Beyond Supply and Demand

PATRICK M. BOARMAN

Beyond Supply and Demand: TheFramework of the Market EconomyThe search for "a capitalism with a human face" and the institutionsneeded to secure it could become the dominant concern of the last yearsof this century and the first years of the next for economists everywhere.

Among the lasting accomplishments of neoclassicaleconomics is its theory of the market economy, inboth its micro and macro dimensions, including thefamous laws of supply and demand, upon which anelaborate scientific stmcture has been and continuesto be erected. Economists can look back on fairlylong periods of stable acceptance of this structure,notwithstanding periodic intermptions by epochalevents such as the Great Depression, World War II,and the end of the Cold War.

Is what we have always believed and taught stilltme? Is our economic mind-set still in accord withreality? Once again, an historic conjuncture is athand, the result not just of the collapse ofCommunism but of the total reconfiguring of theworld economy now under way. It is a conjuncture inwhich the market economy is uniquely positioned tobecome the universal economic model. But is our(the West's) version of the market—one whichlargely takes for granted its institutional supports,and therefore largely ignores them—adequate to themission to which it is called?

The market mechanism as abstraction

For decades, the focus of attention of Westem econo-mists has been the market mechanism in abstracto.Traditional economic theory has examined the marketmechanism, in both macro and micro contexts, inever more minuscule detail, at ever higher levels ofabstraction, and in ever more abstruse terms. Thiswork has undoubtedly yielded rich dividends in

respect to the understanding of how markets function.But it has been carried on largely in a conceptual vac-uum. There has been minimal attention to the institu-tions extemal to markets, and to the interplay of themarkets with these institutions, even though thesedetermine the character and the specific outcomes ofthe world's real market economies, historically andtoday.

Neoclassical economists and we, their legatees,have long been the beneficiaries of the market mech-anism. And we have long focused our attention onthis wondrous device and determined that the expli-cation of its mysteries is the highest of callings. Butwe have tended to forget that, taken out of the livingtissue of beliefs, practices, habits, mores and behav-iors, informal and formal, that surround it, it is andremains an abstraction. To imagine that the dense,complex, multi-layered reality of the modem suc-cessful market economy can be reduced to an ideo-logical epithet—"the free market"—and thenpurveyed as such to those (the inhabitants of the ex-Communist states, among others) in search of a ratio-nal and humane socioeconomic order is simplisticand very possibly prejudicial to a successful outcomeof such a search.

The Nobel Prize in economics

A welcome jolt to the prolonged Westem preoccupa-tion with economic abstraction were the awards ofthis year's Nobel prizes in economics to two institu-tionalists. Professors Robert Fogel and Douglass

PATRICK M. BOARMAN is President of Patrick M. Boarman Associates, Inc., an economics consulting firm in San Diego,California.

March-April 1994/Challenge 31

North. The emphasis given by these economists topolitical, legal, and moral institutions, and to thechanging historical environment of the market asmajor determinants of market outcomes, and of eco-nomic performance generally, helps redress theobsessive attention to the market mechanism as a pri-marily mathematical and geometrical constmct thatis distinct from the institutional matrix from which,in the real world, it is physically inseparable. Theselection of these economists as Nobel Laureates is,in fact, a reflection of the urgent need of our time notonly for understanding of the market mechanism perse, but for a market economy that will work in realtime and in settings that are, institutionally, substan-tially dissimilar.

Professor Fogel is the co-author of a controversialstudy of the institution of slavery. Time on the Cross.(See For Further Reading.) It showed that, contraryto orthodox opinion, slavery was economically effi-cient and that it was abolished only because of moraland political objections to it. Douglass C. North, invarious volumes of economic history (see Structureand Change in Economic History in For FurtherReading), has defended the equally unorthodox viewthat institutions—political, legal, cultural—are asimportant as market activity itself in generating eco-nomic growth and in determining the growth paths ofparticular economies.

For North, institutions—be they the U.S.Constitution, the common law, informal codes ofbehavior, or traditions and customs—are the mles ofthe game in a society. "[They] are the humanlydevised constraints that shape human interaction. Inconsequence, they structure incentives in humanexchange, whether political, social, or economic.Institutional change shapes the way societies evolvethrough time and hence is the key to understandinghistorical change." (See Institutions, InstitutionalChange and Economic Performance in For FurtherReading.) It follows that a socioeconomic order isone comprised not only of universally valid, perma-nent economic elements (e.g., the laws of supplyand demand) but of the institutions peculiar to aparticular culture or society.

Institutions and economic performance

The ultimate determinants of the economic perfor-mance of a nation, assuming that market processes

guide the use of its productive resources, are its his-tory, its religion(s), its laws, and the character andculture of its people. Extended discussion of these isnot within the scope of this article, but selected facetsof these grand infiuences (insofar as they appear asinstitutions) do warrant identification and briefexamination.

Specifically, the question of what kind of institu-tional framework is most appropriate for the success-ful functioning of a market economy is being askedeverywhere in Eastern Europe and in the formerSoviet Union, as the centrally planned economiesthere disintegrate or are dismantled. It is also beingasked in China, where the leadership, openly sup-portive of a market economy, is seeking to fill theinstitutional void inherited from Communism withsome elements of a Westem-oriented legal system,the opening of stock exchanges in major centers, anda revival of the concept of property rights. Andsocialist India, whose population augurs to overtakethat of China in the 21st century, is witnessing agrowing consensus among businesspeople, politi-cians, and academicians that its hopes for the futureare tied to the adoption of some form of capitalismand of the infrastmcture necessary to support it. It isa question that continues to be posed (in more or lessimperative tones) even in countries that have knownthe market form of economic organization for a verylong time. In the unified global marketplace nowemerging, in which some market economies appearto be doing very well (even extraordinarily well),while others are faltering (some badly), a knowledgeof the kinds of government policies, managementphilosophies, legal arrangements, or fiscal and mone-tary measures that are best calculated to give oneeconomy a competitive advantage over another hasbecome as prized as the secrets of the atom in the eraof the Cold War.

Varieties of capitalism

A visitor from another planet, having matriculated atan American college and been obliged to takeEconomics 101, might acquire from his textbook,with its etherealized presentations of market mechan-ics, the impression that the modem economy oper-ates in a vacuum. But he would be mistaken. In fact,the real economy is comparable to the heart of a liv-ing organism. It does not exist apart from that organ-

32 Challenge/March-April 1994

ism. It incorporates and is itself wholly a product ofthe extra-economic mores and values of the societalmatrix in which it is embedded. The market, that is tosay, will yield one result within one particular institu-tional framework and subject to one particular mix ofeconomic policies, and another and possibly signifi-cantly different result in a society with differentvalues, different institutions, and different under-standings of what is appropriate economic and/orsocial policy. In this context, the label "capitalism,"when applied uniformly to existing or historicalsocioeconomic systems, is misleading. Compare, forexample, the different meanings of "capitalism" inVictorian England and in Germany (prior to unifica-tion) in the post-Wodd War II period. In the firstcase, "capitalism" was the rubric under which theBritish Empire witnessed an unparalleled expansionof its power and prosperity. But it was also, in theeyes of many, then and since, equated with a systemof dog-eat-dog, in which the weaker members ofsociety were abused and exploited by the powerful.In postwar West Germany, the heart of whose extra-ordinary economic revival was the free market, thegovernment assumed, and continues to assume,major responsibility for addressing an array of socialproblems. So far, indeed, have the Germans, in theirown estimation, distanced themselves from historiccapitalism that the word has fallen into virtual disusethere. Instead, the combination of market forces andinstitutional arrangements (many of them post-1948innovations) that spawned the German economicmiracle is commonly described as die sozialeMarktwirtschaft (the social market economy). (SeeGermany's Economic Dilemma in For FurtherReading.)

Likewise, to describe the economy of the UnitedStates merely as a "market economy" or as "capital-istic" is not very helpful when it comes to comparingit with other so-called capitalistic states. In the caseof the United States, a complex fabric of institutionsundergird the economy and determine its specialcharacter and performance. Some of them are physi-cal, such as the communications and transportationsystems. Many are organizational in nature, such asthe dense network of fiduciary relationships in thefmancial community. Most (e.g., the antitrust laws,the laws regulating the securities markets, and thefood and drug industries—to name but a few) are theproduct of decades of patient evolution. This compli-

cated whole is summed up most inadequately in thefrequently applied labels "capitalism" or "the freeenterprise system." To equate this complicated realitywith, say, the "free enterprise system" of El Salvador,with its radically different history, its egregious dis-parities between poor and rich, and its primitiveinstitutional framework, does disservice to an accu-rate portrayal of both economies.

Note that the American version of capitalism alsocomprehends the peculiarities of the American styleof management, with its predilection for short-termthinking (the obsessive attention to quarterly earn-ings) and for "the bottom line." It also includes theunhappy intersection of historical and cultural forcesthat has mired much of public elementary and highschool education in a rut of mediocrity, given rise toa national antipathy to saving, and engendered a ritu-alistic hostility among the primary social actors—business, labor, and government. This is a "capi-talism" which, with all its positive and negativeattributes, is extremely complicated and uniquelyAmerican. It functions as well (or as poorly) as itdoes not only because it is "free," but because of allthe other elements in which it is enveloped.

In the case of the capitalism of modem Japan, themarket is the core of a unique constellation of institu-tional and cultural factors that, in extraordinary syn-ergy, has permitted that nation to establish and tocontinuously extend its unprecedented role in theworld economy. The ingredients of Japan's successhave become cliches. They include a high propensityto save; cooperation instead of confrontation amongthe major players—government, corporations, thebanks; intense competition among companies (e.g.,in the automobile industry with its ten fiercely com-peting firms) but unity in the pursuit of national eco-nomic goals; the favoring of long-term overshort-term perspectives; "lean" production, groupdecisionmaking, and emphasis on zero defects inpreference to Western-style mass production with itstop-down command structures and toleration oferrors; and many others.

It is also clear that in bad economic times, like thepresent, the Japanese economy is not invulnerable tothe diseases which afflict market economies else-where. Furthermore, Japanese business cultureembraces what many would see as a pervasive uni-formity, a lock-step mentality that penalizes individ-uality, and an obsession with work that leaves little


time for the pursuit of the things that lie beyond sup-ply and demand. To be sure, the Japanese way ofdoing things is not forever frozen. But the mannerin which it evolves will itself be determined by acontext which is peculiarly Japanese.

Impacts of institutions

It is, in any case, evident that the institutional influ-ences operative in market-based economies mayhave beneficent effects that confer competitiveadvantage upon a particular nation. But others mayexercise a malign influence and, unless corrected oreliminated, will tend to inhibit the optimal function-ing of the market and will lead eventually to deterio-ration in its performance at home and abroad. If, forinstance, it can be shown that govemment has a vitalrole to play in the provision of an effective regulatoryframework for the market economy, it is no lessdemonstrable (and the history of this century has fur-nished abundant evidence of it) that there are limitsto the functions of govemment which, when trans-gressed, lead to the death of the market. It followsthat a critical prerequisite for the successful installa-tion of a market economy is the clear definition ofthose limits (i.e., the careful and unambiguousspelling out of the functions of government in itsmany qualitative economic roles—monetary, fiscal,regulatory—and in its quantitative roles as a supplierof public goods and as a provider of essential infra-structures).

Institutions, in addition to the effects noted hith-erto, perform a major socioeconomic role, in thatthey reduce uncertainty. They constitute "mles of thegame" that directly affect the costs of exchange andof production, and thereby affect economic perfor-mance. The "game" in question is market activitythat arises from timeless and universally applicableassumptions about human behavior—most notablythe laws of supply and demand. The strength ofmicroeconomic theory, as Douglass North haspointed out, is rooted precisely in these assumptions.So that to the extent that institutions—the ruleswithin which economic activity is carried on—arestable and predictable, economic efficiency isincreased.

But it is also true that institutions are human arti-facts, that they are evolving, however slowly, andthat these changes continually alter the choices open

to economic agents. The fortunate part of thisprocess is that institutions that are inimical to eco-nomic efficiency or are undesirable on other grounds(e.g., the institution of slavery) can be changed oreliminated. While the fundamental behavioralresponses of market participants in the United States(as postulated, for example, in the law of demand)are presumably the same today as they were a cen-tury ago, the institutional environment of the U.S.economy has undergone decisive transformationthrough the years in the name of economic reform.Much of the change may be presumed to have hadpositive impacts on economic performance.Conversely, other institutions—those rooted in invet-erate traditions or beliefs, and hostile to economicefficiency—may be resistant to change. They maygive way only under the application of concertedpressure and at the cost of temporary or prolongedsocial disorder.

Lodestar ofthe ex-communist states

The issues raised here have taken on especial signifi-cance in light of the disintegration of the communistideology in Eastern Europe and in the constituentstates of the former Soviet Union (Russia, in particu-lar) and the accompanying, near desperate search fora new economic and social order. That order, fromwhat little of it is now visible, will logically seek tomerge the liberating and creative forces of the marketeconomy with the social, environmental, and ethicalimperatives of a good and just society as ex-Communists understand them. A few years ago, thenSenator Albert Gore described his moving encounterwith Yevgeny Yevtushenko, the Soviet poet of con-science, who warned of the risks of a search forsomething in between freedom and slavery in hispoem, "Half-Measures":

" . . . There is no semi-fatherland,nor can we fathom semi-conscience,

half-freedom is the trek to jail,and saving our fatherland halfway

would fail."And yet, the search for something in between cap-

italism (raw, unalloyed, uncivilized capitalism) and acentrally planned economy is absolutely crucial tothe success of any effort to install or reinstall a mar-ket economy in the states of the former Soviet Union,or elsewhere in Eastem Europe. Both the poet and


Mr. Gore wrestled with that inescapable problem intheir encounter. Among other things, they talked ofthe possibility that then President Gorbachev mightchoose to follow a "third path" to lead the SovietUnion to safety. Such a third path, noted Mr. Gore,would be "an economic transition from the discred-ited 'command' model to something approximating afree market, yet not quite capitalism." Exactly so.The centrally planned economy may be done with,but "capitalism," with its historical baggage of nega-tive associations, is still feared. So it is the "marketeconomy with a conscience" that is likely to find pre-liminary acceptance among many still hoping to dis-cover "a socialism with a human face." Such asocially conscious market system remains, in fact,the lodestar of the erstwhile hard-line communiststates—Bulgaria, the Czech Republic, Romania, and,not least in the wake of recent elections whichrestored former Communists or intransigent anti-cap-italists to power, Poland and Russia. In these states,there is continuing and, lately, increasing anxietyabout the social trauma—the unaccustomed exposureto unemployment, inflation, and economic uncer-tainty of all kinds—that the transition to a marketeconomy may entail.

The importance of competition

The market economy (as more than two centuries ofexperience with it witnessed) stands or falls withcompetition. It is the device that transforms the pur-suit of self-interest into an increase in the generalwelfare. Competition ensures reciprocity inexchange. It also keeps prices close to the costs ofproduction and, by that very pressure, minimizessuch costs. It is the goad that triggers invention andinnovation. Additionally, it makes possible theexpanding array of choices of goods and services thatare associated with a high standard of life. Onanother level, competition is congruent with the dis-aggregation of economic power that favors democra-tic forms of government. But absent the estab-lishment and enforcement of rules to prevent monop-olization, competition tends to decay. This was thecase in all of the advanced economies toward theclose of the 19th century. In the United States, therewere the "robber barons" and the great trusts of theday, whose misdeeds were memorialized in workssuch as Upton Sinclair's The Jungle, a searing indict-

ment in fictional form of the meat industry, and IdaTarbell's A History of the Standard Oil Company,that encapsulated for many the real meaning andfragile structure of competition. (See For FurtherReading.) And it was an exercised public and its rep-resentatives in Congress (not the economists of thetime) who determined to end the abuses by enactingand consequentially enforcing the Sherman andClayton Antitmst Acts. These acts, and subsequentadditional modifications of the legal and regulatoryenvironments within which business was permittedto operate, imparted to American capitalism a moreinterventionist aspect as contrasted with the capi-talisms of Europe in the pre-World War I era.

Comparing the concurrent evolution of capitalismin Europe and in the United States in the period lead-ing up to World War II, one notes the increasingopprobrium heaped upon it in Europe, the displace-ment of market forces by the state in key sectors ofthe economy, the emergence of state capitalism underthe Nazi and Fascist regimes in Germany and Italy,and the rise and growing influence of EuropeanSocialist and Communist parties. In contrast, capital-ism in the United States not only survived, but did sowithout serious challenge from any competing ideol-ogy—an outcome attributable in no small measure tothe passage of the antitrust laws and related reformsof the markets. It was due also, and in even greaterdegree, to the fundamental changes in the market'sinstitutional framework which were accomplishedduring and after the Great Depression. They includedSocial Security legislation, a panoply of regula-tions in the banking, securities, and labor markets,and an increasingly sophisticated employment ofthe new macroeconomic tools of monetary andfiscal policy in the pursuit of growth and stability.

Advent ofthe social market economy

If capitalism in the 1930s and 1940s was increasinglyseen as "the enemy" by intellectuals in Europe(including clerics on the left and on the right), itsfuture at the end of World War II appeared precariousindeed. Labor or socialist governments were inpower virtually everywhere, with Italy on the vergeof electing a communist government. In occupiedGermany, the Social Democratic leader, KurtSchumacher, appeared poised for certain victory in arenascent German democracy. Yet, in spite of the


overwhelming dominance of left-wing and socialistsentiments in the immediate postwar period, capital-ism had an astounding rebirth—first in WestGermany, and then in the neighboring nations. Thatrebirth, baptized as the "social market economy,"was rooted as much in a newly conceived institu-tional infrastructure of the market as in the marketmechanism itself. In retrospect (so Germans wouldargue), it was not the market economy as such (aneutral device), but an inner contradiction in the pre-war capitalistic order of Europe that led to thedemise of that order. This contradiction developedfrom the mistaken belief that a competitive economywould be established and maintained by a policy oflaissez-faire. In fact, freedom was used in the "free"economy to form trusts and cartels and to secure thewelfare of particular groups at the expense of thegeneral welfare. In short, the market economy wouldhave had little chance of reemerging in Europe as itdid without the sweeping changes in the institutionalframeworks put in place around it, the intention ofwhich was to alter the outcomes which an unalloyed,unregulated market economy would have produced.

Adam Smith, self-interest,and Ludwig Erhard

Adam Smith, the first and still one of the greatesttheoreticians of the market, bequeathed to us theenormously fmitful insight that the pursuit by each ofhis selfish interests conduced, through an invisibledesign that was no part of our doing, to the greaterwelfare of all. In the opening pages of Wealth ofNations, he notes that: "It is not from the benevo-lence of the butcher, the brewer, or the baker that weexpect our dinner, but from their regard to their owninterest. We address ourselves, not to their humanitybut to their self-love, and never talk to them of ourown necessities but of their advantages."

But even in 1776 it was evident that if the maxi-mizing of one's own interests were pursued in aninappropriate or conflicting context of the largersociety (e.g., under the threat of war, or where com-petition is feeble or absent) the postulated benevolentsocial outcomes of the market would be fmstrated.

Because Smith, at many points in his great work,recognized the limits of the market, especially inregard to the fragility of competition ("People of thesame trade seldom meet together, even for merriment

and diversion, but the conversation ends in a conspir-acy against the public, or in some contrivance to raiseprices"), it is likely that he would have applauded theemendations to the market model embodied in theconcept of the social market economy, especially itstwo fundamental objectives. The first of these wasthe rehabilitation of a competitive market economy,for so long discredited (in Germany), as the indis-pensable engine of prosperity. The second was theemplacement of that engine within a carefullydesigned social, primarily govemmental frame capa-ble of addressing problems such as large-scale unem-ployment, persistent monopoly, environmentaldegradation, and social dislocations and inequitiesleft in the wake of World War IL At the same time,the architects of the social market economy were notso committed to its "social" content as to be blind tothe economic realities. The chief of these architects,Ludwig Erhard, adjured his countrymen at the timeto remember that, in the infancy of a market econ-omy, the promotion of welfare by increasing outputas rapidly as possible made more sense than expend-ing energy quarreling over how the existing productwas to be distributed. In his words: "It is consider-ably easier to allow everyone a larger slice out of abigger cake than to gain anything by discussing thedivision of a smaller cake." (See Prosperity throughCompetition in For Further Reading.)

It is noteworthy that, thirty-five years afterErhard's warning, Germans are again concernedabout a possible overstretching of the social safetynet of their economy. Chancellor Helmut Kohl gavevoice to the concem when he denounced those whoseintemperate demands threaten to destroy the incen-tives that underlie German economic success. "Wecannot," he said, "organize our country like one bigrecreation park."

In truth, though Germany remains the econotnicpowerhouse of Europe, its economic perfonnancehas slipped in recent years, partly because of somesignificant failures to adhere to the prescriptions ofthe social market economy, but more importantlybecause the expectation on the part of ChancellorKohl and other German leaders that West Germanycould quickly transform East Germany into a replicaof itself was wildly unrealistic. The magnitude of thetask of repairing forty years of German communistmisrule—institutionally and economically—wassimply not foreseen. This miscalculation apart, there


are vital lessons concerning the construction of anappropriate framework for a market economy to belearned from Germany's extraordinary forty-fiveyears of economic and social progress.

Need for rules

Americans, like Germans, also exhibit a new realismin the face of a huge and still-mounting nationaldebt—the legacy, in part, of the national tax-cuttingbinge of the 1980s. It is now abundantly clear that,with respect to public goods, there is indeed no suchthing as a free lunch. They must be paid for, if notthrough increased debt, then through higher taxes. Tothese concems must be added the consequences, stillunfolding, of another major undertaking of the 1980sspecific to the American model of capitalism—namely, the dismantlement of a number of importantgovemmental stmctures and functions. In effect, sev-eral key past reforms of the market economy havebeen undone. There was, for instance, the rush toderegulate the economy that began in the late 1970sand continued through the 1980s. While there is nodoubt that a not inconsiderable number of govern-ment regulations were either unnecessary or perversein their effects or were accompanied by costs inexcess of their benefits (and still are), not all regula-tion can be so labeled. A great deal of it, in fact,remains critically needed. The dilution or abrogationof regulations affecting the U.S. savings and loanindustry has already cost the U.S. public hundreds ofbillions of dollars, and the tab is still mounting.

In a literal sense, laissez-faire was always an illu-sion. The principal institution affecting the marketeconomy on a daily basis is and must remain govem-ment. Its infiuence is exerted in three major ways: (1)quantitatively, as a supplier of public goods (nationaldefense, fire departments, etc.) and of essential infra-structures (roads, prisons, sewage systems, etc.),which the market cannot or will not supply; (2) quali-tatively, as a gyroscope holding the economy to a sta-ble growth path, to the extent possible, through anuncertain and often tempestuous future, using mone-tary and fiscal policies for that purpose; and (3) againqualitatively, as a rule-maker and enforcer. It is thisregulatory function which merits especial scrutinyhere, as it is a chief source of contention betweenmodem-day champions of laissez-faire who are per-suaded of the self-sufficient and self-policing attrib-

utes of the market mechanism, and those who supportan active interventionist role for government (forexample, in the safeguarding of competition or in theabatement of pollution). What is often not taken intoaccount in this argument is a critical distinctionbetween government interventions which are con-stmctive (such as the antitmst laws) and those whichare harmful (such as protectionist policies).Interventions which conform to the market (e.g.,taxes, antitmst laws, regulation of public utilities, reg-ulation of the securities markets, and regulation of thefood, dmg, and other industries exhibiting substantialmarket imperfections) are to be distinguished fromnonconformable interventions (e.g., price controls,exchange controls, import quotas, agricultural pricesupports, etc.) which vitiate the supply/demand mech-anism. The former simply add data to the decision-making process. They alter the mles of the game oradd new mles. But they do not intmde into the inter-nal mechanics of the market. In a forthright acknowl-edgment on the part of one who had inherited thederegulatory mantle of the Reagan Administration,former President George Bush declared in the secondyear of his Presidency that, "In some cases, well-designed regulation can serve the public interest."

Dark side ofthe capitalist moon

The future of the market economy, will, in the end,depend directly upon the desire and the ability of itsbeneficiaries and advocates to surround it with anappropriate institutional framework. That frameworkwill differ from place to place and from time to time.What must be avoided in the discharge of this taskare the two extremes of, on the one hand, an econom-ically ignorant moralism or do-goodism which, indenying the laws of supply and demand, produceseconomic disorder and the impoverishment of thepeople (doctrinaire socialism, for example) and, onthe other, a morally obtuse economism (the idolizingof a disembodied "free market") which, oblivious tothe most important concerns of man, those that liebeyond supply and demand, ends by fomenting a tideof resentment that is capable of sweeping the marketeconomy away.

Giving up on the market before giving it a chanceto work would be an unimaginable disaster forhumankind in the East and in the West. But the act ofwill required not to give up on it will be affected in


critical degree by how the ex-communist states (orthose nominally communist, but in transition) judgethe capitalisms in place around them. Contributing tothat judgment in Russia and in other EasternEuropean nations will be not only the impressive andhighly visible successes of the contiguous societies(such as Germany, Austria, Switzerland, Norway,and Sweden), but the less pleasant, less reassuringfeatures of the capitalist landscape as well. How willthose who have known only communism react to thedark side of the capitalist moon, so to speak? It is afact that economic anomalies in some parts of thecapitalist world (e.g., a spreading blight of homeless-ness in more affluent nations, pervasive and enduringpoverty in some of the less developed ones, andgrowing gaps between rich and poor in both) are pro-voking renewed questions about the inherent good-ness and justness of the capitalist model. In theUnited States—the quintessential capitalist nation—critics note these proclivities of the extant economicculture: an unabashed practice of sleaze in places pri-vate and public; an obsessive cult of the self coupledwith a penchant for unalloyed greed; and leveragedbuyout artists and merchants of junk bonds taking onthe status of folk heroes. Considering all this and thefact that other capitalist nations have hardly exhib-ited immunity to ethical lapses in the highest andlowest places, some are asking: Has the moral bot-tom dropped out of capitalist society?

Morals and the market

Despite Karl Marx, the economic system underwhich a society functions—be it central planning orthe market—is not coterminous with the society. Thelife of the society extends significantly beyond thingseconomic. It is thus fortunate that the economy, as asubordinate part of a larger social whole, can befixed when it is cormpted or broken, instead of need-ing to be extirpated root and branch, together withthe society from which it is indistinguishable.Fortunate, too, is the circumstance that art, architec-ture, literature, and religion lie beyond economicarrangements, but nevertheless infuse them and maybe refiective of them (as, for example, the novels of aCharles Dickens, Sinclair Lewis, or AleksandrSolzhenitsyn). But it is worth noting that, whether asociety is hedonistic or puritanical, or some admix-ture of the two, whether its life-style is materialistic

or ascetic, is to a considerable degree the outcome ofthe freedom of choice that a market makes possible.And though the market, in one sense, is ethicallyneutral (where competition is present and the bene-fits of exchange thus roughly equal), the choices ofthe things or actions—good or bad—which it makespossible and which are within its ambit, involve it ina moral debate. Do people determine the character ofmarkets, or markets the character of people?

One notes, in any case, a sharply increased publicawareness of the moral lacunae in market-based soci-eties, and specifically in the United States. Books,films, talk shows, and legislation-in-process devotesubstantial time and attention to the nation's per-ceived moral and spiritual malaise. Serious socialills, which are clearly not ameliorable by giving freerein to the laws of supply and demand, clamor forsolution, among them the emergence of a seeminglypermanent underclass of the poor and uneducated,nourished by crime and dmgs.

But the moral and social blight that afflicts notonly the United States but a number of the advancedcapitalistic regimes of the present is not unique tothem. The rise in crime rates and other indices ofsocially destmctive behaviors in Russia, China, EastGermany, and other places where communism is inthe process of giving way to market-oriented activityraises troubling questions about a possible immanentdeficiency of the market model. Is moral insensitivityor obtuseness an inherent part of a market-basedsociety? Or, conversely, is a market economy a lux-ury affordable only by a society that has attained acertain degree of moral maturity, including near uni-versal commitment to such core values as the TenCommandments? How these and similar questionsare addressed will certainly affect the future of themarket economy in traditional capitalist societies.And this will apply with even greater force in thenewly liberated states, where the perceived costs of amarket economy in social and moral terms have yetto be exceeded by the perceived benefits. Should thisasymmetry persist, the general disenchantment withvarious aspects of the market system may swell tothe point where the search for "a capitalism with ahuman face" and the institutions needed to secure it(as distinct from a market economy as abstraction)could become the dominant concem of the last yearsof this and the first years of the next century foreconomists and their patrons everywhere.


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Beyond Supply and Demand