John Kay offers a European perspective on the debate of between the superiority of a market economy against a centrally planned economy. Is there empirical evidence that a market economy is superior? John Kay says yes:
“The fall of the Berlin Wall in November 1989 …marked the end of the most extensive controlled experiment in the history of social sciences – the division of Germany into two economic zones, one centralised and planned, the other a market economy. After forty years, the gap in living standards between the two was so extreme that the experiment was terminated.”
Why is capitalism so successful over the long run? Kay gives 3 reasons:
- Prices act as signals; the operation of the price mechanism is a better guide to resource allocation than central planning
- Markets function as a process of discovery, the chaotic process of experimentation through which a market economy adapts to change…Centralised systems experiment too little. They find reasons why new proposals will fail – and mostly they are right in their suspicions, because most experiments do fail. But market economies thrive on a continued supply of unreasonable optimism.
- Markets yield benefits from the diffusion of political and economic power… A one sentence description of why some countries are poor and others rich is that the politics and economics of poor countries are dominated by rent-seeking and the politics and economics of rich countries are not.
But isn’t a market economy one motivated solely by greed? Can a country motivated solely by greed be successful? According to Kay, “This is the economic environment of Nigeria and Haiti, and it does not work.” Instead, the greed must be tempered through the mechanisms of trust relationships and reputation. To get a broader perspective, Kay concludes with the following:
“Markets are not a well-oiled machine: they more closely resemble a constantly changing, adaptive biological system. Pluralism is their motive force, their essence is chaotic, their development inherently uncertain. If we could predict the evolution of markets, we would not need markets in the first place.”
Source: Kay, John (2009) “The Rationale of the Market Economy: A European Perspective,” Capitalism and Society: Vol. 4: Iss. 3, Article 1.