Free markets are subject to the same problem. There have been many examples of market economies in history that were not controlled by governments, but there have been no examples of market economies that were not controlled at all, and if one were to be set up, it would remain a free market for maybe a week at most. Adam Smith himself explained why, in memorable language: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or some contrivance to raise prices.”10 When a market is not controlled by government edicts, religious taboos, social customs or some other outside force, it will quickly be controlled by combinations of individuals whose wealth and strategic position in the market enable them to maximize the economic benefits accruing to them by squeezing out rivals, manipulating prices, buying up their suppliers, bribing government officials and the like — that is to say, behaving the way capitalists always behave whenever they are left to their own devices. This is what created the profoundly dysfunctional economy of Gilded Age America, and it also played a very large role in setting up today’s economic troubles.
There’s a rich irony here, in that the market economy portrayed in textbooks — in which buyers and sellers are numerous and independent enough that free competition regulates their interactions — is a form of commons, and a great many people who claim to be advocates of the free market have spent years arguing that commons should be eliminated wholesale in favor of private ownership. All commons systems, as Garrett Hardin pointed out in a famous essay,11 have to be managed in ways that prevent individuals from exploiting the commons for their own private benefit; otherwise they fail. The 2009 Nobel laureate in economics, Elinor Ostrom, won her award for demonstrating that it’s entirely possible to manage a commons so that Hardin’s “tragedy of the commons” does not happen,12 and she’s quite right — there have been many examples of successfully managed commons in history. Strip away the management that keeps it from being abused, however, and the market, like any other commons, destroys itself.
The Market as Commons
Heretical as this concept may be in term of contemporary economics, it can be demonstrated easily enough by a piece of economic history within the experience of many of my readers. Consider an old-fashioned shoe store of the sort most American towns of any size had 50 years ago. Most of the profit that paid the store’s bills and kept its proprietor fed and housed came from shoes of a relatively modest number of standard types and common sizes, but the store also carried types and sizes that were of special interest to local customers, including some quite unusual ones — for example, orthopedic shoes for a regular customer with foot deformities — and also provided shoe repair and alterations and a range of shoe-related products tailored specifically for the needs of the local market.
Such businesses could be quite successful, but the fact that most of their profit came from a fraction of their total line of goods and services made them vulnerable to competition from businesses that offered only those profitable lines. This was the opening that department stores exploited in the postwar years. As they expanded out of the large cities, they provided shoes in the more popular styles and sizes, without the other goods and services the local shoe stores provided. Since the department stores did not have the costs associated with these other goods and services, and could draw on economies of scale out of reach of local shoe stores, they could sell their products more cheaply than the local shoe stores.
As a result, customers went to the department stores rather than the local shoe stores and many of the latter were forced out of business. This meant that many of the specialized goods and services that had once been available in towns across America — in this example, shoe repair — stopped being available, except to those willing to travel to a city large enough for a shoe repair store to remain viable on its own, without the income stream the old stores had received from the sale of common varieties of shoes.
Nor does the process stop there, for the department stores turned out to be equally vulnerable to discount shoe stores, which provided even fewer services and an even more restricted range of styles and sizes, and thus either outcompeted the department store shoe departments or forced them to follow the discount store model. The result, in most North American towns and a surprisingly large number of cities, is that the only shoes available to consumers at all are cheaply made, poorly fitting mass-produced shoes in a small range of styles and sizes, sold in discount shops by clerks who wouldn’t know how to help a customer find a shoe that fits even if that were part of their job description.
This logic is by no means limited to shoes. The same race to the bottom in which quality goods and services become unavailable and local communities suffer has taken place in nearly the same way in nearly every industry in the industrial world. A torrent of cheap shoddy goods funneled through Wal-Mart and its ilk have driven local businesses out of existence and made the superior products and services once provided by those businesses effectively unavailable to a great many people. In theory, this produces a business environment that is more efficient and innovative; in practice, the efficiencies are by no means clear and the innovation seems mostly to involve the creation of ever more exotic and unstable financial instruments — not necessarily the sort of thing that our society is better off encouraging.
In the real world, in other words, a laissez-faire market doesn’t always produce improved access to better and cheaper goods and services, as Smith argued it would;13 instead, it can put desirable products out of reach of consumers who would be happy to pay for them, but are not numerous enough to generate enough business to keep a shop from shutting its doors. It can also have disastrous impacts on such non-economic goods as healthy communities. The shift from an economy of local firms, which spent most of their income locally, to an economy of multinational firms that effectively pump money out of most of the world’s communities to concentrate it in a handful of important cities, has played a massive role in the economic debacle that has overwhelmed so many towns and rural regions in the industrial world.
These effects can be understood by recognizing that a market is a commons, along the lines sketched out by the Garrett –Hardin essay mentioned above. Like any other commons, it can break down when it is not managed in ways that keep the common interest of all participants from being harmed by the actions of individuals. This does not mean that markets ought to be abolished, any more than Hardin’s arguments show that commons ought to be abolished; the idea that markets ought to be replaced by government bureaucracies was tested thoroughly in the Marxist states of the twentieth century and turned out to be a comprehensive flop. What it means, as I propose to show later on in this book, is that the same logic of checks and balances that has proven to work tolerably well in the political sphere needs to be applied to the economic sphere, particularly to those dimensions of economics that overlap with non-economic realities.
Energy’s Rules
Despite the problems just outlined, the faith in free markets governed by supply and demand remains central not only to contemporary economics but to much of the modern world’s collective conversation about the future. It’s very common, for example, to hear well-intentioned people insist that the market, as a matter of course, will respond to restricted fossil fuel production by channeling investment funds either into more effective means of producing fossil fuels, on the one hand, or new energy sources on the other. The logic seems impeccable at first glance: as the price of oil, for example, goes up, the profit to be made by bringing more oil or oil substitutes onto the market goes up as well; investors eager to maximize their profits will therefore pour money into ventures producing oil and oil substitutes, and production will rise accordingly until the price comes back down.
That logic owes much of its influence to the fact that in many cases,