Market Learning

By Daniel O'Connor of Integral Ventures, LLC

This article was written as an introduction to a book intended to shed new light on the surprisingly difficult questions of how the market is supposed to work, why it doesn’t always work as promised, and how we can make it really work for us.  As such, it introduces a new theory of how the market really works.  That theory is Market Learning.  Though it may sound somewhat contrived, Market Learning is grounded in the novel insight that the implicit rules governing the practice of market exchange are essentially identical to the implicit rules governing the practice of social learning.  In other words, the social learning practice that we must use to gain a shared understanding about our lives and create meaning in the world is actually very similar to the practice of market exchange we already use to buy, sell, work, earn, borrow, spend, and invest.  Thus, by using each of these separate disciplines to illuminate and extend the other, we may increase our understanding of both and, most importantly, develop a practical theory of real markets that can help us resolve what I see as a veritable crisis of vision in economics. 

In order to establish a basic understanding of the Market Learning thesis, we will have to take a closer look at the fundamentals of market exchange and social learning.

Market Exchange

The extraordinary dynamism and complexity of the market economy is the product of a deceptively simple phenomenon: market exchange.  The utter simplicity of trading this for that in order to move just a little bit closer to whatever it is we want, whether it’s financial security or personal expression, has nevertheless deceived and bedeviled economists for centuries.

While some form of market exchange probably dates back to the dawn of human civilization, it was not until the emergence of the modern era in 17th century Europe that this social practice began to assume anything more than a peripheral role in the organization of economic activity.  The emergence of modernity, that grinding transformation of social institutions characterized by the proliferation of rational thought and humanistic values, made possible and perhaps even necessary the increasing emphasis on market exchange as an authentic expression of this new potential.  With modernity came the natural science and moral philosophy that eventually, during the late 18th and early 19th centuries, coalesced into the market economics of Adam Smith, David Ricardo, John Stuart Mill, and the other classical economists.  In their revolutionary and controversial vision, the economy was a complex, evolving system of interdependent markets in which the factors of production—capital, labor, and land—were transformed into finished product according to the demands of the consumers, whose income was derived from the production processes in which they participated—as investors, workers, and land-owners.(1) 

As the market economy continued to evolve throughout the world, there arose in the late 19th and early 20th centuries a neoclassical school of thought whose analytical power and mathematical precision came to define the central paradigm of market economics.  Catalyzed by the concurrent insights of William Jevons, Leon Walras, and Carl Menger in the 1870s, and extended and refined through the following decades by scores of additional scholars, neoclassical economics continues to enjoy a remarkably wide consensus among professional economists.  In their highly formal and essentialist vision of the economy, the traditional notion of a market, as a specific forum to exchange goods, became the market, in the sense of a general model of economic action, the universal logic of which applies to whatever particular forms the market might take in the real economy.

The generally accepted neoclassical theory claims that market exchange between rational buyers and sellers interested in maximizing their own value will generate an equilibrium between supply and demand among all market participants.  As any former student of economics will recall (perhaps with a groan), this market model is typically illustrated using the obligatory supply and demand curves, whose point of intersection represents the market-clearing price for the particular good being exchanged (Figure 2).(2) 

The graph is usually accompanied by a story about how the market works to achieve the equilibrium.  If the price asked by sellers is too high to attract a sufficient demand for the good, then there will be a surplus in the market.  Sellers will then compete with one another to lower their prices until they find the right price necessary to clear the market of the surplus.  Likewise, if the price offered by buyers is too low to attract a sufficient supply of the good, then there will be a shortage in the market.  Buyers will then compete with one another to raise their offers enough to clear the market of the shortage.  This competition among sellers for a given buyer and among buyers for a given seller will move the market toward that point of equilibrium where there are no unsatisfied sellers or buyers.  Once this equilibrium is achieved, so the story concludes, the equilibrium price rules the perfectly competitive market.  That is, unless unforeseen changes in the market should happen to move the supply and demand curves and thereby shift the position of the market equilibrium.  In this event, the competitive process will once again, and as many times as necessary, move the market toward that implicit telos of equilibrium.

Though greatly simplified, this standard presentation incorporates the basic principles of neoclassical market theory as taught to every student of economics.  Unfortunately, the impressive graphs and sensible stories often lull the unsuspecting student into the false belief that orthodox market theory is about the market process.  The truth is, the paradigm guiding economists in their research is completely devoid of any market process.  Instead, when approaching some real-world economic problem, the standard research paradigm directs the economist to proceed as if market equilibrium already exists on the basis of what is known as constrained optimization—a decidedly idealistic model that assumes all market participants have optimized their respective gains from exchange consistent with their respective resource constraints, such that there is no way to make anyone better off without making someone else worse off.(3)  At an equilibrium devoid of any surplus or shortage, there is not a single market participant who could, for example, earn a higher wage using the same skill set or get a better deal on a new car, without at least one other participant incurring an unchosen reduction in welfare.

As Melvin Reder of the University of Chicago emphasized, “no concept is more basic to [neoclassical economics] than that of ‘the market.’  Yet, as we have seen, the paradigm proper says nothing about how a market functions.  All that it says is that (1) for every tradable item there may be only one price at any given time, (2) the price must be such as to make the quantity supplied equal the quantity demanded, and (3) every resource owner (trader) must be maximizing his utility.  Nothing whatever is said about how the market operates to cause the satisfaction of these conditions.”(4)

As the term clearly suggests, market equilibrium is “a condition in which all acting influences are canceled by others, resulting in a stable, balanced, or unchanging system.”(5)  However, this is not to say that economists are unconcerned with change in the real-world market.  But when analyzing the effects of some change in the market, such as a technological innovation, the economist will typically make comparisons between alternative equilibria in a process aptly named comparative statics.  The results of such comparative statics are illustrated as alternative positions for the supply and/or demand curves of a single market model, with no consideration given to the phase of disequilibrium which the real market must presumably pass through as it moves from one equilibrium to the next.  Like a motion picture in which the middle frames have been removed, leaving only the first and last frames to tell the whole story, we are left to wonder just how the market actually moves from one static equilibrium to the next (Figure 3).

Despite the fact that most economists would readily acknowledge that the dynamic process of a real market unfolds over time, their static model of the market is premised on the assumption that this process is instantaneous—that it has, in fact, already happened.  Thus, orthodox market theory implicitly claims that market exchange between rational buyers and sellers interested in maximizing their own value will instantaneously generate an equilibrium between supply and demand among all market participants.  And not just in one market, but in all markets, for all goods, whether they be substitute goods, complementary goods, or as-yet-unconceived goods.  Even the factors of production used to create these goods and the money used to facilitate exchange in all these markets would have to conform to the same standard.  The implications of market equilibrium have no spacial or temporal boundaries within market theory, because every market decision has implications for every other market decision that will ever be made throughout the entire multi-market system.(6)  Therefore, the true story of orthodox market theory is not the dynamic pursuit of ultimate equilibrium, as taught to beginning students of economics, but the static assumption of ubiquitous equilibrium.

We may grant economists the benefit of the doubt that their idealized market model serves a purpose in the analysis and prediction of specific market phenomena.  But we must also recognize that this paradigm represents the market process as the solution to a set of simultaneous equations presumed to accurately model the decision making processes of diverse people participating in highly dynamic markets.  Thus, buyers and sellers are not real people making tough decisions in the midst of great uncertainty, but mathematical derivatives of a presumed market equilibrium, continuously optimizing their exchanges according to the laws of calculus and probability.  This mathematical solution to the market problem under study might, at best, describe the quantitative results of the real market process, in the unlikely event that it was permitted to unfold over a sufficient period of time without any changes in the initial conditions.  But as for the qualitative and quantitative details of that process, it offers us nothing but the unstated assurance that it has always already happened.

Mark Blaug, an economic historian from the University of London, summed it up as follows: “after a century or more of endless refinements of the central core of general equilibrium theory, an exercise which has absorbed some of the best brains in twentieth-century economics, the theory is unable to shed any light on how market equilibrium is actually attained, not just in real-world decentralised market economies but even in the blackboard economies beloved of modern general equilibrium theorists.”(7) 

Perhaps we should not be too surprised at the difficulty some economists have had interpreting the dynamics of real markets, particularly the evident disequilibrium of the business cycle, when they begin their analyses with the assumption that real people can move markets toward eventual equilibrium as efficiently as a computer spreadsheet can calculate a mathematical solution.  Likewise, we should not be too surprised at the difficulty we’ve had in generating the market results we desire when most economists ignore the practical challenges associated with producing the market results they model.  It’s as if they believe that the market’s pervasive presence in our lives is sufficient to convey its subtle dynamics.  Yet if it was, then the market would not be at the center of such a protracted controversy.

So what exactly is the market process?  How do we make these exchange decisions?  We assume we know how to do it even though we’ve never been taught.  Yet we have trouble discerning whether we’ve done it well and just what we would do to improve our performance.  We may conclude that we have been successful market participants simply because we live comfortable lives and have few regrets about our previous exchanges.  But if asked to account for the systemic consequences and moral implications of our market success, we might become rather defensive.  Alternatively, we may criticize those who profit handsomely from a single market exchange or take issue with the difference in wages earned by people who seem to be doing the same work.  But if pressed to explain what was wrong with the exchanges, we might grasp in vain for some economic justification.  And when we look at the overall performance of the market, particularly a stock market that rises 50 percent in just two years and then loses it all again in the next two years, we have to wonder how well we’ve all been making our market decisions.(8)  Surely there must be some method to this madness.

Expecting people to engage in market exchange without providing any instruction in how to go about it is like expecting people to engage in conversation without teaching them how to read and write.  By being immersed in a particular culture, they will eventually learn through imitation how to converse reasonably well.  But they will not really understand the depth of what they’re saying, nor will they be likely to say anything more sophisticated than what they’ve already heard from the people around them.  The point is that we all learned how to engage in market exchange much the same way: through immersion in a market culture.  We learned how to swap this for that, how to get more than we give, and how to deal with the disappointment when we discover that we didn’t get what we expected.  Other than that, most of us are on autopilot as we buy, sell, work, earn, borrow, spend, and invest.

The truth is, if we don’t know how the market is supposed to work in the first place, then we’ll never really know why it doesn’t always work as promised.  In fact, we’ll never know whether it’s even valid to claim that it doesn’t always work as promised.  After all, how could we possibly validate such a claim?  Without some general standard from which to critique a particular market exchange or the whole performance of the market system, we are left with nothing but politics.

The key to understanding how the market works lies in the distinction between a technical theory that describes what market exchange has already done from the perspective of some detached observer and a practical theory that prescribes how market exchange should be done from the perspective of an engaged participant.  By shifting our attention between observer and participant, between static results and dynamic processes, and between ex post descriptions and ex ante prescriptions, we infuse market theory with the consciousness denied by neoclassical economics.(9) 

In our search for a theory of market exchange that prescribes how it should be done rather than presuming that it has already occurred, we can begin with a practical standard used in the real world of corporate finance: fair market value.  Fair market value may be defined as:(10)

The price at which a good changes hands between a willing buyer and a willing seller, where each is aware of the relevant information pertaining to the exchange, neither is under any compulsion to exchange, and both comply with the ultimate terms of the exchange.

This is actually a standard used by independent valuation advisors and market regulators in determining the value of privately-held stock and other securities.  It is intended to describe the conditions that prevail in an actual public market—conditions that the parties to a private market exchange should be creating for themselves with the help of their advisors.

As we take ourselves out of the third-party roles of the advisor or regulator overseeing the exchange and place ourselves into the role of the seller or buyer engaged in the exchange, we realize that what we have here is a fairly detailed prescription for how market exchange ought to be conducted.  According to this view, in order to accomplish a market exchange at fair market value, buyers and sellers have to willingly:

(1) disclose and acquire all the relevant information pertaining to the exchange;
(2) choose freely whether or not to engage in the exchange; and
(3) comply with the ultimate terms of the exchange.

Therefore, fair market value can be transposed into an actionable theory of market exchange that prescribes how it is supposed to be conducted in a real market.  For purposes of this introduction, we may simply summarize it as market exchange based on the mutual pursuit of transparency, choice, and accountability.

Social Learning

Just as the market economy is the ultimate product of market exchange, the more encompassing society owes its constructive blend of stability and adaptability to the inherently subtle phenomenon of social learning.  For the history of every society is a story of social learning about the ways of life worth living and the institutions of society worth creating.  And while learning always takes place within individuals—who are either learning their way up to, or learning their way beyond, the average level of their society—it must also take place between individuals if it is ever to produce the shared values and knowledge that inform the ongoing development of their society.

Jürgen Habermas, a social theorist from the University of Frankfurt, believes that this shared understanding is the implicit telos of all communication and its pursuit through social learning is the driving force of social evolution.  For Habermas, “the level of development of a society is determined by the institutionally permitted learning capacity, in particular by whether theoretical-technical and practical questions are differentiated, and whether discursive learning processes can take place.”(11)  “As learning processes take place not only in the dimension of objectivating thought but also in the dimension of moral-practical insight, the rationalization of action is deposited not only in forces of production, but also—mediated through the dynamics of social movements—in forms of social integration.”(12)  In other words, it is a combination of technical learning about how to get things done and practical learning about the things worth doing that yields the innovations that are eventually institutionalized throughout society.  Further development of the society will then be determined by the extent to which the current institutions, such as markets, corporations, legislatures, schools, churches, and families, foster both technical and practical learning.

All of which begs the question of how these discursive learning processes actually happen.  One of the most compelling attempts to understand them can be found in the school of thought known as Action Science.  Action Science is an approach to social learning that helps people reflect on the social world they create and learn to change it in ways more congruent with the values they espouse.  It was developed over the course of several decades of empirical and normative research by Chris Argyris of Harvard University, Donald Schön of the Massachusetts Institute of Technology, and some additional colleagues.(13)  Although, to my knowledge, Action Science has never been related to market theory, I believe it offers us the opportunity to improve our understanding of how markets really work and how they might work even better.

The central concept in Action Science is the theory of action.  A theory of action is a subconscious value system that tells people how to design their actions in order to achieve their intended results within particular social situations, including how to learn from experience to design more effective actions.  It represents a taken-for-granted way of perceiving, thinking, judging, and communicating that has been so successful in meeting past challenges that it is now assumed to be the best way to engage with one’s social world.  The main reason people develop these subconscious theories of action is because the daily challenge of interpreting real-world social situations and designing actions to achieve desired results would otherwise be very difficult and time-consuming.  So people simplify the challenge by drawing on a repertoire of tacit design principles, or action logics, that they have learned throughout a lifetime of more-or-less-effective socialization.(14)  We each have a theory of action, or perhaps a number of them, socially-constructed over many years as we’ve learned to maneuver in the world.  As I will argue in this book, each of us probably has a socially-constructed theory of market action, customized to reflect our own particular experiences in the market.(15) 

This idea of the theory of action comes to life in the Action Science model of social learning.  The basic structure of the social learning process can be illustrated as a three-step sequence of values, which inform the design of specific actions, which interact with the situation to generate certain results.  The results feed back into the design of appropriate actions and, in the event that the results do not conform to what was intended, people may design new actions consistent with their original values until they produce the results they desire.  This is referred to as single-loop learning because of the feedback loop that facilitates the learning reflected in the newly designed actions (Figure 4).(16)

In the event that none of the actions generates the desired results, an additional feedback loop may be activated and the values that informed the original selection of desired results and the original set of designed actions may be brought into question.  But because these values are largely tacit to begin with and are intertwined with our well developed (yet zealously guarded) story of who we are in the world, they are very difficult to surface, critique, and revise without some dialogue and the pressure that only crisis seems to provide.  If successfully revised, new values lead to a new interpretation of the situation and a new set of action possibilities, which, in turn, generate a new set of results.  This is called double-loop learning because of the additional feedback loop that facilitates the learning reflected in the new values (Figure 4).(17) 

Overall, the continuous, rapid, and largely tacit dynamics of a theory of action can produce an extraordinary variety of results, from creative innovations to destructive misunderstandings, all of which can be traced back to the (more or less effective) processes of single-loop and double-loop learning.  And because theories of action guide both individual action and collective interaction, it is easy to envision self-organizing systems of action and learning based on this relatively simple model.  In fact, this is a way of understanding the socio-technical development of organizations, markets, governments, social movements, and whole societies.  Therefore, it should come as no surprise that Argyris and his colleagues consider Action Science to be an exemplar of Habermas’s critical social theory.(18) 

The Action Science model of single-loop learning is consistent with the technical learning that supports what Habermas refers to as strategic action, by which he means action oriented toward the achievement of certain results.  Thus, strategic action entails a technical learning process in which the results of previous actions are evaluated on the basis of empirical or positive validity claims.(19)  Put simply, what the individual claims to have accomplished will be judged as relatively true or false with respect to the function of a particular system.  In other words, does it work?  This produces the technical knowledge—or techné—we normally associate with physicists, engineers, and positive economists, though it applies equally well to every market participant whose actions are designed to capture some profit or mitigate some risk.  Without it, we would know little of the world around us and could scarcely survive a day amid the apparent chaos.

In contrast, the Action Science model of double-loop learning is consistent with the practical learning that supports what Habermas calls communicative action, by which he means action oriented toward mutual understanding—not just of the facts associated with strategic action, but also the values that guide strategic action.  Thus, communicative action also requires a practical learning process in which the results of previous actions are interpreted on the basis of ethical or normative validity claims.(20)  In this case, what the individual claims to have accomplished will be judged as relatively right or wrong with respect to the norms of a particular culture.  Thus, is it appropriate?  This produces the practical knowledge—or praxis—that is characteristic of philosophers, theologians, and normative economists, as well as every market participant who has ever reflected on the moral implications of his or her own market exchanges.  Without this more humane knowledge, we would not want to live another day among our fellow humans, despite our technical grasp of the world around us.

By situating Action Science within Habermas’s expansive social theory, we can begin to appreciate its broadly applicable and refreshingly humane premises—namely, that people are by nature purposeful individuals who:

(1) draw on tacit values to make sense of themselves and the world;
(2) choose worthy goals and design actions to achieve those goals; and
(3) learn from experience in order to design more effective actions and, when necessary, develop new perspectives on themselves, the world, and the goals worth pursuing.

They inevitably work with others to address challenges of technical and practical significance, and the methods they use are their own personal and shared theories of action.

So how does Action Science relate to our provisional exemplar of market exchange?  It seems that Argyris, Schön, and their colleagues, working in collaboration with thousands of clients over the years, have developed their own exemplary method of communication that consistently facilitates both single-loop and double-loop learning.  This method of social learning is based on the following rules:(21)

(1) valid information;
(2) free and informed choice; and
(3) internal commitment to the choice and constant monitoring of its implementation in order to detect and correct error.

Thus, for now, we may summarize it as social learning based on the mutual pursuit of transparency, choice, and accountability.

Market Learning

Both market theory and social theory, at least in their practical versions presented above, are empirically grounded yet ethically compelling theories of how people make effective decisions in real world situations.  Understanding one can help us understand the other.  And with two methods of decision making based on the same general principles, one focused on market exchange and the other on social learning, we have the contours of a viable new exemplar: Market Learning based on the mutual pursuit of transparency, choice, and accountability.(22)

We can begin to clarify these contours by reframing market exchange as a specific type of action designed to achieve certain results in the market, from starting a company to finding a job to investing for retirement.  In doing so, we highlight the essential role of learning in the proper functioning of the market.  As Figure 5 illustrates, the actions in this particular model are all exchanges of property rights between two people based on the simple rule of quid pro quo—trading this for that on the basis of a mutual agreement.(23)

The values refer to the specific value systems we use to frame our market situations, determine our desired market results, design our exchange strategies, and learn from our market experiences.  They would certainly have to include the preferences, expectations, heuristics, and biases that economists have so carefully studied over the years.  But as we shall see, there is no good reason why they should not also include the deeper structures of cognitive, moral, affective, and volitional development that economists have so carefully ignored over the years.  Nevertheless, for the sake of simplicity, I will generally refer to them as values or value functions, a concept which elevates the neoclassical utility function to a more humanistic level.

Finally, the results include both the intended and the unintended consequences of our market exchanges, each of which can generate positive feedback for more of the same or negative feedback indicating the need for a change.  Both positive and negative feedback are incorporated into the single-loop market learning that either confirms or disconfirms the previous exchange strategy, as well as the double-loop market learning that either confirms or disconfirms the value function from which the exchange strategy was derived.  Thus, it is the same general model of social action and learning presented above, but adapted to produce a general model of market action and learning.

Taking this a step further, we can create yet another model of Market Learning by reconstructing the orthodox market exchange model of supply and demand (Figure 6).  This requires that we recognize the market process implicit in the static image of market equilibrium as a process of Market Learning.

In this view, the development within the market of supply and demand curves can be thought of as the collective result of single-loop Market Learning by individual market participants.  The buyers and sellers who participate in the market on the basis of their own personal value functions would bid and ask various prices for various quantities of goods, the most valid of which would result in the consummation of actual exchanges.  Over time, through their own individual yet interdependent processes of single-loop Market Learning, they would acknowledge the results of past exchanges, improve their own exchange strategies, and systematically pursue the best results they can achieve, consistent with their respective value functions and resource constraints.  However, because of the competition between sellers for a given buyer and between buyers for a given seller, this individual process of single-loop Market Learning may have the collective effect of moving the market toward an equilibrium price that clears the market, even though this would not necessarily be the goal of any individual market participant.  Of course, we need not claim that people ever optimize their exchange strategies or that the market ever realizes this potential equilibrium.  It is enough to claim that there is a dynamic process of individual yet interdependent learning that inadvertently moves the market in this general direction, despite all individual efforts to the contrary.

Building on that insight, we can now see that the supply and demand curves represent the potential results of the value functions that inform the exchange decisions of all market participants.  Therefore, the movement of demand and supply curves, as is often depicted in comparative statics, is actually governed by a process of double-loop Market Learning.  As soon as any of the buyers or sellers in the market changes his or her value function, perhaps due to a dramatic technological innovation, then that change would be reflected in the location of the corresponding demand or supply curve and result in a new point of potential equilibrium for the entire market.  However, the actual manifestation of this new demand or supply curve would be contingent upon the consummation of actual exchanges and the systematic improvement of these exchanges via competitive single-loop Market Learning.  Thus, it is double-loop Market Learning that moves the market toward disequilibrium, while simultaneously establishing the new value functions that will guide the subsequent process of single-loop Market Learning that moves the market back toward a new equilibrium.  Therefore, this reconstruction reveals that what moves the market between the order of complete equilibrium and the chaos of complete disequilibrium is the dual process of single-loop and double-loop Market Learning governed by the value functions of market participants.

If we can avoid reading too much into these formalized diagrams, then we can appreciate the simple fact that Market Learning can be understood in terms of the language, logic, and graphical representations of both social learning and market exchange.  So, no, this theory of Market Learning is not based on a vision of market participants as mathematical derivatives of a presumed market equilibrium nor as cybernetic systems of learning and action.  On the contrary, Market Learning is premised on the commonsense idea that buyers and sellers are human decision makers seeking reasonable outcomes in a market context largely of their own creation.  As such, it promises to illuminate some of those subtle dynamics of the market that are obscured by the static neoclassical theory.  And as the following chapters will demonstrate, it is based on far more than the guidelines of a relatively obscure valuation standard and a surprisingly similar learning theory.  In fact, it seems to be congruent with the essential insights of libertarian, egalitarian, and authoritarian economics, although not necessarily in the most obvious ways.

Those unfamiliar with market theory may have some difficulty appreciating the logical mechanics of this new integration with social theory.  But as the dialogue unfolds in the chapters ahead, it will be explored in greater depth and illustrated in a variety of different ways.  For now it is enough to know that the market process can be thought of as a process of social learning with two general dynamics:

(1) the selection of different exchanges based on previously selected values; and
(2) the selection of different values that enfold within them a host of potential exchanges.

As for the selection process itself, both market theory and social theory suggest that it is governed by the mutual pursuit of transparency, choice, and accountability.

However, to suggest that Market Learning is governed by the mutual pursuit of transparency, choice, and accountability is not to imply that markets are actually characterized by maximal, or even optimal, degrees of transparency, choice, and accountability.  Indeed, that dubious claim seems to be implied by the basic tenets of neoclassical economics.  When orthodox economists adopt the static assumption of ubiquitous equilibrium, they are implicitly claiming that markets are, in fact, always already in a state of perfect transparency, choice, and accountability, wherein single-loop and double-loop Market Learning have, presumably, already happened.

My hypothesis for Market Learning is more realistic, yet more subtle.  It is that markets are tacitly governed by the mutual pursuit of transparency, choice, and accountability.  Therefore, to whatever extent market participants do not intentionally practice this method, for whatever reason, Market Learning will be undermined and market performance will suffer in some fashion.  As a consequence, the market will tend to create incentives for people to live up to this standard of practice, if not in the short-term, then at least in the long-term.  And as I have just indicated, neoclassical market theory may implicitly support this claim even as it explicitly denies its relevance.  For the neoclassical model enfolds within it the full depth and breadth of the market experience, collapsed and condensed into the most fundamental of variables.  My task is to unfold this model enough to do justice to the primary features of a truly human market experience.

Those who have followed the presentation thus far may recognize some rather humanistic implications of this new synthesis.  What if the market system is a system of social learning and action as much as a system of goods production and wealth creation?  If so, it would seem to follow that those factors that influence social learning, from interpersonal trust to institutional design, would also influence our success in the market.  Likewise, those factors that influence our success in the market, from property rights to monetary policy, would, presumably, influence our efforts to learn about the world and effect positive change.  Thus, at a minimum, the Market Learning synthesis would reframe the dialogue about how best to foster learning and action, within the market and throughout all the institutions of society.  And all this would seem to relate to Habermas’s interest in the institutionally permitted learning capacity and its determinative role in social (and, as I will argue, economic) development.

Upon further reflection, more implications come to mind.  What if the market could be relied upon to correct its own errors, and not just errors of unexploited profit opportunities, but errors of outmoded values?  Wouldn’t that imply that market exchange was some sort of moral discipline and the market itself some sort of ethical system?  Then again, doesn’t the market undermine both noble and ignoble intentions?  Doesn’t market value automatically trump social values?  And what’s wrong with that?  Maybe there should be a place in our world for the market’s cold efficiency.  After all, isn’t one of the great virtues of the market that it allows us to buy, sell, work, earn, borrow, spend and invest in a values-free system, relieved of the burden of social learning?  Isn’t the market a private haven from our over-politicized society?  Shouldn’t we restrict our social learning to the domain of public policy and let politicians determine the best ways to manage the market?

Such counter arguments are certainly compelling and they form an important part of the economic dialogue among professional economists, who make a critical distinction between positive and normative economics.  As Milton Friedman of the University of Chicago famously argued, positive economic analysis is designed to answer the question what is? with respect to economic development.  It is concerned with understanding how the economic system has behaved in the past in order to predict how it will behave in the future.  Normative economic analysis, in contrast, is designed to answer the question what ought to be? with respect to economic development.  Therefore, it incorporates value judgments that are not necessarily grounded in the positive economic theories.(24)

For example, positive economics might claim that a minimum wage law will tend to increase unemployment among those low-wage workers whom the law was designed to help. We can expect this because when the state intervenes in the market and sets a minimum price that is above the market’s natural equilibrium, this higher price will tend to discourage demand and encourage supply, thereby creating a surplus of the good—in this case, low-wage labor looking for work. However, the question of whether the state should pass such a law to support some low-wage workers at the expense of others who will, according to the positive theory, suffer from unemployment is considered to be a matter for normative economics.

Therefore, the debates over economic policy are often framed in terms of positive claims vs. normative claims that are difficult to reconcile, because one set of claims calls for empirical validation to ensure the policy works, while the other calls for ethical validation to ensure it is appropriate.  Moreover, this framing is typically only implicit as the protagonists often have a difficult time differentiating the positive claims from the normative claims, thereby undermining their attempts at validation.  Worse yet, many debates over the state’s economic policy are entirely based on competing normative claims that pit one ethical perspective against another ethical perspective, or one political philosophy against another political philosophy, with little or no recourse to positive theory and empirical evidence.  Thus, in trying to follow the political debate over minimum wage laws and other attempts to manage the market, one may never hear the positive economic arguments over the endless din of normative allegations, from the “economic injustice” attributed to the Republicans to the “class warfare” attributed to the Democrats.(25)

The fascinating thing is, while most arguments about the market are inherently normative, few of these arguments address the normative dimension within the market.  That’s because very few economists and politicians acknowledge that the market even has a normative dimension.  The typical economic libertarian contends that the market’s inherent amorality, its ethical neutrality, is a great virtue.  Those who might acknowledge a certain normative flavor to the choice behavior of market participants will nevertheless insist that it can be safely ignored in the quest for a positive social science.  Not surprisingly, the typical economic egalitarian sees the market’s inhumane amorality as a terrible vice, the root cause of our economic and social problems.  Those who might admit to the same normative flavoring will tend to dismiss it as a shallow, selfish morality corrupted by the so-called “market values” of profit, loss, risk, and return.  Therefore, it seems that either our values aren’t present when we engage in market exchange or, if they are present, they are either irrelevant or corrupted.  One way or another, the question of values within the market has been rendered undiscussable within the mainstream economic dialogue.  It is therefore no surprise that the economic authoritarians have claimed for themselves both empirical and moral authority over what so many people mistakenly regard as a purely technical system of economic development.

As provocative as it may be to both market theorists and social theorists, Market Learning is premised on the idea that the normative judgments we naturally (and quite tacitly) incorporate into our social actions are also, just as naturally (and just as tacitly), incorporated into our market exchanges.  When we reflect on this for a moment it seems reasonable, though perhaps a little embarassing, that all our market exchanges bear the imprints of our personal and shared values—not necessarily those values we espouse, but evidently those values we actually apply in the market.  Therefore, for those of us who are struggling with difficult questions about what we ought to be doing to solve the world’s economic problems, or perhaps just our own personal economic problems, it would seem that Market Learning might have something to say about bridging the chasm between what is and what ought to be in economic development.

To insist, as many economists will, that proper science has no interest in social values, that knowing what is should be divorced from considerations of what ought to be, is not only a self-contradictory paradigm, but also a rather disingenuous stance that implicitly denies the active role that economists have always played in guiding human affairs.  Keynes was right when he observed that economic ideas are more powerful than is commonly understood,(26) and many economists are rather proud of this ideological power.  Their positive quest to understand and control the social process of the market is unavoidably normative in its capacity to shape the consciousness and culture of market societies.  Moreover, their academic indoctrination of new students, particularly those disciples of applied economics, the self-assured and unreflective MBAs, represents a normative intervention whose impact on society can hardly be overstated.  Yet their repudiation of normative interests only empowers those politicians, bureaucrats, and lobbyists whose normative interests and positive methods are demonstrably anti-market and anti-social.  Worse yet, it bestows a patina of legitimacy to those misguided market participants who, unaware of their own anti-market sentiments, claim the right to violate the most basic norms of civilized society in the interest of their own hollow brands of business performance and market success.

Regardless, if Market Learning is a valid theory of how the market really works, then we will discover that we have little choice about the existence of a normative dimension to the market—only choices about how we want to engage with this normative dimension.  Suffice to say that a purely positive approach to understanding the market’s normative reality leaves much to be desired and much more to be explored.

If we are to develop an Integral Economics for a 21st century economy centered on knowledge and values, then we must begin with a conception of the market that differentiates and then integrates its positive and normative dimensions through a combination of technical and practical learning—techné and praxis.  Market Learning begins with this very conception and offers us the possibility of a critical theory of the market, by which I mean a theory that simultaneously illuminates how the market is supposed to work, why it doesn’t always work as promised, and how we can make it really work for us.  The proposed exemplar of this critical theory, the mutual pursuit of transparency, choice, and accountability, may be considered an Integral Market Hypothesis™ summarizing how real value is, and ought to be, created in the market.(27)

Market Learning suggests that, given the right conditions, people can reflect on the market they create and learn to change it in ways more congruent with the values they espouse, including, perhaps, the integral values of freedom, fairness, efficiency, effectiveness, growth, and sustainability.  It’s an appealing prospect, to say the least.  However, in order to preclude any utopian pretensions, we would do well to resurrect Hayek’s sobering perspective that the present crisis of our civilization may be the result of genuine error on our own part and the pursuit of some of our most cherished ideals has apparently produced results utterly different from those which we expected.(28)

Indeed, the ultimate challenge in creating an Integral Economics is to expand our conception of the market to embrace and resolve those deeper dilemmas of the modern/postmodern mind that have until now most assuredly undermined our pursuit of these most cherished of economic ideals.  If this effort should rise to that challenge, then the mutual pursuit of transparency, choice, and accountability would constitute a market-based, yet socially-conscious method for integral economic development—an authentic third way economics that could justify the libertarian faith and engage the egalitarian skepticism.

© 2002 by Daniel J. O'Connor.  All Rights Reserved.

_______

(1)  These classical terms for the factors of production are still in common use, although each is undergoing a certain revision to accommodate the factors of production associated with the new mode of economic development based on knowledge.  For example, information technology is just another form of capital, knowledge work is just the latest form of wage labor, and even knowledge itself, in the form of codified information or intellectual property, can be framed as yet another commodity resource analogous to oil and food (although it must be briefly noted that while oil and food can only be used once, intellectual property can typically be used many times over).  The dynamics of the knowledge economy still play out within and between the three factor markets.

Another revision of these classical terms that seems to be coalescing is the adoption of the term capital to refer to each and every factor of production, with the use of adjectives to distinguish the three classes of technological capital, human capital, and natural capital.  Given that each factor of production earns a type of income from the production process, I find this capital-income, stock-flow nomenclature to be the most useful.

(2)  My presentation of neoclassical market theory and general equilibrium is based on Reder (2000) pp. 43-65 and Blaug (1996) pp. 277-405 and pp. 549-95.

(3)  The proof of a welfare maximum associated with general equilibrium was developed by Wilfredo Pareto, whose proof is often referred to as Pareto-optimum. Blaug (1996) pp. 570-74.

(4)  Reder (1999) p. 59.

(5)  The American Heritage Dictionary of the English Language, Fourth Edition.
Houghton Mifflin Company.  http://education.yahoo.com/reference/dictionary/index.html

(6)  Proof of a general, multi-market equilibrium as a logical and mathematical possibility was pursued most aggressively by Leon Walras, subsequently achieved by Abraham Wald, and later generalized and refined by Kenneth Arrow and Gerard Debreu, who shared a Nobel Prize for their work. Source: Blaug (1996) p. 553.

(7)  Blaug (1996) pp. 569-70.

(8)  The S&P 500 stock market index closed at 957 at the end of August 1998.  Two years later, at the end of August 2000, it closed at 1,518, for a 59% increase over just two years and an average annual compounded growth rate of 26%.  The index closed at 916 at the end of August 2002 (having recently been as low as 798), for a 40% decrease over just two years and an average annual compounded growth rate of -22%.  Thus, the average annual growth rate of 26% for the first two years was more than completely reversed by the average annual growth rate of –22% in the next two years. Source: Standard & Poor’s Corp.

(9)  I do not imply that technical market theories exclusively “describe what market exchange has already done” nor that practical market theories exclusively “prescribe how market exchange should be done.”  As I will carefully explicate in later chapters, there are technical market theories with at least implicit prescriptions for market observers and participants, as well as practical market theories with important descriptions for market participants and observers.  For now, my intent is to focus the reader on the distinctions between those very common technical theories that are primarily descriptive of what an observer might see and those very rare practical theories that are primarily prescriptive of how a participant might act.

(10)  There are many specific definitions of fair market value espoused by valuation advisors, bankers, accountants, and regulators, all of which are, to my knowledge, consistent with this general definition.  For example, in the Internal Revenue Service Revenue Ruling 59-60, fair market value is defined as “the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.  Court decisions frequently state in addition that the hypothetical buyer and seller are assumed to be able, as well as willing, to trade and to be well informed about the property and concerning the market for such property.”

This definition clearly highlights the first two strands of my composite definition—where each is aware of the relevant information pertaining to the exchange and neither is under any compulsion to exchange—while implying the existence of the third strand—both comply with the ultimate terms of the exchange.  The idea that the parties to a market exchange at fair market value are in some sense mutually accountable for honoring the terms of their contract is clarified by simply considering the alternatives in which they are not held accountable by one another or they intentionally avoid accountability.  Thus, the fact that this definition exists within the regulatory context of IRS Revenue Ruling 59-60, with its obvious implications for, and frequent enforcement of, ex post accountability, represents the third strand in my composite definition of fair market value.

Furthermore, this third strand of ex post accountability is often only implied in market theories which presume either: (1) perfect information and rational choice and, therefore, no need for ex post accountability; or (2) an institutional context of laws and regulations that enforce contracts and property rights, while providing the parties to every exchange with the opportunity to hold the other party accountable via the judicial system.  This implied accountability feature of orthodox market theory will be discussed in subsequent chapters.

(11)  Habermas (1975) p. 8.

(12)  Habermas (1979) p. 120.

(13)  Argyris and Schön (1978), Argyris (1982), Argyris, Putnam, and Smith (1985), Argyris (1990), and Argyris (1993).

(14)  Argyris, Putnam, and Smith (1985) pp. 80-1.

(15)  I am not aware of any typology of actions created by Argyris and his colleagues, though I have found it interesting to consider the possibility that we develop distinct theories of action for particular contexts in our lives—e.g., market, family, school, politics, religion.  Furthermore, we may develop distinct theories of action appropriate to each successive level of psychological development through which we pass over the course of a lifetime.  Thus, taken together, we can see that each of us may have a reservoir of multiple, interrelated theories of action aligned with the basic structures of psychological development as well as the different contexts of our lives.  Therefore, an understanding of why people act the way they do in particular situations might include elements of both developmental and contextual theories of action.  I explore the implications of these ideas for economics in Chapters 5 and 9.

(16)  Argyris, Putnam, and Smith (1985) pp. 80-8. Figure P-3 is based on the figures in Argyris, Putnam, and Smith (1985) p. 84, Argyris (1990) p. 94, and Argyris (1993) p. 50.

(17)  Argyris, Putnam, and Smith (1985) pp. 80-8.

(18)  Argyris, Putnam, and Smith (1985, 69-79) specifically describe Action Science as a critical theory congruent with that presented in Habermas (1971), a claim with which I am in agreement.  My presentation of the parallels between Action Science and Habermas’s social theory includes Habermas’s later developments and, therefore, must be acknowledged as moving beyond the presentation in Argyris, Putnam, and Smith (1985).  However, in my view, Habermas’s subsequent developments only serve to accentuate the parallels between his social theory and Action Science.

For more on Habermas’s critical theory of society, an extraordinary intellectual project that has evolved over several decades, see: Habermas (1971), Habermas (1975), Habermas (1979), Habermas (1984), Habermas (1987), Habermas (1990), Geuss (1981), McCarthy (1994), Braaten (1991), Bernstein (1994), and Morrow and Brown (1994).

(19)  Habermas (1979) pp. 117-20.

(20)  Habermas (1979) pp. 117-20.

(21)  Argyris, Putnam, and Smith (1985) p. 99.

(22)  The subtle distinctions between the two exemplars of market exchange and social learning used to construct the Market Learning exemplar will be explored in considerably more detail throughout the remainder of the book.  For example, readers may have noted that the particular version of accountability presented in the market exchange presentation did not specifically mention the detection and correction of error as did the version of accountability presented in the social learning presentation.  On the basis of such an observation, one might wonder whether I have glossed over such an important distinction and adopted a fuzzy notion of accountability in a rather hasty construction of the Market Learning exemplar.  Rest assured, that I have simply tried to convey the essential hypothesis to be explored throughout the remainder of this book.  Before the end of the book, I will examine this and many other subtleties within the proposed exemplar of Market Learning, including a careful look at each and every term used in the summary definition: market, learning, mutual, pursuit, transparency, choice, and accountability.

(23)  I believe there is much to be gained by framing a typology of economic action that includes exchanges, gifts, transfers, and thefts of property.  If such a typology is valid, then the integral theory of economic action for a particular individual or collective would have to account for decisions regarding which type of economic action to use in pursuit of particular economic goals—i.e., the mix of exchanges, gifts, transfers, and thefts that best satisfies the positive and normative criteria—as well as the specific decisions subsequently made within each domain of economic action.  This suggests a wider, deeper understanding of the mutual pursuit of transparency, choice, and accountability wherein even the choice of whether or not to participate in the market (and the other economic domains) is made as a part of one’s integral economic meta-praxis.  This is developed over the course of the entire book and presented in full in the Epilogue.

For now, I will simply suggest that this model might contribute to an Integral Economics capable of embracing the valid perspectives of libertarian, egalitarian, and authoritarian economics.  For example, at the risk of over-simplification, we may find it useful to describe libertarian economics as a preference for the use of exchanges via the market sector to accomplish our individual and collective economic goals—e.g., promoting entrepreneurship and dynamic markets for technological, human, and natural capital.  Egalitarian economics might therefore constitute a preference for the use of gifts via the civil sector to accomplish our economic goals—e.g., promoting non-governmental, non-commercial enterprises with a social mission or perhaps just promoting a more altruistic approach to market exchange.  Authoritarian economics would constitute a preference for the use of third-party transfers, or forced redistributions of income and wealth, via the state sector—e.g., promoting the use of government taxation and expenditure to address perceived economic problems that do not seem to be adequately resolved by the market and civil sectors.  Those who cannot or will not achieve their economic goals via the market, state, and civil sectors would resort to theft or some other illegal and unilateral acquisition of property within what we might call the criminal sector as a means to their chosen ends.  With tongue in cheek, we might call this barbarian economics.  Of course, most of us have elements of all four economic philosophies within us, to varying degrees, thereby giving us the opportunity to choose among the various types of economic action and tailor our responses to various economic challenges.  Most importantly, for those interested in a more integral economics, we must carefully investigate the ways in which all four economic philosophies have manifested in each of the four economic domains—e.g., egalitarianism, authoritarianism, and barbarianism join libertarianism in the market sector.

Notice that this provides a way of thinking about how the actual mix of market, state, civil, and criminal sectors is determined within a society, while also providing a way of contrasting the different economic cultures across different societies.  With some economic concepts to support us, we might say that as we find that sustainable allocation of economic decisions among the economic sectors, we move the meta-institutional socio-technical system toward some sort of social equilibrium that reflects the population’s integral theory of economic action.  Put simply: economic reality comes into alignment with economic philosophy.  But we can also see that there are times of economic crisis in which economic reality becomes misaligned with economic philosophy, society moves toward a great disequilibrium, and the long-standing allocation of economic decisions among the different sectors is challenged and revised.  One such economic crisis occurred in the 1930s and is referred to as the Great Depression.  Some economists would characterize the crippling “stagflation” of the late 1970s and early 1980s as another such crisis.  Fewer still, but nevertheless some, would look to our present course of economic development and ask whether we are heading into another economic crisis.  Economic crises such as these present triple-loop or third-order challenges that require integral vision and logic to foresee, understand, and navigate.  This is the core competence required of all those who would presume to design and lead our economic institutions, whether they be institutions in the market, state, or civil sectors.  More on this in the Epilogue.

(24)  See for example Friedman (1953) pp. 3-43.

(25)  There are of course four potential combinations of positive and normative claims, which we can think of as answers to the questions does it work? and is it appropriate?: (i) yes / yes; (ii) no / no; (iii) yes / no; and (iv) no / yes.

The first two combinations, where the positive and normative claims are aligned, lead to relatively easy agreements.  For example, when orthodox economic theory claims that some policy will work and politicians judge that it is also appropriate in light of their constituents’ wishes or their own political ambitions, then the policy is very likely to be approved.  Likewise, when economists and politicians conclude that a policy won’t work and is also inappropriate, it is just as easily rejected.

But when there is a conflict between the positive and normative claims, as there often is, the decision is far more difficult.  How the decision makers deal with this conflict says a lot about their economic praxis, not to mention their political praxis.  For example, would they consider the possibility that their positive or normative economic theories are wrong?  Would they consider alternative economic theories that might yield different conclusions?  After all, some economic theories contend that the government can create jobs through fiscal policy, while other theories claim that such policies destroy more jobs than they create.  And how would the politicians address the conflicting claims?  Would they cover-up the positive claim that one of their policies will not work in order to push through the legislation demanded by one of their special interest groups?  Or would they explain the uncertainties and trade-offs that are a fact of life in a complex political economy?

An interesting example of the conflict between positive and normative claims arose with the discovery by politicians on July 28, 2003 that the Defense Advanced Research Projects Agency, the research and development branch of the U.S. Department of Defense, was exploring the potential to develop what they called a Policy Analysis Market to support the assessment of various political and security risks.  According to the official webpage at http://www.darpa.mil/iao/FutureMap.htm, the DARPA FutureMAP (Futures Markets Applied to Prediction) program would “concentrate on market-based techniques for avoiding surprise and predicting future events.”  These market-based techniques might support “analysis of political stability in regions of the world, prediction of the timing and impact on national security of emerging technologies, analysis of the outcomes of advanced technology programs, or other future events of interest to the DoD.”

Although the official webpage was rather vague about the specific form that these market-based methods might take, it was reported in the press (Hulse, 2003) that initially “the market would focus on the economic, civil and military futures of Egypt, Jordan, Iran, Iraq, Israel, Saudi Arabia, Syria and Turkey and the consequences of United States involvement with those nations.”  Several politicians who were critical of the initiative claimed that this market might have allowed traders to buy and sell futures contracts that would reflect their own expectations for, say, a major terrorist attack in Israel or a North Korean missle attack.

So what are the positive validity claims of this Policy Analysis Market?  As the Defense Department said in its statement to Congress, “Research indicates that markets are extremely efficient, effective and timely aggregators of dispersed and even hidden information."  For example, “futures markets have proven themselves to be good at predicting such things as elections results; they are often better than expert opinions" (Hulse, 2003).

Indeed, one of the great virtues of a market is its unmatched ability to assemble in one spacio-temporal pattern of price data the private expectations of a great diversity of people whose opinions might not otherwise be factored into the experts’ assessment of the future.  It is believed that those people who actually participate in such a market, putting their own money at risk, will tend to be people with some expertise or inside information that is expected to generate profits.  Furthermore, over time, the competitive process of the market tends to weed out those traders whose vision and knowledge are found lacking.  Thus, a spontaneously self-organized and sufficiently dynamic market might well produce consensus assessments of potential future events that are different and even better than the assessments of expert analysts studying multiple and contradictory intelligence reports.  In theory, by allowing such a market to self-organize, the government could mine a great deal of patterned information on a diversity of security issues, including potentially significant intelligence on the nature, location, and timing of specific risks and crises.

It was a rather creative idea and it certainly referenced legitimate market theory to support its positive validity claims.  However, there are some good reasons to suspect that this futures market might have failed on purely positive grounds, though not if we adhere strictly to the idealistic tenets of neoclassical market theory (which, incidentally, is the theory base for the valuation models of futures, options, and other derivative securities).  For one example, consider the fact that this futures market would not be a spontaneously self-organizing process, but rather a state-organized system in which participants would almost certainly be profiled and monitored while trading state-created property rights of questionable legitimacy.  The positive validity claims of market theory that were employed in support of the Policy Analysis Market presuppose a spontaneously self-organizing process of exchange involving property rights legitimized, first and foremost, by the parties to each exchange.  Absent these conditions, we have reason to doubt the positive claims made in support of what appears to have been conceived as a state-managed market bearing only superficial resemblance to the decentralized market of market theory.

For another example, consider that if terrorists wanted to fool intelligence analysts they could manipulate the market by deliberately trading against their own knowledge of future terrorist activities.  They could sell contracts on a particular type of terrorist attack even though they were intending to carry out such an attack.  They could buy contracts on a completely different type of attack even though they had no plans to ever conduct such an attack.  In this way they would subtly undermine the quality of the patterned information reflected in the spatio-temporal price structure of the market by deliberately ignoring the objectivist profit motive they are presumed (according to neoclassical theory) to be exercising in the market.  And because there are no property rights and no markets for actual terrorist attacks, the implied underlying securities of which the futures are merely derivatives, there is no way to measure the profit, loss, risk and return for terrorists when they ultimately carry out (or fail to carry out) an attack they were secretly planning.  Therefore, the incompleteness of this particular futures market would contribute to its potential manipulation by the very people the Department of Defense would like to discover and control.

Considerations such as these might have constituted a sufficient disconfirmation of the positive validity claims of this otherwise creative initiative.  But the economic dialogue in Congress was not primarily concerned with positive validity claims.  Whatever its positive merits and demerits might have been, the initiative was ultimately blind-sided by its own normative implications.  When politicians discovered this program, they denounced it as “morally repugnant” and even illustrated this claim by asking their colleagues to imagine how it would feel to learn of a foreign government-sponsored futures market that allowed people to bet on the potential assassination of an American politician (Hulse, 2003).  While watching excerpts of the dialogue on television, I heard one politician exclaim that he didn’t care whether or not the market could work, because it was so morally offensive that we shouldn’t even consider it.  Therefore, the normative inappropriateness of the state’s economic proposal was so pronounced as to silence any further discussion of its positive merits or demerits.  Needless to say, the program was hastily scrapped and its public webpage immediately removed from the DARPA website.

Ironically, on July 30, 2003, a Dublin-based trading site called TradeSports.com began making a market in a futures contract on Admiral Poindexter’s employment as head of DARPA, with the term set for August 31, 2003.  The very next day, Admiral Poindexter resigned under pressure.  Presumably, somebody somewhere profited off this resignation.  One may wonder how many more futures contracts of this nature will be forthcoming in the years ahead.

(26)  “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood.  Indeed the world is ruled by little else.  Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.  Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.” Keynes (1997) [1936] p. 383.

(27)  The Epilogue will present this critical theory exemplar in considerably more detail, incorporating the key insights gleaned through the three intervening Dialogues.  Until then, Jane Braaten’s characterization of Habermas’s critical theory provides some helpful context for this Prologue: “It is a feature of a critical theory of society in general… that it attempts a ‘self-clarification of the struggles and wishes of the age,’ in such a way as to guide those struggles.  Toward this end, it should also explain how a person, group, or society has come to be engaged regularly in practices that, in fact, are not in his, her, or its interest, as a result of some feature of that society.  Another feature of critical theories of society is that they identify deep conflicts, or potentials for society-wide crises, inherent within the social, political, and economic institutions of modern capitalist societies.”  Source: Braaten (1991) pp. 10-1.

For more on Habermas’s critical theory of society, see: Habermas (1971), Habermas (1975), Habermas (1979), Habermas (1984), Habermas (1987), Habermas (1990), Geuss (1981), McCarthy (1994), Braaten (1991), Bernstein (1994), and Morrow and Brown (1994).

(28)  “We are ready to accept almost any explanation of the present crisis of our civilization except one: that the present state of the world may be the result of genuine error on our own part and that the pursuit of some of our most cherished ideals has apparently produced results utterly different from those which we expected.” Hayek (1994) [1944] p. 13-4.

Comments

[Laurel]

Hello, I am an economist trained at UCLA in the 1970s. My professors claimed that economics was a value free science -- and I never believed them. In one simple example, prices depend on demand curves which depend on the distribution of income, among other factors. Yet the professors took the distribution of income as a given and never considered the ethical implications of various distributions of income.

I'm wondering if there is a close link between what you are writing on Market Learning and double links and information theory. A few years ago Stiglitz won the Nobel Prize in economics for his work on information theory. I talked with him briefly on KUOW and as I remember it the theory adds some dynamics to microeconomics relating to how information impacts the movement towards equilibrium (I don't think this is quite right). When I talked to him he indicated that what is taught now is different than what was taught when I went to school and the seventies. I have not pursued this any farther than looking up on the Nobel prize site a description of why he won.

While I agree with you that Market Learning impacts demand curves, I don't believe that economists would disagree with you. My understanding is that market learning incorporates values as well as learning over time. I wish I could remember the context for this... I have heard economists say if you want natural goods, organic goods, energy-efficient goods that a person can choose to go out my market and purchase those goods (assuming enough demand so that the goods are produced; people can even get solar products now and they certainly aren't cost-effective when only looking at the dollars...). I'm not sure how to distinguish this from what you are arguing.

Towards the end of this chapter use state "Market Learning begins with this very conception and offers us the possibility of a critical theory of the market, by which I mean a theory that simultaneously illuminates how the market is supposed to work, why it doesn’t always work as promised, and how we can make it really work for us." It seems to me that any alternative theory of economics also needs to explain how the economy works today.

I am curious to read how the market is supposed to work, and the values underlying your description of how the market is supposed to work.

Laurel (I'm local and heard of your work through Anita)

[Daniel O'Connor]

Laurel,

Thanks for the feedback. I think that what I am writing will, once published beyond this brief introduction, address more deeply all the issues you mentioned and more.

If you have any specific questions about it, I'll do my best to address them.

Daniel