We misunderstand the Market

A Smithian reflection on the economic uncertainties post-Ukraine Invasion

This is a bit of a half-personal and half-academic piece of writing, and I thus do in advance apologise for the collateral damages of cringe exegesis and pedantry that this might bring about. For apart from the writer’s identity that occasionally spits out essayistic and ironicising texts for Die Funzel, I do, around these times, also start to possess a more ‘academic’ persona, one that attends conferences, worries about getting first papers published, and nonsense of the like. More or less unfortunately, this academic persona was lately obliged to read a lot of Adam Smith. This is because the persona specialises in a weird area of expertise – namely the latter half of the 18th century in Scotland, commonly known as the ‘Scottish Enlightenment’. The philosophically interested might associate a couple of big names – David Hume, who awoke Immanuel Kant from his dogmatic slumber in metaphysics, Thomas Reid, who founded the Scottish School of ‘Common Sense’, Adam Ferguson, who is sort of remembered as the first scientific sociologist avant August Comte – but what is, undeniably, important in this period is the emergence of a new science, that of ‘economics’ or ‘political economy’, spearheaded by Smith, the moral philosopher.

Adam Smith you probably know – famous and infamous as the ‘father of capitalism’, loved and hated in popular discourse as a proponent of the ‘free market’: brief, various movements treat or attack Smith as an icon. Hegel attentively read Smith, Karl Marx saw his project of a ‘critique of political economy’ in line with Smith’s methodological tradition, and so do many thinkers still today, both those who are in favour of a free market and those who are against it.

I find reading Smith tedious, for he is a textbook-style writer who tends to avoid playing with ambiguities and literary pictures and whose prose is crisp and subtle. If you are not in the mood for reading through 900 pages in which Smith mostly summarizes stuff like the effects of the decrease of the amount of silver in the English coinage system from the 14th to the 18th century or the monarchy’s regulation system of the herring fishery in the North Sea, ploughing through the Wealth of Nations is not a lot of fun, although historically extremely interesting. This should also already suggest that Smith is a much less ideological writer than later authors sometimes make him to be: he is neither advocating a complete unleashing of the markets, nor is he condemning government interventions, trade unions or monopolies per se – instead, the figure which emerges in Smith’s epistemological, aesthetical, moral and economical writings is the one of a nuanced scholar and university professor who is incredibly obsessed with minute facts and details, and who is always aware of ‘both sides of the coin’ , as for instance, his occasionally quoted remark on the horrendous effects of specialised labour in a complex self-regulating market system shows:

„The man whose whole life is spent in performing a few simple operations, of which the effects are […] always the same […] has no occasion to exert his understanding […]. He naturally […] becomes as stupid and ignorant as is possible for a human creature to become […]. The torpor of his mind renders him, not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment concerning many even of the ordinary duties of private life. Of the […] interests of his country, he is […] incapable of judging. The uniformity of his stationary life naturally corrupts the courage of his mind, […]. It corrupts even the activity of his body […]. His dexterity at his own particular trade seems […] to be acquired at the expence of his intellectual [and] social […] virtues. But in every […] civilized society this is the state into which the labouring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it.“[1]

Now, that is not how a usual free-marketeer sounds. Yet, right after this outburst of empathy and social awareness, Smith goes on to talk about feasible tax systems in 18th century Britain, the various advantages and disadvantages of specific ways of funding infrastructure and education, the way the state should generate and invest his own monetary resources, etc. – he is just not proposing simple solutions or catchphrases. This is also the reason why it is usually very hard to philosophise with Smith, or to use his insights to elucidate contemporary political or economic events. In a very general nutshell, the gist of Smith’s prescriptive thinking about economics is that people should simply stop doing what they are not good at. As Scottish herring fishers in the 18th century in the North Sea do definitely know better how and why and where to catch or not to catch or sell or not to sell herring than government officials in London do, the government officials should simply let them decide, and not impose their own opinions as rules. Yet there are exceptions, and the devil is in the details – which makes it all the more difficult to draw any kind of normative recommendation out of Smith’s writings. Just imagine, today, who knows best when to catch fish and when to refrain from doing so: is it climate scientists, fishermen, nutritional experts, animal ethicists, geographers or marine biologists? Or someone I have forgotten? Probably all of them know significant bits, and I am sure Smith would acknowledge that. Yet he would probably be as puzzled as I am as to how to incorporate this into a policy recommendation, and this is why I have personally grown to really dislike opinion pieces like ‘what would Adam Smith have said about this or that’ or ‘what should we do to keep Smith’s spirit alive’, etc, for in the worst case such pieces misrepresent a complex historical thinker, or even legitimise nonsensical opinions with dubious references to him, and in the best case they simply amount to triviality.

This is also why I am refraining from attempting anything of the like here. Yet it recently occurred to me that one aspect of Smith’s thinking started to look really relevant in the way we currently try to make sense of and react to the events triggered by Putin’s invasion in Ukraine. This concerns his understanding and his epistemology of the market, which, I think, we deeply misunderstand.

Why does Smith’s understanding matter? Well, in a certain sense, Smith invented our contemporary notion of the market. And we are employing this notion all the time, especially right now as we are trying to react to the roaring gas and energy prices that have been triggered by the recent war. So, it should matter how this concept of the market was formed, because it might help us to elucidate a dimension of our surrounding world that currently escapes us.

What, to Smith, is a market? In one important sense of the word, it is a physical or conventionally agreed-upon space (like, e.g., a digital site) where people come together to buy or sell stuff. In another, philosophically tremendously important sense of the word, it denotes the mechanism by which individual behaviour – like consumption, movement, general activities, but also wishes, intensions, desires and decisions – is collectively being formed without any central planning instance. The idea of the market mechanism in the second sense is an incredibly sophisticated and abstract, but also ingenious intellectual discovery. Think about your daily behaviour. You start your day at, say 8 AM, you drink a cup of tea, then you go outside to enjoy the sunshine. You take a run, or you meet a friend for a coffee. Then you go home, or to the library, to prepare for an exam or to study. Or you perform some activities for which, in turn, you are getting paid. You take a break, you have lunch, afterwards you continue your day, and so on. If you only sit back for a while and reflect on the tiny number of activities I have just related to you, you should be able to realise that these form part of an incredibly sophisticated stream of decisions. These decisions, in turn, rest upon numberless conditions: in order to wake up these days, you must have had an alarm clock (unless you are gifted with an exceptional biorhythm), you must have had tea at home, you must have had a home, you must have had running shoes, a running route, a place to work, a book to study, etc.

What’s more, not only your behaviour looked like this today, but millions of other people performed similar activities in a coordinated way. No person or office commanded them to do this. At the same time, the conditions that made it possible did not come from nowhere – other people have in the past, for instance, coordinated their behaviour in a way that today enables millions of people to drink a cup of tea at 8 AM in the morning. For instance, by labouring: by designing, producing and delivering parts of the tea bags. The people who are leaving their homes in Ukraine at this very minute, or the current debates on social justice, remind us that these things – and these tea bags – are far from being naturally granted to us. But we (in the west) at the present age have access to them. And yet there is no central instance that coordinated the collective behaviour by which you, this morning, had a home, an alarm clock, tea and running shoes apart from a mechanism to which everyone in the past, has submitted, and in the future, might submit: the market.

That societies coordinate their collective behaviour on the basis of a market mechanism is a contingent fact. Societies have, in the past, tried to coordinate their activities by means of other mechanisms, for example. There were times during which people trusted the judgement of shamans or kings to decide when to sow the seeds, to reap the harvest or to produce a certain commodity; there were times, too, when guilds and associations commanded over commerce and production and determined what could be sold, when, to which price, to whom and how. Some say that in the future, computational intelligences might be able to decide much better than market mechanisms who needs to perform which activities at a certain time and place. Smith pointed out this historical contingency of the primacy of the market, and contrasted it to nomadic or feudal societies in which selected and few rulers coordinated the behaviour of all, instead of an anonymous and essentially de-personified mechanism. Another famous thinker who made the same historical point was Marx, who also foreshadowed a society in which the market mechanism might be suspended once the class of the producers mutually shared the goods that they produced amongst themselves. So far, this has never happened, because the class of the producers has never remained constant – but this is another point. Marx also pointed out that you might not like the way the market coordinates individual behaviour collectively. You might not like, for example, that you see no other option for yourself but to labour for an employer who makes you do activities which you yourself consider nonsensical. You might also not like the selection of teas available in the supermarket; alas, you might not even like the fact that everyone around you is only drinking tea, and that therefore tea is the only drinkable commodity that is being supplied, as if predetermined by some invisible hand! Your employer might not like the business she is running, and which she cannot quit because she sees no other option, and she might know that the tasks she is assigning to you, and paying you for, are silly and meaningless to both of you. The market mechanism is far from being a perfect coordinator, and if we could all do what we really want to do, the world might be a very different place. Marx tried to outline how such a place could look like, Smith – in my humble scholarly opinion – was pretty aware of the market’s shortcoming, too; but unlike Marx he was not sure whether he knew how to go beyond a market system if the market mechanism was kind of the least terrible of all the bad options that humans in the past had come up with, and if it was collectively coordinating all the myriads of details within each individual’s behaviour much better than Smith or anyone else could individually prescribe.

I wrote above that Smith can somewhat be credited with the discovery of this de-personified collective coordination mechanism that the market constitutes, and this hangs together with the awe Smith felt when surveying, in Adam Ferguson’s words, those ‘establishments, which are indeed the result of human action, but not the execution of any human design.’[2] What Smith discovered, when he conceived of the market, was thus an epistemic, rather than a moral space: a kind of automatic information and signaling system that indicates to each actor involved in the economic process which actions are more feasible than others. As long as everyone went along with the options that the market automatically suggested, it would naturally coordinate the options that are most feasible to the greatest number of people. With every consumer ‘naturally’ consuming what they considered best, and with every producer ‘naturally’ producing what they could produce best, entire societies could without any personal central coordination arrive at establishments that proved to be much more beneficial to everyone than any individual could conceive of. As a matter of fact, the leading picture or metaphor that was often used in allegory to the market process was ‘nature’; that meaning natural coordination mechanisms like a beehive, a plant, or a planetary system, in which every unit, by simply progressing on their individual path, contributes to the well-being, the complexity and the grandeur of the whole. (An interesting merging of ancient Stoicism and Newton’s cosmology was crucial in informing this metaphorical trope, but never mind that!)

Today, we are far from being in awe in this way, because we know of all the pitfalls and horrors that the market can incorporate in its workings. When I can choose between three brands of coffee for 2, 3 and 4 pounds, I am aware that these three options are probably the most feasible remnants of a process that has sorted out many, many other individual ideas that have proved to be not workable along the way. Yet I am also aware of the misery of the labourer who works for the coffee farmer who sold this product to the multinational company, of the unsustainable shipping process that transported it into the shelfs of the supermarket, the precarious wage that the staff is getting for the work in the supermarket chain, and so on. The way we consume meat is an even more egregious example: for every piece of meat you buy you basically know that an animal has just been killed and eviscerated under atrocious conditions, and that the individuals who are living off this business are simply getting the signal by your consumption choice to carry on with their activities and to not change their jobs, because their slaughtering meets with positive response.

The market mechanism is thus not functioning primarily as a moral corrective. I actually think that Smith was very aware of that, for whereas, in his book on moral psychology (The Theory of Moral Sentiments, but never mind!) he did choose the interest we have in other people (thus our so-called ‘altruism’) as his main starting point, he deliberately excludes this category from the Wealth of Nations, and analyses human coordination in its economic dimension purely in terms of those decisions that are being taken on the basis of self-interest. We don’t give a damn about the poor pigs when we buy a slice of meat (although, according to Smith, we should do; but he is not a preacher) – we are simply interested in the meat, for what reason soever. Here we arrive at the kernel of Smith’s conception of the market. For Smith, is the reflection of the collective sum of the individual decisions that everyone of us takes, every day, every hour. The market mechanism thus functions like an extraordinary organ of communication. If absolutely no one in East Anglia is willing (for what reason so ever!) to spend more than 2 pounds for a cup of coffee (which would be visible in no one just ever spending more than 2 pounds for a cup of coffee there, even if it is being offered), then the market, by virtue of its signalling-ability, will communicate this collective sum of individual wills to a someone who is trading coffee, and who either manages to supply these people with coffee that is cheaper than 2 pounds (never mind the misery of the labourer) or who, in case coffee cheaper than 2 pounds cannot be made available, just completely withdraws coffee from the market there. Within the market, prices function as signs, as signalling mechanisms that carry information from one place to another. The information itself is morally neutral. Those individual people who (can) read the signs can in turn react to them, and the process of communication continues. Smith’s big hope was that if everyone just sticks to what they are good at, and remains a human being with feelings and intelligence (which is one thing government officials should look after!), then the options which are being communicated by the market will gradually become better, and entail less suffering, and thus bring about the most feasible options for all, in a coordinated way that could not have been designed by a single human intelligence or a group of smart minds.

I do not want to suggest that today these hopes are already completely dashed, but I guess we at least know about a couple of more difficulties than Adam Smith did. Here is a point, however. If the de-personified, communicative coordination-mechanism is the way Adam Smith understood the market, then we have actually already lost access to this picture. If, today, in the weeks after the Ukraine invasion, I look at the way people make sense of the market, I cannot help the feeling that we are misunderstanding the very notion that we are constantly employing in our very theories. (With this, I do not want to suggest that the notion of the market has not substantively changed ever since the days of Adam Smith – but at least the idea of de-personified, intra-personal coordination by means of a price mechanism as I have just outlined above has pretty much stayed the same.) For what is happening? I want to take the roaring gas and energy prices as an example.

What is the case? Here is a very simplified, but true story in the Smithian vein. We are used to many individual behaviours that consist in driving around in big vehicles, called cars, that, in most versions, need to be fuelled with stuff like gas and oil in order to work. We also heat our living-caves with that sort of energy. Most of the gas and oil comes from Russia, more technically, from Siberia, where, for a couple of generations now, labourers are getting paid more or less shit wages to suck oil and gas out of the soil, thereby ruining the natural environment of the Siberian forests and landscapes, and the cultural grids of meaning of the people who traditionally used to live there, and sending that stuff over to Europe, where consumers can buy it for a very cheap price and drive around in their vehicles, mostly without really knowing why. It sounds like an immoral deal to pretty much everyone except for a couple of oligarchs – but hey, the market does not judge! It just reflects and communicates everyone’s behaviour. Now a dictator with small balls and a minority complex invades another sovereign country, and most of the people in the west who drive around with their vehicles go like: ‘hey, you cannot do that! We no like.’ So, there is a public moral shitstorm, and the politicians representing the people who drive around with their vehicles communicate this shitstorm to Putin the rocket man, and make sure that they are being taken seriously by severely impairing the trading options between Russia and the West. This makes it hard for the people who suck the oil out of the Siberian soil to send it to Europe to the same prices as before. The market reacts, in the sense of reflecting this behaviour and communicating it to the people who drive their vehicles in the West. But this time the people in the west who drive around with their vehicles go like: ‘Oh no! Diesel be like very expensive! We no like. The market has gone crazy!’ The German minister of finance (who is part of the liberal party and usually likes to waive Smithian flags, lol) tries to calm the vehicle-drivers by subsidising their previous consumption choices with a state-granted discount on every litre of oil they consume. This is funny to an extent to which it is cynical – for this is one of the few publicly visible examples where the automatic communication mechanism of the market actually works, and yet the first thing we (and state officials) do is to disrupt the market’s communicative success, to conceal its signals and to encourage everyone to just go on as if nothing had happened.

From a Smithian perspective, what do higher gas and oil prices mean for the people who consume gas and oil? Well, they mean that it might not be in their self-interest anymore to pay all this money for gas and oil. The market literally says that gas and oil are not very fashionable anymore. So, what would be in our self-interest to do? To consume less gas and oil, and to thus signal to other participants in the market that we are interested in other options. The market would be pretty reliable in communicating this: and, who knows, in very little time other people might react to this by selling energy that is cheaper than gas and oil, and not based on fossil resources? Some people have long asserted that gas and oil are a pretty sub-optimal option, and that driving vehicles on the basis of these fuels just actually is a bit silly. But these voices didn’t have a lot of signalling power on the market – which is not the market’s fault, but rather due to the majority’s constant noisy and affirmative signalling towards more oil and gas. The political disruption has changed their behaviour for a short while – but now, the signals that fire back are not being understood. Post-Ukraine, the prices that the market communicates are suddenly being understood as an anomaly that needs correction. But this means misunderstanding the market!

For what these prices currently do, in the Smithian sense, is providing a corrective that points out the anomaly. At the moment, the anomaly is our use of gas and oil, the anomaly is not the price we are paying for that. The status quo has been disrupted, and the market just reveals that. If we try to conceal the prices as if nothing has happened, the disruption of the status quo would be concealed, and people could not react to the signal that the disruption of the status quo has created. In this case, the market sadly ‘tells the truth’, and covering that up means defending the status quo. This case ironical, for it shows more about our misunderstanding the market than about the actual empirical situation. Often, we link the ‘status quo’ to ‘the economy’, thus denoting the evil market order, and think of everything that subverts the status quo as an anti-market force. That the reality can just be the other way around is a Smithian insight which we need to regain. The economic disruptions post-Ukraine can help in showing that. Hegel and Marx shared this insight, too, by the way. Their recognition could take the shape of the following textbook-style Doppelsatz: In most cases, it is the market which subverts the status quo. And in many cases, it is those that disrupt and conceal the market-forces who are in the service of the powers that be.

[1] A. Smith, ‘An Inquiry into the Nature and Causes of the Wealth of Nations: Volume II’, Edited by R.H. Campbell and A.S. Skinner; Textual Editor W.B. Todd in D. D. Raphael and A. S. Skinner (eds.), The Works and Correspondence of Adam Smith, Glasgow edition, 7 vols. (Indianapolis: Liberty Fund, 1976-1987), vol. 2, at 782 (V.i.f.50).

[2] A. Ferguson, An Essay on the History of Civil Society, 5th ed. (London,: T. Cadell; W. Creech; J. Bell, 1782), at 205.

Ein Kommentar zu „We misunderstand the Market

  1. Great article and pleasing to read! I was already interested in reading something of Smith and this was an understandable and useful introduction as well as an exciting change of perspective. There are two questions left out.

    1. How does advertising influence the market behaviour? I think the psychological and/or sociological point has a major role that wasn’t captured in this article.

    2. On what reasoning does this market system depend? It is a fact that humans often act irrationally. For example, it is not rational to consume drugs (at least under the assumption that conscious life is not a complete madness). If Smith’s theory can’t capture this circumstance then his position should be withdrawn.

    I don’t know if Smith was aware of that. But maybe you have some good remarks 🙂

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