Obsolete Free-Market Metaphors

by Brian Dean (originally printed in In Business magazine)

“There is no such thing as society”. So said Mrs Thatcher. She apparently meant that “society” can be seen only as an abstraction or cultural metaphor. Adherents of free-market economics have often expressed a dislike of terms like “society” and “social concern”. The market system has traditionally had an individualistic bias – its central premise is that the market registers choices made by separate, sovereign individuals who freely consume for themselves.

If every economic effect is seen to result from the free choices of autonomous, atomistic consumers and entrepreneurs, then “society” will be viewed as a nebulous metaphor with little economic relevance. Those who blame their financial problems on an aspect of “society” are unlikely to receive any sympathy from free-marketeers.

Ironically, critics of the competitive market system would argue that “free market” is itself a metaphor, an idealised abstraction whose central premise fails to take into account the vast array of social factors affecting human motivation and behaviour. For instance, social phenomena such as advertising, state education and the mass media inevitably tend to influence the value systems which determine what individual consumers will buy. The notion of a ‘totally rational’ individual, completely immune from ‘social’ influences, is naive. And contrary to free-market thinking, ‘society’ has aspects which can’t be explained or predicted in terms of the rational choices made by its individual constituents. To view a complex phenomenon like a human society as no more than the sum of its parts is to subscribe to a kind of reductionism belonging to the 18th century (which was when classical free-market economic theory originated).

Only Britain and the USA put the free-market idea of individual self-interest so far above notions of ‘social concern’. The European capitalist model is more ‘communal’ in its emphasis, as reflected, for instance, by the Social Chapter of the Maastricht treaty. Meanwhile, Japan – possibly the most economically successful of all capitalist nations – has a more communitarian model than even Europe. To the Japanese, the main purpose of business is to benefit society.

‘Communal’ does not infer communism or statism, but merely cultural perspectives which recognise that wealth-creation may not be an entirely individualistic pursuit.

Of course, there are good reasons for the Anglo-American belief that economic self-interest must take precedence over social concern. Adam Smith observed that merchants acting from selfish motivations tended to produce more of public value than those motivated by benevolence towards society. The reasons for this are easy enough to follow – self-interest fuels competitiveness and, according to classical economists, shifting resources to those who compete successfully and away from those who compete badly is a process which promotes economic growth, thus benefiting everyone.

But just as the metaphors of, say, Freudian psychology mirror the technology of the times (eg hydraulic build-up of pressure, letting off steam, etc), classical economic metaphors reflect the Newtonian mechanical view of the world. There is an almost mathematical satisfaction to be gained from understanding the classical economic notion of ‘supply and demand’, as if predicting economic effects is a simple problem of physical mechanics. The market ‘mechanism’ is even regarded as a sort of universal scientific law by many economists and business people.

Professor Paul Ormerod, of the Henley Centre forecasting organisation, has pointed out that Western economic theory has been conspicuously unsuccessful at making the kind of accurate predictions you would expect from a scientific discipline. He goes as far as saying that little in standard economics texts is known to be true, and that orthodox economics still has no effective answer for basic problems such as unemployment.

So is the classical view of the effectiveness of self-interest within a ‘free market’ a universal law or just a cultural prejudice favouring the greedy and predatory? In their book, The Seven Cultures of Capitalism, Charles Hampden-Turner and Fons Trompenaars describe Adam Smith’s doctrine of self-interest as “perhaps the world’s leading example of cultural bias and historical circumstance disguised as a principal of science”. They argue that market forces depend on specific cultural contexts and shouldn’t be seen to act in an impersonal, universal way – the market shouldn’t be revered as a neutral arbiter ‘out there’. Their book is rich in examples which contradict the fundamental assumptions of mainstream economics.

Sweden, for example, has been something of an enigma to classical economists. A strong social democratic welfare state, with substantial government control moderating economic fluctuations, has put Sweden in the “soft” category of capitalism (but with very little industry nationalised, it is outside the “socialist” categorisation). If business is necessarily a ruthless struggle between self-interested competitors, how did Sweden’s “softness” (social equality, humanitarianism, welfare and environmental concern) lead to such a strong economy? Sweden has had one of the world’s highest standards of living (in 1992 GDP per person was $12,000 higher than in the UK), and working conditions and labour-management relations have generally been excellent. Economists rationalised that Sweden was a small, insulated exception to universally harsh economic laws, but, in fact, since the late nineteenth century Sweden has been a world economy highly exposed to international trends.

Similarly, in Germany, Holland and Japan, benevolence towards ‘society’ (as expressed towards employees, customers and local communities) is very much part of their economic strategies, rather than simply a hoped-for effect of the market mechanism. This tendency hasn’t harmed the economic growth of these countries (from 1979 to 1991, manufacturing grew by 33.3% in Germany and 60.4% in Japan, compared with 4.9% in Britain. Also, GDP per capita in Britain continued to lose comparative advantage with these countries during this period).

Britain’s leading companies are extremely profitable, and, in fact, competitiveness tends to be measured here solely by the level of profit extracted. Obsession with profit, however, is not a common factor in successful economies. In Germany the pursuit of technical excellence and service to society through producing quality products is more valued than profit making. The Japanese see capitalism as a system in which communities serve customers, rather than one in which individuals compete to extract profits – profitability is the means, not the end. With the emphasis less on the short-term profits of the individual owner/shareholder, there is a degree of co-operative activity in German and Japanese industry which is quite alien to the British and American “lean and mean” approach.

From the western perspective of analytical either/or logic, we must choose either co-operation or competition – we can’t have both at the same time. Or, to put it in terms of the mechanistic metaphor, we can’t push and pull simultaneously. So, following classical economics, we choose competition and get rid of co-operation. However, using metaphors of “integrated wholes” (eg “organic”, “cybernetic” or “structured network” models), much of European and Japanese industry has learnt how to reconcile co-operation with competition. This is an especially important trend in the area of high technology.

But what does reconciling co-operation and competition mean in practice? The question we should probably ask is: What is the thing that competes? – an individual, a company, an industry, or a nation? Early on in the development of capitalism, individuals competed with other individuals, then, later, competition was largely between companies whose employees co-operated (although fierce competition is still encouraged between individual employees in the UK and US).

Japan has spread the level of co-operation further still, in the keiretsu (a co-operative conglomerate), whose divisional companies co-operate and share technological knowledge and resources (in British and American conglomerates, the divisions compete with each other for the funding of the holding company, and share nothing). Thus, the development of capitalism may be seen as “..a function of evolving co-operation, which spreads outward, pushing competition to its own boundaries” (The Seven Cultures of Capitalism).

In order to compete successfully at the national level, European nations have largely adopted the internally co-operative approach, in contrast with the UK, where the political strategy has been to increase internal competition. The UK approach derives from a belief in the universal nature of the market mechanism – ie the conviction that all-out competition will work at all levels.

Describing economic progress in terms of evolving co-operation, rather than ruthless self-interested competition, may have important benefits, particularly in knowledge-intensive markets (eg high technology), where a co-operative free flow of information throughout a company (or industry) is likely to prove more effective than jealous guarding of privileged knowledge by ambitious individuals. In fact, the information technology revolution is increasingly leading to commercial scenarios which the mechanistic metaphors of classical economics are unable to deal with.

The metaphors we use to describe economic success have a flip side that we can’t easily escape from. If we believe that a competitive and individualistic (rather than co-operative and communitarian) approach is the way to succeed, then it follows that economic failure must be the fault of individuals who aren’t competing hard enough, rather than ‘social’ factors (blaming ‘society’ isn’t allowed). We therefore resent the poor for their lack of individual initiative, and despise people who blame their problems on social circumstances.

There is a lot of irony in this. The emphasis on “success” being solely the individual’s responsibility fails to take into account the role of social consensus in defining “success”. We often hear politicians talking piously about the responsibility of individuals to contribute to the country’s economic success, but they rarely say what they mean, which is that people should conform to their definition of “contribute”. ‘Society’ in fact holds us accountable for not complying with its definition of our individual responsibilities.

– Acknowledgement: This article makes use of some of the ideas expressed in the The Seven Cultures of Capitalism by Charles Hampden-Turner and Fons Trompenaars (Piatkus, 1994), which we highly recommend.