The Market System:
What It Is, How It Works, and What To Make of It

Charles E. Lindblom

Yale University Press 2001
A book review by Danny Yee © 2003
The Market System integrates the economic, the political, and the social in a broad overview, spurning narrow disciplinary boundaries. No specific ideas in it stand out as particularly original, but the overall result is a nice overview from an unusual perspective. It is free of jargon and assumes no technical background, but it may be thought-provoking even — or perhaps especially — for specialists. An academic with a background in both economics and political science, Lindblom remains calm and dispassionate throughout; he also seems remarkably free from political presuppositions, though everyone is likely to find something to disagree with, given the subject and the breadth of the treatment.

Lindblom stresses throughout that the market system is a system of social coordination, a "mammoth coordinator" whose reach extends beyond economic behavior.

"[O]nce again, you will not gain any insight into market-system scope by postulating something called the economy, which then defines its scope. Think society, not economy."
As well as a tool for cooperation, the market system is a powerful tool for peacekeeping. Some of its notable features include diffusion of participation and control, simplicity of decision problems, coordination of conflicting sets of preferences, and adaptability. The key building blocks of a market system are liberty, property, quid pro quo, money, production for sale, intermediaries, entrepreneurs, and large collectives (corporations).

The theoretical "maximum reach" of market systems is huge: their only prerequisites are contingent control, scarcity, and voluntarism. And contrary to some claims, they are perfectly capable of accomplishing collective goals. But the actual scope of market systems, what Lindblom calls their "chosen domain", is — and must be accepted as — smaller.

"Determining the domain for market, state, family, enterprise, and civil society — for each of them — is a serious task for every society, not to be disposed of by all-too-common dogma."

On the political side, Lindblom discusses elites and mass, the contrast between governmental and enterprise elites, enterprises as "islands of command in a market sea", and different forms of enterprise ownership.

Lindblom goes on to ask what we should "make" of the market system. He begins with the problems of the quid pro quo rule, that people take out according to what they put in.

"One can play down market inequality as a blight on the grounds that nonmarket systems reveal a history of even greater inequality ... But that does not deny the magnitude of market inequality. Nor does the impossibility of complete or exact equality justify such existing inequality as follows from the rule of quid pro quo."

When it comes to efficiency, market systems are hard to beat. They have

"the great and distinctive merit of efficiency prices that permit a drastically improved degree of efficient choice. They make cost information universally available."
Working through mutual adjustment, markets also offer strong motivations towards efficiency, especially for entrepreneurs. And distributed control allows efficient and rapid solutions.
"[M]any problems are solved not head-on but as a by-product of attacks on smaller, easier problems more likely to stir individual persons and collectives to action."

But market systems also have their inefficiencies: spillovers, which are significant and can't be defined away by enlarging the market; the effects of power asymmetry on market relationships and contracts (which Lindblom labels "transaction termination"); monopoly and arbitrary prices; ignorance and irrationality; inequality; and entrepreneurial motivations. And even without those, the market system would still not be efficient, because of the problem of "prior determinations", the assignment, by custom, law and historical accident, of assets and skills. (Lindblom seems to rely here on a definition of efficiency that is never fully articulated.)

It is often argued that the market system provides freedom as well as efficiency. Lindblom looks at some qualifications to this: many market liberties are possible without the market system, enterprises are often authoritarian, and market transactions often have a degree of compulsion.

"[T]he state has in many ways stepped in to protect the liberties that the market itself fails to protect. States do not permit people to sell themselves into servitude, and they impose limits on discharge of employees ... Unions and other private groups also often intervene. That they and the state intervene so frequently traces back to the frequency of market offenses against freedom."
And on the relationship between democracy and the market system Lindblom concludes:
"In all of this we find no convincing evidence or argument that, except in the mind, the market system is necessary to democracy. ... There may be connections we have missed."

Many have criticised markets for their negative effects on personality and culture, but Lindblom finds little of this convincing. Another criticism is that the market, through persuasion, creates market circularity — but sales campaigns are "not very threatening to consumer control over market elites". Other complaints focus on the "assault on the mind" of advertising distraction, obfuscation and misrepresentation and the possibility of a "political circularity" where elites benefit from and in turn maintain the market system.

Turning to enterprise "obstructions" to democracy, Lindblom stresses the danger of giving democratic "rights" to corporations and treating them as persons: "In a democracy, a corporation would not go into court as an injured person but in its role as a social institution." He also considers arguments for more democracy within corporations and criticisms of the privileged position of market elites.

Two chapters at the end of The Market System consider "alternatives", but are unlikely to make revolutionaries happy. The first considers alternative market systems, or rather options for their operation, while the second argues that any alternative system of social organisation would have to preserve many features of a market system.

January 2003

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%T The Market System
%S What It Is, How It Works, and What To Make of It
%A Lindblom, Charles E.
%I Yale University Press
%D 2001
%O paperback, references, index
%G ISBN 0300093349
%P 296pp