approach to market exchange. Authoritarian economics would constitute a preference for the use of third-party transfers, or forced redistributions of income and wealth, via the state sector—e.g., promoting the use of government taxation and expenditure to address perceived economic problems that do not seem to be adequately resolved by the market and civil sectors. Those who cannot or will not achieve their economic goals via the market, state, and civil sectors would resort to theft or some other illegal and unilateral acquisition of property within what we might call the criminal sector as a means to their chosen ends. With tongue in cheek, we might call this barbarian economics. Of course, most of us have elements of all four economic philosophies within us, to varying degrees, thereby giving us the opportunity to choose among the various types of economic action and tailor our responses to various economic challenges. Most importantly, for those interested in a more integral economics, we must carefully investigate the ways in which all four economic philosophies have manifested in each of the four economic domains—e.g.,

Argyris, Putnam, and Smith (1985) pp. 80-8. Figure P-3 is based on the figures in Argyris, Putnam, and Smith (1985) p. 84, Argyris (1990) p. 94, and Argyris (1993) p. 50. 35

36

Argyris, Putnam, and Smith (1985) pp. 80-8.

Argyris, Putnam, and Smith (1985, 69-79) specifically describe Action Science as a critical theory congruent with that presented in Habermas (1971), a claim with which I am in agreement. My presentation of the parallels between Action Science and Habermas’s social theory includes Habermas’s later developments and, therefore, must be acknowledged as moving beyond the presentation in Argyris, Putnam, and Smith (1985). However, in my view, Habermas’s subsequent developments only serve to accentuate the parallels between his social theory and Action Science. 37

For more on Habermas’s critical theory of society, an extraordinary intellectual project that has evolved over several decades, see: Habermas (1971), Habermas (1975), Habermas (1979), Habermas (1984), Habermas (1987), Habermas (1990), Geuss (1981), McCarthy (1994), Braaten (1991), Bernstein (1994), and Morrow and Brown (1994). 38

Habermas (1979) pp. 117-20.

39

Habermas (1979) pp. 117-20.

40

Argyris, Putnam, and Smith (1985) p. 99.

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egalitarianism, authoritarianism, libertarianism in the market sector.

and

barbarianism

join

theory of society in general… that it attempts a ‘self-clarification of the struggles and wishes of the age,’ in such a way as to guide those struggles. Toward this end, it should also explain how a person, group, or society has come to be engaged regularly in practices that, in fact, are not in his, her, or its interest, as a result of some feature of that society. Another feature of critical theories of society is that they identify deep conflicts, or potentials for society-wide crises, inherent within the social, political, and economic institutions of modern capitalist societies.” Source: Braaten (1991) 10-1.

Notice that this provides a way of thinking about how the actual mix of market, state, civil, and criminal sectors is determined within a society, while also providing a way of contrasting the different economic cultures across different societies. With some economic concepts to support us, we might say that as we find that sustainable allocation of economic decisions among the economic sectors, we move the meta-institutional socio-technical system toward some sort of social equilibrium that reflects the population’s integral theory of economic action. Put simply: economic reality comes into alignment with economic philosophy. But we can also see that there are times of economic crisis in which economic reality becomes misaligned with economic philosophy, society moves toward a great disequilibrium, and the long-standing allocation of economic decisions among the different sectors is challenged and revised. One such economic crisis occurred in the 1930s and is referred to as the Great Depression. Some economists would characterize the crippling “stagflation” of the late 1970s and early 1980s as another such crisis. Fewer still, but nevertheless some, would look to our present course of economic development and ask whether we are heading into another economic crisis. Economic crises such as these present triple-loop or third-order challenges that require integral vision and logic to foresee, understand, and navigate. This is the core competence required of all those who would presume to design and lead our economic institutions, whether they be institutions in the market, state, or civil sectors. More on this in the Epilogue. 43

For more on Habermas’s critical theory of society, see: Habermas (1971), Habermas (1975), Habermas (1979), Habermas (1984), Habermas (1987), Habermas (1990), Geuss (1981), McCarthy (1994), Braaten (1991), Bernstein (1994), and Morrow and Brown (1994).

References Anderson, William L. 2002a. “The Press and the State.” Mises Daily Article (May 6, 2002) Auburn: Mises Institute. Anderson, William L. 2002b. “Congress, Accounting and the Free Market.” Mises Daily Article (July 11, 2002) Auburn: Mises Institute. Anderson, William L. 2002c. “The U.S. Economy Is Not Depression-Proof.” Mises Daily Article (July 26, 2002) Auburn: Mises Institute. Anderson, William L. 2002d. “Assigning Blame.” Mises Daily Article (August, 14, 2002) Auburn: Mises Institute. Anderson, William L. 2002e. “The War on Business.” Mises Daily Article (September 6, 2002) Auburn: Mises Institute. Argyris, Chris and Donald Schon. 1978. Organizational Learning: A Theory of Action Perspective. Reading: Addison-Wesley. Argyris, Chris. 1982. Reasoning, Learning and Action: Individual and Organizational. San Francisco: Jossey-Bass. Argyris, Chris, Robert Putnam, and Diana McLain Smith. 1985. Action Science: Concepts, Methods and Skills for Research and Intervention. San Francisco: Jossey-Bass Publishers. Argyris, Chris. 1990. Overcoming Organizational Defenses: Facilitating Organizational Learning. Englewood Cliffs: Prentice Hall. Argyris, Chris. 1993. Knowledge for Action: A Guide to Overcoming Barriers to Organizational Change. San Francisco: JosseyBass. Bernstein, Richard, editor. [1985] 1994. Habermas and Modernity. Cambridge: MIT Press. Blaug, Mark. 1996. Economic Theory in Retrospect. Cambridge: Cambridge University Press. Blundell, John. 2001. Waging the War of Ideas. London: The Institute of Economic Affairs. Braaten, Jane. 1991. Habermas’s Critical Theory of Society. Albany: State University of New York Press. Callinicos, Alex. 2003. An Anti-Capitalist Manifesto. Cambridge: Polity Press. Castells, Manuel. 1997. The Information Age: Economy, Society and Culture. Volume II: The Power of Identity. Malden, MA: Blackwell. Congressional Budget Office. 2002a. The Budget and Economic Outlook: Fiscal Years 2003-2012. The Congress of the United States (January 2002). Congressional Budget Office. 2002b. The Budget and Economic Outlook: An Update. The Congress of the United States (August 2002). Congressional Budget Office. 2002c. “Social Security and the Federal Budget: The Necessity of Maintaining a

See for example Friedman (1953) pp. 3-43.

There are of course four potential combinations of positive and normative claims, which we can think of as answers to the questions does it work? and is it appropriate?: (i) yes / yes; (ii) no / no; (iii) yes / no; and (iv) no / yes. 44

The first two combinations, where the positive and normative claims are aligned, lead to relatively easy agreements. For example, when orthodox economic theory claims that some policy will work and politicians judge that it is also appropriate in light of their constituents’ wishes or their own political ambitions, then the policy is very likely to be approved. Likewise, when economists and politicians conclude that a policy won’t work and is also inappropriate, it is just as easily rejected. But when there is a conflict between the positive and normative claims, as there often is, the decision is far more difficult. How the decision makers deal with this conflict says a lot about their economic praxis, not to mention their political praxis. For example, would they consider the possibility that their positive or normative economic theories are wrong? Would they consider alternative economic theories that might yield different conclusions? After all, some economic theories contend that the government can create jobs through fiscal policy, while other theories claim that such policies destroy more jobs than they create. And how would the politicians address the conflicting claims? Would they cover-up the positive claim that one of their policies will not work in order to push through the legislation demanded by one of their special interest groups? Or would they explain the uncertainties and trade-offs that are a fact of life in a complex political economy? The Epilogue will present this critical theory exemplar in considerably more detail, incorporating the key insights gleaned through the three intervening Dialogues. Until then, Jane Braaten’s characterization of Habermas’s critical theory provides some helpful context for this Prologue: “It is a feature of a critical 45

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Yergin, Daniel and Joseph Stanislaw. 1998. The Commanding Heights: The Battle Between Government and Marketplace that is Remaking the Modern World. New York: Simon and Schuster.

Daniel J. O'Connor, MBA, MA, CFA, is a management consultant who helps entrepreneurs and executives envision alternative futures, articulate clear strategy, and measure strategic performance.

Catallaxis explores the potential for a more integral approach to the business and economic challenges of our time. It features original articles and essays, thoughtful reviews and commentary, and referrals to other work in the field.

email: [email protected] website: www.integralventures.com

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