Corporate & Securities Law

Are Economic Laws Universal or Culturally Determined?

By Hanno Kaiser

Ever since Socrates demolished Gorgias to lasting effect, the universalism vs. relativism debate has had a prominent place in moral theory, in law, and (with some delay) in the natural sciences, too. In stark contrast, much of modern price theory proceeds in a strictly Platonic fashion. The rational actor is an abstraction liberated from the contraints of time and place, so is the firm and the idea of the market itself. The perfectly competitive market with its infinite number of atomistic buyers and sellers, each reacting to aggregated forces outside of their control but to which they each unwittingly contribute, trading perfectly homogenous goods in exchange for an ideal currency with constant marginal value, exists in a parallel universe of ideal forms. We observe its various more or less imperfect instantiations in the real world. The closer the real world approximates the ideal, the better. The implication is that basic economic laws are universal, and that there are thus objective normative criteria by which to judge economic systems, irrespective of their time and place. That belief in economics as a process for discovering universal laws of human action, either through mathematical formalization (”nature obeys mathematics”) or through the observation of a quasi-evolutionary process in which those real-world economies survive that better approximate the ideal, is a driving intellectual force behind the neo-conservative faith in the power of free markets, unlocking human potential everywhere.

The real world, however, does not reflect this hopeful (or plainly ideological) Platonism. As Max Weber pointed out, economic institutions and the theories reflecting them, are largely the product of political history, religion, and geography. For example, French and to a somewhat lesser extent German competition law still clearly reflect the administrative tradition, which has a longer history in centralized France than in decentralized Germany, where an expert government bureaucracy ensures that capitalistic enterprise remains alinged with the public good. Given the a priori embeddedness of the market in the broader body politic, the market never comes into view as a fully separate, autonomous system. As a result, there is no real need for a theory of the market as a self-regulating and self-stabilizing process, which is the defining feature of the perfect competition model. The perfect competition model describes, above all, a stable dynamic, a process moving towards equilibrium without any outside intervention. It is the theoretical justification for laissez faire, for why governments can, in fact, afford to leave businesses (and, not coincidentally, the rich) alone. The perfect competition model is expressly designed to explain why ideal free markets simply cannot spiral out of control.

In France and Germany, the market has always been (at least in part) a tool to be deployed by the state in furtherance of public good (however determined). The market is not an end in itself, as it contains no universal truth about human affairs, or at least no truth that, normatively, the body politic should necessarily encourage or embrace. Rather, the ends of the market process are expressly defined in political, not economic terms, and they include competing values beyond productive efficiency, such as predictable growth, limited inflation, and full employment. (Obviously, having those goals is one thing, achieving them is quite a different matter.) Similarly, competition as a key ingredient of the market process is “managed competition,” as opposed to unlimited competition in a hypothetical natural state. The same is true for property in rivalrous goods, another necessary ingredient of the market process. Property in critical sociatal infrastructure such as transportation, energy, and telecommunication, has never been an entirely private affair, irrespective of who created, planned, or financed the infrastructure, which is reflected both in the constitutional definitions of property (e.g., in Germany) and, in practice, in the still significant state ownership of such industries.

In other words, economic institutions and the building blocks of economic theory reflect in significant part the political structure of the society of which the economic system is a part. In the history of philosophy, countless Platonisms have turned out to be little more than theoretical universalizations of unquestioned contingent beliefs. Antitrust economics would greatly benefit from a more explicit historic and comparative perspective. Competition law certainly has.

Full post as published by Antitrust Review on November 08, 2008 (boomark / email).