In this article we want to better understand why we need an alternative to market economies and how it could look like.
We aim for a broad audience, if you are unfamiliar or don't have clear what a market economy is, we hope the Appendix will make it clear.
The best way to see why we need a better economic model is to explore what issues Market Economy creates when applied to real life.
In a Market Economy our main objective is to make as much profits as possible, and we achieve the most profitable outcome if we secure a position of monopoly.
We have a monopoly when the market have only one single seller for a given product, meaning that their market share is 100%. They are the kings of the market.
Remember that to keep prices under control markets need a healthy competition between many sellers. Once such competition is missing, the single seller has free reign over the market. This gets even worse when they provide very important products, such as medicines, water or energy.
Big sellers can band together and form an oligopoly through mergers, acquisitions or by forming a cartel. An oligopoly isn't much different than a monopoly, given that the market is again controlled by a small group with aligned interests.
They don't even need 100% market share, as long as it is big enough. A common tactic is to push prices artificially low which will push smaller sellers out of market because they cannot compete anymore. Now that they have full control, they can raise prices and/or low the quality of their products to greatly increase profits.
One infamous example is the Phoebus Cartel.
Monopolies tend to be strictly regulated in many countries, however big businesses often find loopholes or ignore it until they are busted. See Amazon hit with record US$1.3 billion fine for abuse of supply chain monopoly for a quick example.
The problem this creates is that most wealth with time will naturally flow towards the hands of the few people who owns those massive corporations, and because wealth is power in every market economy, they become the new aristocracy of their time. Even worse, wealth sticks, it is forwarded to future generations. When few people seize most of the wealth, then the majority of the population is forced into poverty. After World War II, each new generation could enjoy a better life than previous one, with more wealth and education, however since the 1970 the trend inverted and each new generation lives in worst conditions than previous one. This is well demonstrated by the widening gap between productivity and pay. Incidentally, greater and greater wealth is concentrating in the hands of the few.
One peculiarity it reflects is the limits of fierce competition. Even in an environment as strictly competitive as markets, those who actually win the game, raking in the greatest profits, do so through collaboration rather than competition. Toxic competition however brews toxic collaboration, in fact these agreements are often unstable and aimed at brutally drive out of market as many competitors as they can.
🔗Markets don't measure societal value
We deem as successful a business that is capable of conquering a big market share and produce hefty profits for its owners.
This economic success doesn't equate to a business that is morally just, nor even ethical. Indeed, many economically successful businesses are also unethical and infamous for their exploitative malpractices. Nestlé and its boycott going on since 1977 is just one example; even in the eyes of much controversy, it still continues to operate with very little issues.
Another classic example is the hedge-fund manager who earns hundreds times more than a teacher. We could debate on which job provide greater benefits to society, but we should all agree that the value provided by the manager will never be hundreds times more than the teacher, thus this suffice to see how profits in market economies do not equate to social value.
Markets are simple tools limited to the economic realm and that's it. Price in a market isn't synonym of societal value, only of market value, but we often conflate the two.
Even Friedrich Hayek, known economist, philosophers and passionate advocate of free-markets, recognized at his time that there is no connection between how much one profits in markets and their intrinsic merits. In Constitution of Liberty, Hayek wrote:
There is little a man can do to alter the fact that his special talents are very common or exceedingly rare. [...] the value which a person's capacities or services have for us and for which he is recompensated has little relation to anything that we can call moral merit or deserts.
This is particularly dangerous when it comes to the idea of free markets. Markets encourages competition over everything else, and when there is fierce competition the powerful preys upon the weak.
Slavery in the eye of Market Economy is a good way to reduce costs and improve profits. Environmental regulations instead are a big nuisance because they increase costs, possibly cutting out profitable industries such as coal and oil extraction. There is no malice, only callous economics.
History teaches us that we cannot be trusted when competition is on and our quality of life depends on it. We will exploit all that we can to improve our immediate conditions, despite the problems we may incur in the future. That's why we are obstinately driving towards the precipice of the global climate crisis, even though it could wipe the entire humanity out of existence.
Because sellers must compete and price tends to be a big factor for market share, they have all the incentives to reduce selling price as much as they can. Every seller have an inherent cost of production that eat on their profits, hence to lower the price they must also lower the cost of production.
The easiest way to reduce costs is by cutting on quality, which allows us to produce more for less.
Cutting quality on physical goods is even better. If a seller introduce in the market a product that is very durable and can be easily repaired, after a while they will exhaust demand and thus reduce their profits.
Another big issue created by low-quality products is they produce lots of garbage, have a bad environmental impact and waste precious resources.
This issue isn't only limited to physical goods, think for example about all software available. A good amount of it is bad because the business decided to cut on labor needed to produce or maintain it.
Humans have a great record when it comes to exploiting things, including ourselves. It is only natural that when our quality of life is at stake, people will nudge and push, trying to find the best way to exploit markets.
The issue with market manipulations is that they move us further and further away from the economic equilibrium. A well-known economics fact is that more we diverge from economic equilibrium, and worse will be the resources distribution, making market economies increasingly inefficient.
What follows is in no way an exhaustive list of how markets can be manipulated, we only give some examples to get an idea around it.
Advertisement nowadays is manipulating buyers in preferring a product rather than an equivalent one.
Consumerism is another way to push buyers into over-consumption of products. Through advertisement sellers try to instill in buyers an artificial need for their product, trying to trick people into buying.
Originally, consumerism meant that buyers should drive production through expressing their needs, by "voting with their wallet", but this degenerated quickly.
Consumerism infiltrates our very own culture, think of what the tobacco industry did with smoking: they portrayed it as something "cool", something every "true man" does, until it became natural and part of our culture.
Fashion is another face of consumerism. It manipulates buyers through our innate sense of community. We need to be part of a group, we need to feel socially included, but also to feel special in some ways. They leverage these innate sentiments to sell us specific products even though we don't need them. A classic cliché is for women to have way too many shoes and bags. They don't need as many, only sellers profits from it.
Branding works similarly to fashion, but can tap into loyalty and trust, allowing sellers to sell products at higher price than normal, distorting the law of supply and demand, raking in more profits than otherwise. Another subtle consequence of branding is that people have an innate distrust of brands they don't recognize, making it harder for a new seller to enter the market.
The term "influencer" should ring an alarm bell, their job is literally to influence (read: trick people) into buying a product or an opinion, they don't even hide it.
Misinformation plays a big role in manipulating buyers. Tobacco industry once again comes to mind, and how much they underplayed the bad effects of nicotine and cigarettes. Another less known example is lead contamination, which was kept under the rug by big corporations through corruption of renowned scientists; today we are aware of it thanks to the great efforts of Clair Cameron Patterson's campaign against lead poisoning.
A common example of supply manipulation is scalping, a way to manipulate the market to artificially limit the availability of a given product.
For example, a small group of people buy concert tickets en mass as soon as they are available, so much that it is sold out in hours, if not minutes. After a while, they put tickets on sale at much higher price netting a quick and nice profit.
This isn't limited to tickets though, we have seen this happening in the house market, but also cars and especially for limited edition goods.
From the economic point of view, this is a sound strategy: the original seller will cash in profits and move the burden of sale on the scalpers, which are in turn rewarded with a high chance of profits.
However, from a buyer perspective it can be quite frustrating. The high prices sometimes cannot be afforded, or people will have to fasten their belts. It is a socially immoral practice, another example of callous economic.
Markets can be manipulated even at the global level. Powerful countries influence global supply of certain goods by imposing austerity on weaker nations through debts, preventing them from subsidizing production of goods. On the other hand, these powerful countries subsidize their own products, giving their sellers a sharp advantage in terms of price and thus win a bigger share in the global market. This is also an example of how markets can be manipulated through regulations.
The whole financial market is one of the most unstable and prone to manipulation that let their perpetrators rake in extreme profits in a relatively short amount of time. Truth to be told, not all market economies include a financial market, but it is a typical in capitalism.
Many of these manipulations are being revamped in the more recent crypto-currency market, such as the "pump & dump": a wealthy, organized group of buyers start buying lots of crypto and generate transactions to artificially increase the coin value (pump); once the price is high enough, it will attract more naïve people and allow the initial buyers to sell their cryptos for a big profit (dump). Those people who buy high may even be tricked to believe they are part of the "pump" scheme, while in all effect being victim of the dump.
These are just two of the simplest examples, financial manipulations are increasingly sophisticated and can look as legit businesses until they explode.
Finance piggybacks on top of all other markets, hence the worst part is that once it crashes, it has a cascading effect on the whole economy and causes serious repercussions even to those people that weren't directly involved.
All regulations introduced in a market will in some way distort it and therefore manipulate it. Free-markets are immune to this given that by definition they are free from regulations and rather trust buyers and sellers to do the right thing.
Even though some regulations have positive social effects (think of laws that abolish child labor), legislators of any Market Economy can certainly be corrupted to introduce regulations that favor some sellers and penalize others. Lobbying is just that.
For example, insurance markets are greatly boosted by regulations, given that States make many of them mandatory and in some cases appoint only a specific group of businesses as eligible.
It is true that markets encourage people to try novel ways to win over the endless competition. This is the main argument used by market advocates to promote markets as the engine of innovation.
In a market economy, secrets are very important. If you happen to discover the formula for a satisfying sauce or drink, or perhaps a way to produce a product in a more efficient way, then you have a greater advantage in the market, bigger profits and therefore a better life for yourself.
Markets encourage us to keep innovations for ourselves as much as we can. Just think of Ancient China's silk production method or Coca-Cola (Coke) secret recipe; people have literally died to ensure it remained a secret.
There is no doubt that secrets hinder progress. By hiding information, by hiding a better way of doing something, we are excluding all others from possibly improving it even further. The best way to innovate is for people to freely share information and their passions, to cross-pollinate ideas in a stimulating environment. This is the setting that many start-ups incubators try to reproduce.
A patent owner has the right, granted by the government, to exclude others from making any use of an invention, in exchange for the public disclosure of it. Thanks to patents, inventors can now grant use of the invention for a fee, while others can see how it works and possibly further innovate, spreading progress much faster they could do otherwise. If you want, it tries to have a mild form of collaboration.
Notice how the language used for patents is exactly the one of secrets: to exclude others. Keeping a secret is really hard, especially in an increasingly connected world, patents provide the same exclusion benefit while avoiding all the hassles.
Even supposing a benevolent initial intent behind patents, today they are becoming increasingly problematic and are once again hindering progress.
The scope of patents has broadened up, to the point that in some industries it is quite difficult to come up with an innovation that doesn't touch on this or that patent. Furthermore, patents can be sold, hence many wealthy businesses are racking in as many as possible, making it much harder to enter a given market. This is yet another way how sellers try to control markets.
Regulations tried to counter the hinder of progress in markets by creating yet another way to exploit it. This is an example of how unstable it is as a system.
Another reason why Market Economy hinder progress is because the social structure that derives from it could be disrupted by certain kind of innovations. Automation is one of the most important area for progress, but also one of the most dangerous for markets societies. The reason is simple: most people profits comes from waged labor; automation main goal is to replace human labor with machines, essentially cutting out participation in the market for millions of people. Most of these people will not be able to quickly find a new source of profits, thus there will be less people spending money, creating a bad effect on the Market Economy at large.
We should never forget that markets do not exist in a bubble. What happens in markets affect the life of real people, as we very well know. That's why automation in this context can't go full speed and instead have to be carefully threaded, even limited and delayed.
One important component of progress is failure. We need to try countless experiments, come up with different alternative designs and formulae before we find something innovative and groundbreaking. In one word: research. All of these efforts and failure are rejected by markets. Markets are a tool to exchange products that self-optimize for profits; research and development is the exact opposite of profit, given that we need to burn through quite some time and resources.
That's why in a society heavily built around markets progress is further hindered by this aversion for research. It isn't the fault of markets, but rather a problem of using the wrong tool, like trying to drive a nail with a screwdriver.
Even though today most research take place in private enterprises, they are heavily subsidized by public money. In this way society is burdened with the costs of research, while businesses enjoy all the successes.
However the worst effect is that research follows the interested of the business, and thus isn't an activity aimed to improve our society, but rather to rake in more and more profits, diverting important resources and efforts from the real issues we are facing. In fact most of the useful researches are still done in universities.
All the issues so far discussed stems from the fundamental design decision that all variations of Market Economy abide to: an individual's quality of life is strictly bound to how good of a seller they are.
Let's analyze what it means.
Remember that in a market economy the main way to earn money is through selling products in the market. For the majority of people it's their own labor and time, while for others can be what their factories produce, what their shop sell, etc...
More we manage to profit from the products we sell, greater will be the amount of money we can spend. Further consider that as a buyer our main limitation is the amount of money owned, hence greater the amount, higher the quality and quantity of products we have access to. Ultimately, better access to products translates to a better life overall, both at material and social level.
Most human beings (if not all) strive hard to maximize their quality of life and their survival. That's one of the innate trait we have, hence it is by this design that competition arise as the king of markets, further exacerbating our egoism and individualism. Indeed, there is no incentive in helping a complete stranger doing better in life, but rather it is the opposite: by penalizing others we have a greater chance of succeeding.
It is, in our opinion, a ruthless design choice that gave birth to the ruthless world we now live in. Today societies often fall in the meritocracy pitfall, believing that some deserve to have more, and that through markets we can best assert it. As explained in What we deserve, we see things differently.
🔗An alternative: Babel Economy
We have already discussed at length how Babel Economy looks like in the article "Babel in depth: Economy".
As a quick reminder, Babel Economy is strictly decentralized, but it doesn't use markets to distribute products, there is no money and consumption is free under certain limits, depending on each product and environment constraints.
The single, most important design decision is that in Babel an individual's quality of life is strictly bound to society's quality of life.
Society's quality of life is in turn bound to all the efforts poured in by its members. This setup creates a virtuous positive feedback loop where to improve our life we actively and indirectly improve the life of everyone else. We use our natural egoism to our advantage.
In this model collaboration is way more important and effective than fierce, ruthless competition.
We'll now see how Babel Economy tackles the issues we have analyzed in Market Economy.
In Babel, even though the main driver is collaboration, there is competition going on. Given that it is a fully decentralized society without any central authority, competition will naturally arise whenever there are two different ways of doing something.
Because the best solution benefits the whole society, there is no need to kill one over the other, but rather it is much better to experiment, let those who believe in each solution work on it and see which one will naturally prevail.
It is probable that the competing solutions will yield better results in different aspects and that in time will cross-pollinate to then generate a different, better solution.
The most important aspect is that this is a form of healthy competition, where the main goal isn't to prove yourself at all costs, but rather prove and improve the solution, and with it everyone's life.
🔗Focus on societal value
In Market Economy society abide to market rules, but in Babel it is society that drives and decides on what's really important.
Because there is no profit, production is strictly bound to the value delivered to society, both material and moral.
For example, there is no way slavery could be established and nobody sane in mind would pollute the river they rely on. Replacing oil and coal in favor of more green and sustainable sources of energy will be actively researched and promoted, because this increases everyone quality of life.
This system is designed to promote all those activities that improve society rather than meaningless profits.
No profits and no money means that production is much more sensible on how resources are consumed.
There is no need for infinite growth, which is physically unsustainable as demonstrated by all the global issues we are facing today, and that menacingly loom over our future.
Babel encourages the opposite behavior: produce less and enjoy each product much more.
In this system designing products that are environmentally sustainable, durable and repairable is essential, hence planned obsolescence, cheap and single-use products have no reason to exist.
🔗Manipulation is worthless
All forms of manipulation exist to let few people reap greater rewards while penalizing others. In Babel there is no reason to penalize nor favor anybody, hence all manipulations are worthless.
For example, why should we spend so much effort in tricking people on using a particular product given that there is no reward out of it?
Advertisement and algorithmic marketing will come back as a service rather than a manipulation. Instead of helping sellers reap greater profits, it will help buyers sift through products, getting to know the new ones and chose according to their real preferences, as it should be.
In Babel, if an inventor decides to keep a new invention secret, they don't only damage society as a whole, but worsen the overall quality of their own life too.
The best way for inventors to improve their life is to spread their innovations as much as possible. Giving other people access to all the bits and bolts of each innovation increases the chance to further improve it, or perhaps use it as a base for a completely new one. This is yet another positive feedback loop that will propel progress in society.
Because quality of life is completely unrelated from what we do as a job, there is no reason to restrain innovation in any field that could be beneficial to society. In fact automation is one of the most interesting field to advance: people will try hard to avoid labor they don't like to do, finding novel ways to offload it to machines.
Automation will serve the whole society, affecting only those fields that we aren't interested in pursuing, such as repetitive tasks, while those we enjoy can be enhanced by it. Even during the transition phase, if so happens that one have pride in a line work that is being automated, they are free to keep doing it in parallel with the machines. Efficiency, though important, should never be more important than people.
The most gifted of us will be able to focus on research to their heart content. We expect Babel to be thriving with research, a place where full-on collaboration spiced by competition will yield incredible results.
More importantly, because all resources are in the hands of all, research and innovation naturally align with society needs.
The issue with Market Economy is the intrinsic and systemic ruthlessness at its core. The more socialist form of it mitigate the issue, but it's there nonetheless.
In theory it is possible to build a good society based on Market Economy, but it is such an unstable system that it's hard to keep it up. We have seen times and times again in the last two centuries the struggle needed to stabilize it. We had some prosperous, yet short period of balance, that inevitably degenerated into a worse society, including the one we live in today. It is a Sisyphean struggle.
We have presented a better alternative, one that is much more stable thanks to its virtuous cycles, but by no means we want to affirm it is "the true and only way". Still, it is a way. A pragmatic, possible way that systematically solves many of the issues that we all face in our day-to-day life. It isn't a perfect way, but a better one that we can surely improve with time and practice.
There is no "end of history". History doesn't end. Change is inevitable, but not all changes are good, it can always change for the worse.
It is paramount for the people of today to act and strive for a better tomorrow. Tomorrow will always come, it is up to us to stir it towards the right direction.
🔗What is Market Economy?
A Market Economy is an economic model centered around markets.
The components of a market are: prices, products, trade, buyers and sellers.
For sake of simplicity, we define "price" as the monetary value accepted for a product.
A product is anything that can be exchanged for money, such as goods, services and labor. Money is also a product.
Trade is the act of exchanging products between a seller and a buyer.
A buyer is a person or a group of people that want to exchange money for a product sold in a market. They can freely decide what products to buy, their only limitation is the amount of money available.
A seller is a person or a group of people whose goal is to sell a product on the market for a profit. They can freely decide how to acquire the product and what to sell, but they are limited by the capital available and their environment.
Profit is when a seller exchange a product for more money than used to acquire it. Suppose that to produce 1kg of apples I spend $0.70, then if I sell it for $1.00, I'll net a profit of $0.30, that I can now use to buy something else.
The profit aspect is very important, given that this is the only way in markets to let money flow and the keep the economy working.
Any person participating in a market economy acts as a seller when they acquire money, and as a buyer when they consume money.
In theory sellers can decided by themselves at what price sell their products, however higher the price, less people will buy it.
This competition between producers and consumers is the so-called "law of supply and demand".
Demand is how many buyers want a given product.
Supply is how much of a given product is available on the market.
The law of supply and demand is pretty intuitive and states that when many people want the same product (high demand), then sellers can afford to sell at higher price.
Vice versa, when there are more products than needed (high supply), sellers have to lower the price, otherwise nobody will buy it.
Both demand and supply are influenced by many factors in real life. Imagine that a drought hit a coffee plantation, which decreases the amount of available coffee and therefore raise prices. This is just one example of how prices change through time.
Still, why should a seller low prices? It's because there is another competition going on, the one between sellers. A healthy market needs many competing sellers over the same product to ensure a fair price.
Market share is a big factor for profits. Given a product, the market share is how much a seller sold of it in proportion to the total amount. For example, if in total the market sold 100kg of apples, and a single seller managed to sell 30kg, then their market share would be 30%.
There are many factors that influence market share, a common one is price. Given two equivalent products, a smart buyer will buy the cheaper one, hence a lower price help sellers conquer a bigger piece of the pie. It may seem counter-intuitive, but the logic is that I can try to sell apples at $1/kg, but then only sell 20kg and gain $20, or I can lower the price to $0.90/kg, which allows me to sell 30kg and gain $27, $7 more than before.
A third component a seller has to be aware of is the State and its regulations, such as regulations in the food industry that guarantees a certain level of security to buyers.
This brings us to the degree of freedom in a market. Higher the amount of regulations imposed by the State, less is the freedom.
A free market is when there are no regulations at all and both sellers and buyers are the sole responsible for their actions in the market. This means that if a seller goes bankrupt, the whole burden should be on them, but same goes if a buyer gets scammed.
The opposite extreme is a fully-regulated market where the State is in full control, such as the military.
A market economy is composed by many different markets with various degrees of freedom. Think for example how different regulations applies to the labor market (more regulations) and the financial one (more freedom).
There are different flavors of market economies, such as capitalism, market socialism and laissez-faire. All of them share the fundamental aspects we have discussed, but may add further characteristics and differ in how they build society around it.
What's important for our discussion is that all share the same fallacies.