The Market

By the term “market”, economics designates the process through which, in the division-of-labour economy based on private property in the means of production (the market economy), production is steered into those channels in which it best serves the satisfaction of the consumers’ most urgent wants.

The consumers are sovereign. By buying or by abstaining from buying, they decide upon the profit or loss of the entrepreneurs. Profit and loss direct the control of the means of production into the hands of those who know how to employ them most expediently in the service of the consumers. In the market economy, ownership of the means of production is, as it were, a social mandate that is withdrawn from the mandatary if he fails to comply with the respective instructions of his principals, the consumers.

A business is profitable if it serves the best possible provision of the consumers. It is unprofitable if the consumers prefer a different employment of the means of production concerned. To construct an antagonism between profitability and productivity is meaningless so long as one remains within the framework of the market economy and does not call into question the sovereignty of the consumers. Whoever describes a profitable business as unproductive sets his own opinion of what ought to be produced and consumed above that of the parties to the market. He presumes to know better than they do themselves what benefits the consumers. In doing so he gives his personal judgement a form that makes it appear as a universally valid truth and rule of life. When he demands that the government take coercive measures in order to enforce productivity against mere profitability, he tacitly assumes that the judgements of all men concerning what is productive and what is not coincide, and that his own view will also be that of the authorities.

In describing the processes of the market it is customary to speak of the free play of economic forces. Another image often used to characterise the market is that of automatism. To a supposedly blindly operating automatism one opposes the conscious intervention of the wisely planning authority. Such metaphorical turns of phrase obscure the state of affairs. All market phenomena are the result of the endeavours, directed at the best possible covering of their requirements, of all those who wish to buy or to sell on the market. It is mistaken to characterise these actions of individuals as unconscious behaviour by setting them in contrast to the conscious intervention of the authorities.

Men are not infallible, not even in their economic doing and refraining. Everyone is free to censure the conduct of his fellow men — for instance their predilection for alcoholic beverages, for shows of dubious character, for wrestling and boxing matches and the like — and to attempt to persuade them to a wiser employment of their means. Yet the problems that arise from the inadequacy of the human mind are by no means solved by replacing the market with planned economy and placing individuals under the tutelage of the authorities. Kings, leaders and officials too are men and can err. The liberty that the market grants to the individual may be doubted from the standpoint of metaphysical trains of thought. In the sphere of the satisfaction of wants, however, it embodies the ideal of liberty that constitutes the essence of the culture of the West and distinguishes it fundamentally from the oriental style of life. In this sense the market, ultimately governed by the consumers, is an essential element of the modern social order and culture.

State and municipal enterprises that operate within the framework of a social order otherwise based on private property in the means of production are just as dependent on the market as private enterprises. As buyers (of raw materials, semi-finished goods, tools and labour) and as sellers (of goods or services) they must fit themselves into the dealings of the market and, in order to maintain themselves, must strive to earn profits and to avoid losses. Attempts to mitigate or to eliminate this dependence by covering the operating and capital losses of public enterprises through subsidies out of tax revenue merely shift the points at which the reaction of the market sets in. For it is not the tax-levying state, but the mechanism of the market, that decides upon whom the levy ultimately falls and how it affects production, the provision of goods, the management of capital and the formation of incomes. Thus here too the sovereignty of the buyers and the inescapability of the laws of the market come into play. When one speaks of a private-capitalist sector and a state sector of the national economy, one must not forget that the state sector too depends on the market.

The tendency prevailing on the market to adjust production to the consumers’ desires in the best possible manner fails to come fully into effect in one case only: that of the monopoly price. In order to render a monopoly price possible, it does not suffice that the supply of a good or a service be monopolised. A particular configuration of demand must be added. The consumers must rate the monopolised good so highly that, in the event of a rise in its price above the potential competitive price, they do not curtail their purchases to such an extent that the seller fares worse than he would with sale at the competitive price [→Monopoly].

An example may illustrate the effect of monopoly prices. With competitive prices for copper, there is a tendency to exploit the deposits up to the point at which further exploitation no longer covers the additional outlay of the complementary material and human means of production. With monopoly prices for copper, exploitation is broken off at an earlier point. The non-specific complementary means of production thereby saved are employed elsewhere for the production of articles that would otherwise have escaped the consumers. Yet the consumers would have preferred a better provision with copper to the provision with these other articles.

The market prices tend in each case towards a position at which demand and requirement cover one another. At this price — which the classical economists called the natural price, the older subjectivists the equilibrium price, and which we more aptly call the final price — all who wish to buy can buy and all who wish to sell can sell. Since, however, the price-determining factors are subject to constant changes, in reality — unlike in the mental construction of the evenly rotating economy (the economy of static equilibrium) — the final price changes again and again before the market price has reached it.

Interventionist and socialist writers maintain that the theory of market and price developed by the economists holds good only for the conditions of an economy of small and medium-sized enterprises. The large enterprises that characterise “late capitalism” would be so powerful that they could impose their will upon the consumers. Against these mammoth enterprises there could be no competition. As far as their domain extended, there would no longer be anything corresponding to what economics has called the market.

Around the turn of the 19th to the 20th century, the railway companies were designated as the typical example of such large enterprises against which no competition could arise. Yet that allegedly irresistible power of the railways was unable to prevent, or even merely to delay, the emergence of the most dangerous competitors, the motor car and the aeroplane. As soon as something comes onto the market that suits the consumers better than what the large enterprises produce today, the same process will repeat itself. Precisely the larger an enterprise is, the more strongly it is dependent on the market, that is, on the consumers. The large enterprise has therefore developed methods of market analysis and of the systematic investigation of the consumers’ wishes [→Market research].

The increase in the sums expended on customer advertising likewise shows the superior power of the buyers [→Advertising].

Competition exists not only between those who offer the same article for sale, but also between those who wish to sell different articles. The sums a consumer spends on the purchase of any one commodity diminish the sums he can lay out for the purchase of other commodities. All entrepreneurs strive to channel as much as possible of the monetary means available to the public into their own coffers. All goods and services stand in competition with all other goods and services. One mistakes the essence of →competition if one regards the endeavour of the producers to “differentiate” their products — that is, to give them qualities that are meant to make them appear more desirable in the eyes of the public than those of other producers — as measures designed to make competition “monopolistic”. The endeavour to outdo competitors by such product differentiation is one of the most important means of competition. It is precisely this endeavour that releases and keeps alive the force inherent in the capitalist market to work towards the constant improvement of the provision of wants.

Economic activity serves the satisfaction of future wants. Since nothing can be predicted with certainty about the shaping of the future, every action directed at the covering of requirements rests upon conjectures and expectations. Not only the actions of the producers, but also those of the consumers, are speculative. The consumer who buys reckons that the good acquired will satisfy his future wants better than other goods whose purchase he has postponed in order to be able to buy precisely this good. All economic activity — including that of the self-supplier and that of the manager of a socialist organisation — is →speculation. Whoever expends time, money and effort on training for a particular occupation likewise speculates. Only the future decides whether he has acted rightly.

By market situation we mean the totality of →expectations concerning the shaping of future prices, both the future of the next moment and the more remote future. The parties to the market form these expectations from their knowledge of the prices paid in the transactions most recently concluded and from their estimation of the changes that new facts — already occurred or expected — will bring about in those prices. Each individual is pleased if the expectations that have determined his action prove correct, or if conditions turn out more favourably than he had expected. But if it turns out that it would have been more expedient to proceed differently, then those who have come to harm through incorrect appraisal of the future situation (mis-speculation) tend to raise the demand that the government come to their aid. The only source from which such state aid can be granted is the curtailment of the profits of those who have speculated correctly. The further this policy of equalising profits and losses proceeds, the more the market is hindered in the fulfilment of its function. The task of prescribing the direction of production must then be taken over by the state.

The market is unitary and indivisible. All prices hang together and condition one another. Every part of the market is dependent on all other parts and in turn influences them. There were, and even today still are, groups of men who live in full autarky outside the society of exchange that encompasses the rest of the world. Yet within a market-economy system all actions are potentially connected with the market. Whoever is a self-supplier with regard to particular wants influences the market price of the articles concerned and is influenced by it.

The partial markets on which means of production are turned over are just as dependent on the ultimate consumers as the partial markets of the various goods ready for use and consumption [→Markets]. The same holds of the stock exchanges. The stock exchanges decide upon the distribution of the capital goods available for additional investment among the various investment opportunities. The newly formed capital and the means available for new investment — corresponding to the building of reserves and to the depreciation made to replace the capital goods used up in past production — are directed by the →exchange into those channels of production that, in the opinion of the speculators, appear to offer the most favourable prospects. On the exchange itself neither profits nor losses arise. Profits and losses in the transactions of securities trading are the result of correct or incorrect anticipation, by the investment activity, of the future conduct of the consumers.

Price formation on the → labour market is just as dependent on the demand of the final consumers as that on the market for the material means of production. For the earnings of stage celebrities and professional athletes this has never been doubted. Yet it is no different on the market on which the wages for all other services and work performances are formed. On the free labour market — that is, one not impeded by any coercive power — there prevails a tendency to fix the wages of each particular kind of labour in such a way that everyone willing to work for that wage finds work, and everyone willing to employ workers at that rate finds workers. The free labour market strives towards full employment. If minimum wages exceeding the potential market rates are fixed by government decree or by the coercive measures of the trade unions, then a permanent unemployment of part of the job-seekers arises (institutional unemployment).

This too was acknowledged by John Maynard Keynes. The peculiarity of the full-employment policy he recommended lies in the fact that it strives to eliminate institutional unemployment not by restoring the free labour market, but by increasing the quantity of money. In this Keynes proceeded from the expectation that, with nominal money wages maintained, a gradual “automatic” reduction of real wages brought about by inflationary price increases would meet with less resistance on the part of the wage-earners than undisguised attempts to adjust money wages to the market. Whether this expectation holds true may be doubted in view of the popularity that the method of index numbers has attained.

In the conceptual image of the evenly rotating or stationary economy, the price of every product equals the sum of the prices laid out for the complementary means of production, including the interest corresponding to the production time required. There are therefore neither profits nor losses. In the continually changing real economy, discrepancy between supply and demand keeps arising anew. To remedy this discrepancy, production must be newly adjusted to the altered conditions. From this process of adjustment spring the profits or losses of the entrepreneurs.

Profits or losses are the consequence of the circumstance that the adjustment of production to the new situation does not take place all at once throughout the whole market system. The entrepreneurs who correctly foresaw the change and acted accordingly achieve surpluses, because on the one hand they realize higher prices for the product and on the other can still buy means of production at the lower prices corresponding to the earlier situation. As events proceed, both sources of their profit dry up. The increase in the production of the profitable article lowers its price, and at the same time the prices of the complementary means of production rise. Were no further changes to occur, stationary equilibrium would set in, in which there are neither profits nor losses. On the market there is a tendency to make profits and losses disappear. Profit and loss are permanent phenomena only because there is again and again change in the economic data and the evenly rotating economy is nothing but a conceptual image to which real life never corresponds. Profit and loss are, as it were, the reward and punishment which the consumers mete out for the swifter or slower satisfaction of their wishes.

It would be inexpedient to describe the appearance of entrepreneurial profits and entrepreneurial losses as a transitory phenomenon or a frictional phenomenon, and their absence as the ideal state of the economy [→ entrepreneurial income]. The never-ceasing striving for the improvement of want-satisfaction is a characteristic mark of man. The state of equilibrium of which economics speaks is not a goal whose attainment appears desirable from any point of view. It is a conceptual aid intended to convey insight into a reality of a different kind. Political prejudice is at work when one calls the market, on which no stationary equilibrium exists, an imperfect market, and the competition that takes place on this market imperfect or → incomplete competition.

In the social order resting on conquest and the violent appropriation of the soil — which Adam Ferguson, Claude Henri de Rouvroy de Saint-Simon, and Herbert Spencer designate as militarism, and contemporary Anglo-Saxon writings as feudalism — the inequality in the distribution of landed property is of political origin. One is rich or poor according to whether more or less was allotted to one by the conqueror or his successors. A change in the distribution of possessions can be brought about only by political measures.

In the market economy there prevails a tendency to bring the means of production into the hands of those who know best how to use them in the sense of the consumers. Inequality in the magnitude of incomes and wealth is the result of the conduct of the consumers. It is they who make the one rich and the other poor. If one insists on holding to the expression distribution of income and wealth, which misrepresents the state of affairs in the market economy, one must be clear that the distribution is carried out by the consumers, who in doing so are intent solely on the best possible furtherance of their own interests. In the militaristic social order it may be true that the neediness of the poor is the counterpart of the abundance of the rich. In the market economy the growth of the wealth of the rich and the shrinking of the wealth of others are the consequence of an improvement in the want-satisfaction of the remaining members of society. The very processes that raise the average standard of living are those that make great fortunes arise and disappear. The view that sees in the formation of great fortunes an impairment of the well-being of the rest of the people’s fellows mistakes the essence of the market economy. The source of market-economy wealth is the raising of the standard of living of the consumers, and vice versa. Measures aimed at levelling out the inequality in the magnitude of incomes and wealth come at the expense of the standard of living of the consumers. From the standpoint of the interests of the consumers, a taxation of business losses would be more justifiable than a taxation of business profits. Inequality of wealth and incomes is an essential element of the market economy. Karl Marx and Friedrich Engels rightly recognized in the “Communist Manifesto” that a “heavy progressive tax” and the “abolition of the right of inheritance” lead to the destruction of the market economy.

The interventionist policy of the present aims to counteract the decisions that the consumers make on the market. It seeks to switch off the market. In doing so, one is not always clear that the authority must then ultimately take over the direction of the production process and thereby set socialism in the place of the market economy.