The Market is Dead; Long Live the Market!

Nothing endures but Change.
How many times in modern history have people proclaimed the end of a major institution, only to be proven wrong? Hard saying.
How many times have people, upon surviving the end of an institution, later proclaimed the vindication of said institution when its vanquisher is later brought into disrepute or is itself deposed in favor of a third thing? Equally hard to say.

One thing that is beyond debate however is that there is currently a fad of claiming that the failure of present capitalist market systems somehow vindicates Communism. I am not making this up. In my regular daily immersion in the information streams supplied by extraterrestrial sources (not as crazy as it sounds) I have in the previous few weeks heard a small but growing number of voices from all over the world and many walks of life proclaiming that the current global economic crisis is proof positive that capitalism is a failed, non-viable, inequitable and basically evil horror, finally revealed for the monster it is. These people are not universally insane, ignorant or anarchists or tyrants. Although even Marx would admit that a disproportionate number of collectivists are generally poor and for various reasons disaffected.

What is disturbing (particularly here in the U.S.) is that so many people seem to be caught in a bi-polar cognitive extremism; the argument essentially being that, "An economy must be either Capitalist or Communist. There are no other options nor any middle ground."

This is obviously a false dilemma to anyone with a fractional understanding of economic systems and/or the reasoning ability of a small child. When people's finances are threatened however, both understanding and reason often go out the window, hurled by a massive explosion of emotional reaction. This is neither surprising nor difficult to understand. Wealth is the medium of survival in the modern world and the most primal instinct burned into every cell of every living creature is survive. I'm getting ahead of myself however. Let's start (as always) with first principles.

What is money? Money is not, in and of itself, anything real. Money is a symbol, a marker like a poker chip. So what, then, is it symbolic of? Without delving into a lot of history that is not, for the moment, relevant in a practical sense we'll simply say that money is representative of the amount of energy available in the social system. Any commodity or service can be explained in terms of the amount of energy it requires to produce/provide. This is where all economic theories begin and from whence they begin to diverge.

One argument says that the social system is closed in this regard, that no energy is gained or lost, only distributed. Detractors call it the "zero sum game" and it is the underlying basis of Communism, "There's only so much wealth to go around, so we have to make sure everyone gets a fair share." The counter argument says that new energy is added by the labor of participants in the social system. "Work creates wealth," as they say in Capitalist circles. What the proponents of this argument tend to fail to address is whether not the door swings both ways; can energy also leave the system? Some adamantly deny this, most ignore it and a few spend uncomfortable minutes examining their shoes. What most Communists get hung up on isn't actually where it all might go, but rather where it comes from. The question/argument boils down to, "Energy cannot be either created or destroyed, so where are you bastards getting it from?"
As it happens, they're both right.

Here's the short version: Energy (money) cannot be created, but it can be converted from one form to another. Work transforms energy and moves it into the economic system. A good analog might be to think of the economy as a plant and work as sunlight. Light (work) does not strictly speaking create more plant(economic growth) but it does supply energy to the system...and without it, obviously the whole thing fails, withering and dying.
Now lets get complicated.

The market force itself is a mechanism, matching supply with demand. This machine, seemingly as simple as a lever and fulcrum, is instantly complicated by human motivations that frequently ignore the simple logic of a mechanism. Often there are demands created not by a genuine need (in the survival sense of the word) but by a perceived need. Also there are wants, which create further demands that the market must, by its very nature as an exchange mechanism for energy within the system, try and fulfill.

Now lets draw these threads together; Money is the medium by which we manipulate the free energy in the social system, allowing demands (including survival demands such as food and shelter) to be met in an efficient manner. Got that? Moving on...

So if money is the key to meeting demands (of whatever kind) in the social system, nobody should be surprised by the idea that every single rational human being wants to have as much of it as they can possibly get. There are a host of natural and manufactured imperatives for this, ranging from instinctual survival to dating/mating and social dominance to entertainment. The most valuable asset most people have is their house and/or land. Since the population is almost always increasing and there is almost always a demand for more housing, the temptation to sell for a substantial profit is great. Especially if you can artificially inflate the sale price.
This is where the whole thing really starts.

I choose my words intentionally when I say "artificially inflate". There are a host of reasons why a house might be sold at more or less than its "real" price. Location matters such as proximity to hospitals or schools, retailers or employers. Crime rates or vulnerability to natural disasters might factor in as well. The immediacy of need; my own family once found itself in a situation where we absolutely needed to find a place to live in particular region during the winter. Not exactly optimal for the buyer's side of the ledger. All of these things are perfectly normal and generally do not disrupt normal market functions much, if at all, depending on how acute they may be. In a Capitalist economy though, you can try and buy or sell at whatever price you think you can get away with.
When selling real property, there is almost always a third party involved whose job it is to assess the value of the property in question. A number of factors are involved, include those mentioned above. During the latest housing boom though, a new factor entered the equation, "How much do you want this to sell for and what's my commission going to look like?"

This started small but grew rapidly until houses and properties were being valued not according to what they were actually worth but rather how much profit could be made by sellers, lenders and assessment companies. As a result, the entire market started selling houses at inflated rates to people whose needs frequently forced them to accept loan terms they wouldn't be able to meet in anything but absolutely _perfect_ circumstances.

The first, most obvious question we all have to ask is, "Why on earth did lenders make such obviously irresponsible loans in the first place? Why weren't they afraid of a wave of mass defaults?" The answer is painful and in some ways brilliant, at least on their part. They didn't hold onto the debts.

Once large numbers of these mortgages started to accumulate, the lending institutions started bundling them together as blocks of debt, sold under the label of "Mortgage Backed Securities." American real-estate was the most solid asset in the world and buyers around the world flocked to buy these products, assuming them to all be guaranteed income generators as debtors payed off their mortgages. The bad paper by this point was spread all about the world.
The defaults began and red ink ran like blood at Iwo Jima.

This is a simplified version of things. The cascade hasn't finished yet and more factors are coming into play.

The point is, none of this is the fault of the free market itself. The market is a mechanism, nothing more or less. Like any machine it functions exactly as it is designed to unless you screw with it. Artificially inflating home prices counted as screwing with it and as a result the entire system operated, for years, as though it had more money than it really did. Goods and services were produced that weren't backed up by real energy and as a result the entire system is now, violently, re-balancing itself. All of this comes about, not because the market is good or evil or because of anything outside of the stupid, short-sighted decisions made by the operators of that vast mechanism we call the market.
People did this. Not systems, people.
So, as the song goes, "Where do we go from here?"

The simple answer is, we go forward. In one sense, the current would-be Proletariat are right; the free market has failed, though not because of any systemic flaw. Rather it has failed because we haven't operated it correctly. The near future will undoubtedly see a shift towards greater oversight, more extensive regulations to try and deter this sort of abuse. That is as it should be but I must emphasize and cannot overemphasize that we must be extremely cautious that we do not over correct, dipping towards command economics. Perhaps a mixed-economy approach would be good, allowing businesses free reign until they become a threat to national interest, then either breaking them up into smaller interests or outright nationalizing them, if their product or service becomes essential, such with utilities or transportation networks.

Whatever the case, we can safely say that the market as we have known it is certainly going to go away, replaced by something that will, in all probability, be very much the same, but different in a small but important way that will make it more robust in the face of parasitic cleverness. Systemic Darwinism, if you like, "Decent with modification."

It is interesting and perhaps worthwhile to note that the Tarot symbol for change is the Death card, capturing the concept that in order for something new to begin, some old has to end. Therefore, again, the would be revolutionaries around the world are right, in a sense.
The Market is Dead; Long Live the Market!