Constructive and Evolutionary Rationalism, Different Factors Affecting Market Freedoms - Literature review Example

Market Driven I. Introduction A free market follows the natural order of supply and demand where the two forces seek to find an equilibrium point where it achieves stability. Accordingly, necessary components for an ideal free market are the absence of artificial price pressures from subsidies, taxes, tariffs or granted monopolies. Different schools of thoughts and critiques have been developed on free market and its drivers. A classic thought on spontaneous market order can be derived from the statement of Hayek “ We have never designed our economic system. We are not intelligent enough for that.”( Hayek 1978). According to Hayek, the market is the “result of human action but not the execution of any human design.”(Hayek 1978). There are two kinds of rationalism introduced by Hayek: constructive rationalism and evolutionary rationalism. By association he related these two orders to designed or made orders and spontaneous orders. In relations to marketing and production, we see constructive rationalism as designed demands. Designed demands in modern parlance can be understood to mean those “designed for one or several definite purposes” ( Marks, J. 1985). On the other hand, evolutionary rationalism speaks of self-generating or spontaneous orders, which we recognize is a free market. In currently realities, a market driven economy such us ours, pose challenges not only in terms of market dimensions and orders but also on the interventions of outside forces such government controls, trace policies, monetary policies1, capital flows and foreign investments, wages and prices, banking and finance, property rights and even our informal market sectors which may usher the ideals of constructive realism as introduced by Hayek. Although most economist thought that an ideal market is a free market, different schools of thought would force us to look into the a wider dimension including the artificially created market2 and its dynamics. To understand the relationship between market freedom and interventions, this paper seeks to present dialectic of the two aspects by looking into the principles laid down by scholars regarding the open market. This paper shall limit its discussions on elucidating on the different factors affecting market freedoms and do not seek to agree or disagree with any of the points raised. The essence therefore of this paper is merely to give a clearer understanding of the different principles and apply the same to the present generation. II. Market Theories One of the leading authorities in this field is Adam Smith (1723-1790)3. In his book, “An Inquiry into the Nature and Causes of the Wealth of Nations”4 presented fresh ideas, which stimulated the free trade and competition and it, effect on labour and capital. He ushered a new understanding on how a nation accumulates wealth. A very popular principle espoused by Smith in book 1 is “that the annual labor of every nation is the fund which originally supplies it with all necessaries and conveniences of life which it annually consumes, and which consist always either in the immediate produce of that labour, or what is purchased with that produce from other nations”(Smith 1776). In other words, Smith establishes the idea that what you produce will affect your purchasing powers. As understood in our generation, the amount of work you render, will determine the purchasing power you will have on goods and services which will give you comfort and convenience. But, according to Smith, “this proportion must in every nation be regulated by two different circumstances; first, by the skill, dexterity and judgment with which its labour is generally applied; and secondly by the proportion between the number of those who are employed in useful labour, and that of those who are not so employed.” (Smith 1776). At this point, wealth should be understood in terms of wages, profits and rent. Smith’s idea revolves on coordination and allocation of resources through price mechanism. Complex systems work because of one single fact that the market prices obtained through competition is circulated and become a rule of thumb in the entire market system. It is this information, transmitted through prices, which enables each part of the system to respond to the rest and plan its own detailed activities (Marks 1985). Karl Marx presents the idea of total equality. For Marx, markets provide no freedom for labour. According to Marx, “’free competition, accompanied by a social and political constitution adapted in it, and the economic and political sway of the of the bourgeois5 class” (Marx. The Communist Manifesto). For Marx, the essence of power in socialist society is basically different. For a socialist, production and products belong to all members of society; the latter are the collective subject of economic and other form of power. To illustrate, the masses controls and management system of production and is purported the one who give authority to the professional performers of the managerial functions. Though under the impact of scientific and technological revolution the number and role of management workers increase, this cannot change the character of their authority. The basis of decisions which determine the functioning of production, as well as of other spheres of social life, are the expression of the universal will of the masses. 2.1. Creation of Wealth, Production and Market Segmentation The creation of wealth of a nation focuses “the causes of this improvement in the productive powers of nature, and the order, according to which its produce is naturally distributed among the different ranks and conditions of men in society.” (Smith 1776). Division of labour plays a vital role in this area where people are involved in mutual exchange and specilisation of products occur. “Labour can be more and more subdivided in proportion only as stocks is previously more and more accumulate” (Smith 1776). In modern times, this is specializing products for a specific market segment. For instance, an organization may be producing a special kind of computer chips specifically intended for a telecommunications company. This is therefore its capture market. As part of market segmentation, where I am producing chips for telecommunications, I am not expected to farm and produce my own food. Somebody has to do that task for me. Smith’s theory on segmentation is closely associated with freedom of choice and ownership thereof. However, from a socialist point of view, this is not feasible. Marx’s theory is to abolish property ownership as well as free selling and buying. Marx talks of collectivism, which will do way with the split between labour and capital. As Marx noted “ on the one hand it is the product of alienated labour, and on the other hand it is the means by which labour alienates itself, the realization of this alienation.”6 2.1.1 Max’s Point of View on Properties Marx see the antagonism between rulers and the ruled is most closely connected with the private ownership of the instruments and means of production. This system, according to him is an exploitative relation, whereby functions of labour become the sole functions of those who have no property, while ’the work of directing, superintending and adjusting becomes one of the functions of capital”7 Under such conditions, various types of concrete labour become separated as independent spheres of economic activity of private owners, and economic separation is underway. For him, this not acceptable as this is a of “the separation of labourer from his means of production and the conversion of these means into capital.”8 The socialist belief is that the elimination of private property and all forms of exploitation and oppression leads to the removal of the antagonistic confrontation between the rulers and the ruled. Marx believe the final overcoming to be possible as a result of attaining a qualitatively new level of productive forces in a full-fledged communist society, when direct social relations of the producers will turn into and integral, all-embracing system free from all vestiges of commodity-money relations (Trunikov V. 1975), since the latter come out “not as direct social relations between individuals at work, but as what they really are, material relations between persons and social relations between things.”9 This all-embracing system10 of direct social relations will be attained in a self-governed communist association which according to Marx “ is not something arbitrary: it presupposes a definite development of material and spiritual conditions” 11 2.2 Government and Free market For most, economist and sociologist, government interventions in free trading is bad. The term political economy is noteworthy. Economy means originally the direction of a household.12 The management of a household involves especially getting supplies. Political economy is the corresponding art in relating to state. The main theories of political economy concerned mostly in mercantile and physiocrat theories. Mercantile – theory that a nation’s wealth is increased mostly by export industry and physiocrat – increased mostly by agriculture. (Marks. 1985) According to John Galbraith, economic power was once based on land ownership. Then it passed to capital. In our time the source of power is the blend of knowledge and experience, which is represented by what he calls techno structure13. Another influential sociologist, D. Bell, holds similar views. In his opinion, property as an institution has been fundamentally revised and is now controlled by managers rather than proprietors.14 Thus, government interventions may not have any positive effect on free trading. However, scholars like John Maynard Keynes15 who started the Keynesian economics (pronounced KAYNzian), also called Keynesianism, where mixed economy is promoted, talks of the role of the state and the private sector in the market place. Contrary to the belief of most classical economist, Keynes asserted the importance of a aggregate demand for goods as the driving factor of the economy. He marked the end of the laissez-faire16 era. (Keynes 1936) Followers of Keynes believe that if the economy is to function effectively, central government must maintain the conditions required for the decentralized transmission of information. Government must maintain order both internally and externally, create a legal framework – including laws of property, contract and tort – which allows the market order to function. (Marks 1985) V. Conclusion There theories behind free market and government/non-government interventions have ushered different types of market evolution. As we grow into the 21st century, we experience both government intervention and some degree of free market principles. The market is complex and multi-facet that no single system may be able to control and run it efficiently. Bibliography 1. Hayek, F. 1767. Law, Legislation and Liberty Vol. 1 2. Keynes J.M. 1936. The General Theory of Employment, Interest and Money 3. J. Kenneth Galbraith. The New Industrial State, N.Y. 1967 4. Smith A. (1776) An Inquiry into the nature and causes of Wealth of Nations. Edinburgh. 5. K. Marx and F. Engels. Works Vol. 46 Part 1 6. http://en.wikipedia.org/ 7. Archives europeennes de sociologie, 1964 t.5. No. 3, page 35 8. D. Bell. Technocracy and Politics,” Survey, 1971. Vol. 16, No. 1 pp. 2-10 9. K. Marx, Capital, Vol. 1 10. K. Marx. Economic and Philosophic Manuscripts of 1844. Lawrence & Wishart ltd. L. 1970 p. 117. 11. K. Marx & F Engels. The Communist Manifesto 12. Keynes. JM. (1936) The General Tehory o fEmployment, Interest and Money. 13. Marks John. 1985. Two Kinds of order online Available http://www.ertnet.demon.co.uk/2kinds.html last accessed march 15, 2006 14. V. Trubnikov (1975) Socialism Theory and Practice. Moscow, USSR Read More