Cover image for The market system : what it is, how it works, and what to make of it
The market system : what it is, how it works, and what to make of it
Lindblom, Charles Edward, 1917-
Publication Information:
New Haven [Conn.] : Yale University Press, [2001]

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296 pages ; 22 cm.
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HB501 .L512 2001 Adult Non-Fiction Central Closed Stacks

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In the wake of the collapse of communism, we hear much about the victory of the 'market system'. Just what is the market system? This clear and accessible book begins by answering this question, then goes on to explain how the market system works and what it can and cannot do. Charles E. Lindblom, writing in nontechnical language for a wide general audience, offers an evenhanded view of the market system. His analysis of the great questions that surround the market system is sometimes unexpected, always illuminating: Is the market system efficient? Is it democratic? Does it despoil the environment? Does it perpetuate inequalities? Does it debase personality and culture? Big choices are yet to be made about the future of the market system, observes Lindblom. He outlines what these choices are and how they will affect not only our economic well-being but also our social and political lives. For market systems organise or coordinate more than just the flow of commodities, he shows. They influence human behaviour in all its dimensions.

Author Notes

Charles E. Lindblom is Sterling Professor Emeritus of Economics and Political Science at Yale University.

Reviews 3

Booklist Review

The collapse of the Soviet Union and the end of the cold war have made the terms communism and capitalism seem obsolete. Instead, we have the "market system." Russia's deteriorating, gangster-driven economy has been labeled a market system. So has Britain's so-called third way. At the same time, the excesses of globalism and the growing power of corporations, the depletion of natural resources and the degradation of the environment, challenges to welfare, and unprecedented prosperity have all been attributed to the market system. Lindblom's goal is to reconcile these discrepancies. A professor emeritus at Yale University, Lindblom neither "celebrates" nor "deplores" the market system; he hopes to have us understand it. He defines the market system as the organization or coordination of "activities not through governmental planning but through the mutual interactions of buyers and sellers" and explains that it encompasses labor, agricultural, capital, consumer, and business markets. As Lindblom makes these abstractions more concrete, he also catalogs the benefits and liabilities of the market system. --David Rouse

Publisher's Weekly Review

Ever since the worldwide collapse of Soviet-style communism, the triumph of the "market system" has been spoken of as a fait accompli, while the market has been touted as a panacea for every social ill from failing schools to Third World poverty. Lindblom (Politics and Markets: The World's Political-Economic System) explains what this "market system" is, details how it works, makes a strong case for its advantages and keenly outlines some of its limitations. Exploring the relationship between markets and democracy, for instance, he points out that while it's true that all democratic societies have market systems, we can't conclude that markets always foster democracy, because many antidemocratic societies also have market systems. Addressing nothing less than the nature of cooperation in human society, his discussion spans history, philosophy and political theory, an unusually multidisciplinary approach for an economics text. Lindblom, a professor of economics and political science at Yale University, also explores the relation of the market system to efficiency, ethics, social equality, power, the natural environment and culture. Posing bold questions such as "[I]s there in our time an alternative to the market system... ?" Lindblom provides refreshingly few definitive answers, making his the most mild-mannered economics book published in some time, as well as one of the most cerebral. (Apr.) Forecast: Admirably clear and penetrating, this book deserves to find a broad audience interested in an intellectual approach to economics. Unfortunately, since the title sounds dull, the author is little-known to general readers and the book is hard to categorize, it may not achieve the sales it deserves. (c) Copyright PWxyz, LLC. All rights reserved

Choice Review

The dissolution of communist systems and the associated abandonment of central economic planning in favor of a market system is the rationale for entering into an articulate and wise exposition of the so-called market system. Lindblom (emer., Yale) analyzes the market system in detail, citing it as a method of social coordination brought about by mutual adjustment among market participants, namely the buyers and sellers of goods and services. However, government in the modern market system does not disappear: it provides for defense and education and dispenses social welfare programs, necessary activities to smooth the operations of a private enterprise system. The author also identifies major issues confronting the market system, e.g., the role of huge multinational corporations; difficulty in finding employment for low-skilled workers in a high-tech society; the conflict between the economic growth and environmental protection; and the inability of the market to reduce existing income equality. Furthermore, he argues that no necessary connection exists between the market system and democracy, as has been frequently asserted. Lindblom rejects fundamentalist views of the market system, viewing government as supportive through interventions in selective situations. This book should have broad appeal and is highly recommended to the general public as well as to social theorists of all disciplines. All collections. H. I. Liebling emeritus, Lafayette College



Chapter One Market System Ascendant The massive social changes with which the twentieth century gave way to the twenty-first have written the preface to this book. Much of the world began an unexpected transformation. Communist systems are abandoning central planning of their economies and struggling to establish the market system in its place. China freed its farmers to produce and sell for profit rather than under instruction from the state. It began moving industry out from under the system of state-prescribed targets and quotas. Less buoyant, Russians try to swim in the same tide, both their Berlin Wall and their economy having come down in ruins.     Much earlier, the democratic world had been surprised to see the democratic socialists of Western Europe abandon their traditional ideological hostility to the market system. After World War II, they no longer pressed to abolish it. Instead socialist parties in France, Italy, and Britain advocated a new kind of market system, with state-owned rather than private market enterprises. But not for long. They began to turn to the familiar capitalist private corporation while they pursued their socialist aspirations through income redistribution and the social programs of the welfare state. And so, like the British Labour Party today, they talk not of state-owned enterprises but a "third way"--a way not yet well defined but in any case embracing the market system.     Meanwhile, nonsocialists, both liberal and conservative, have taken a renewed interest in the market system, resisting both government regulation of business and social welfare programs. Much of their change of heart seems motivated by what they see as failures of the state: bureaucratic lethargy, for example, or excesses of partisanship. Some of it, however, arises out of the case now often made for the market system--as, for example, in the drive toward a common market for Europe, in globalization, and in exploiting the opportunities of the "New Economy."     Despite this great current of change, transition of communist systems to the market system may never be complete. Some nations of the former USSR--perhaps Russia itself--may return to old ways rather than continue to suffer the hardships of transition. Many Russians see their embryonic market system as a cousin to gangsterism, so exploitative has become their transitional system--whatever it might be called. Russia today reveals some of the worst aspects of the market system. The end of the story has yet to be written.     What a beginning to a century! These great changes and failures ask for a book neither to celebrate nor deplore but to understand the market system, around which the dramas revolve. One can study economics for many years without understanding the market system. I graduated from college without understanding it. If my instructors understood it, they did not take the trouble to explain its structure. They taught about trees rather than forest, about inflation, monopoly, and international trade. They somehow failed to present the overarching structure of social organization called the market system. You perhaps have seen a picture full of diverting detail that only on careful examination abruptly reveals a face or other object that had been hidden in all the detail. That was my problem: detail was abundant, but for years I could not find the face.     For at least 150 years many societies have been trapped in an ill-tempered debate about market systems. Now we have an opportunity to think about these systems with a new dispassion and clarity. Market ideologues have learned that there is little to fear from communism. They can come away from their ideological barricades and talk sense about the market and its problems. On their side, socialist ideologues have realized that aspiring for a better society is not enough. They have to face the complexities of constructing one.     Even so, it will not be easy to think straight about the market. Mainstream economics still stumbles because the market's dazzling benefits half blind it to the defects. On the other hand, many critics perceive the benefits only through the smoke of their burning disapprobation. An often tight-lipped rigidity persists, even in the most scholarly discourse. One does not find much intellectual interchange on the market system between economists, most of whom admire it, and those scholars of history, literature, and philosophy who, like the sociologist-philosopher Jürgen Habermas, judge its consequences for values like freedom, rationality, and morality.     One's understanding of the market system is sometimes impeded by a sense of mystery or magic about how it works. Adam Smith acknowledged as much when he wrote, more than two hundred years ago, that market activities are coordinated by a "hidden hand." In our time, the full account must describe the workings of both the hidden hand and the many visible hands. What Is This Market System? We need first to draw a distinction between market system and market. Although not all societies embrace or contain a market system, all existing societies make use of markets. Walking down a street in either Maoist China or the USSR, a visitor would have seen markets for haircuts, bicycle repair, and consumer commodities. An observant visitor would soon also have found markets (perhaps more black than legal) for raw materials and machines. Whenever people frequently pay other people to do something--sing a song or dig coal--those interchanges constitute markets. Yet despite the commonalty of such interchanges in Maoist China and the Soviet Union, these societies were not called market systems, because a market system exists only when markets proliferate and link with each other in a particular way. Just as a basket of parts does not make a computer until they are assembled or used in a particular way, so an assortment of markets does not make a market system until they are employed in a particular way--specifically to organize or coordinate many of the activities of a society.     The market system organizes or coordinates activities not through governmental planning but through the mutual interactions of buyers and sellers. To establish a market system it is not enough that people buy and sell. Also required is that their purchases and sales, not central authorities, coordinate the society. This gives us a definition of the market system sufficient for our immediate purposes: it is a system of societywide coordination of human activities not by central command but by mutual interactions in the form of transactions.     I find it useful to contrast the market system with another method of organization, though only small scale: the household. In premarket households, paternal or other authority coordinated the activities of members of the household to try to provide the necessities and pleasures of life. The household was organized to produce for its own use whatever was needed or wanted. It coordinated child rearing, housekeeping, and cultivation of the soil. Householders might only now and then reach beyond the household for some assistance--perhaps musicians for a wedding--or for a commodity they could not provide for themselves. They might only rarely see a coin. The market system appeared only when these households began to attempt production for sales rather than for household use--that is, when they became deeply engaged in producing for distant others rather than simply for family. Only then arose such large-scale and detailed social coordination as market systems provide.     Market systems did not wholly displace the production-for-use household. The household remains a bedrock of the contemporary market system, continuing to organize much of child rearing, food preparation, and maintenance of the home. What, then, changes with the rise of the market system? Typically, the household allocates one or more members of the family to go outside the household with production for sale--he becomes a cobbler, making shoes to sell--so that the household can obtain objects and assistance that it cannot produce on its own.     If not just a household but a whole society is to be coordinated, then in a wider social process the participants have to be assigned to the many tasks that need doing. Tools and machinery have to be made available to those who can use them. Farmers need to feed not only themselves but those engaged in industry. Hypothetically, this can all be arranged through central command, but in historical fact, it has been largely arranged by buying and selling.     Three kinds of markets are the most familiar: labor markets, agricultural markets, and markets for services and goods that industry provides to consumers. Two less obvious kinds of markets are no less necessary for a market system. One is markets for intermediate services and goods produced for other producers--for example, computer chips sold to enterprises that assemble computers from purchased parts. The other is markets for capital, specifically markets for loans, securities, and other kinds of investments. In these two kinds of markets the major participants are no longer ordinary people but entrepreneurs, enterprises, and financial institutions.     The rise of market-system coordination of the production of services and goods for sale outside the household was slow and uneven, but by about 1800, England qualified as a market system (some historians put it earlier), and Western Europe and North America followed.     Drawing people out of the household into a wider coordination was, however, an idea antedating the market system. The usual formula for doing so was central coordination. Ancient Egypt's rulers drew labor from each household in order to put it to work on irrigation projects, defense of the realm, and construction of temples and pyramids. Although royal coordination of a vast labor force declined in subsequent centuries, the idea of societywide central coordination did not. It was still alive more than three thousand years later, in the mid-nineteenth century, in the desire of communists and some socialists to organize society by central direction. At their most ambitious, they envisaged doing away with money, prices, and markets, all considered obstructions to rational and humane social organization. Because some utopians still aspire to it, the idea deserves a name. I shall call it physical planning.     A new idea of central planning arose in a late nineteenth- and early twentieth-century reaction against the market system: convert the great structure of trade with money and prices into a centrally coordinated system. The new planners first came to power in Russia, through the Russian Revolution, and later in China, with a few small countries following in imitation. They were not twentieth-century Pharaohs or advocates of physical planning. They were more sophisticated planners proposing to make use of money and prices and even markets--but not of the whole market system, which they abhorred--as instruments of their central control. It is of course such a system that fueled the great twentieth-century communist challenge to the market system. Dimensions of Market System Like the state, the market system is a method of controlling and coordinating people's behavior, if you call on a team of gardeners to do some weeding, you, not the state, exercise the control that brings them into coordination with you. They turn up and do the job. You did not coerce, compel, or even command them, but you succeeded in getting them to do what you want by paying them. When a hundred workers predictably appear at the gate of a factory every morning at 8, their appearance is not commanded by an agency of the state. They are there because they are controlled and coordinated by promise of money payments.     Can it really be true that the apparent disorder of buying and selling accomplishes anything so profound as control and social coordination? Everyone can see that the state accomplishes some coordination of the whole national society, but it is harder to see that the market system also does so--in fact organizes both nation and globe. But is it not true that people are either coordinated by the state or are left to do as they wish, all going their own way, as in the market? That is a colossal misperception. In market systems people do not go their own way; they are tied together and turned this way or that through market interactions. If they were in fact left to go their own way they would not achieve the prodigious feats of production that characterize market systems. That market participants see themselves as making free and voluntary choices does not deny that they are controlled by purchases and sales.     The market system is not, however, Adam Smith's laissez-faire, not a market system tied to a minimal state. In our time it is a governed market system, heavily burdened or ornamented with what old-fashioned free marketers decry as "interferences." In these systems, the state is the largest buyer: it has a long shopping list, including a military force, highways, and the services of police officers and bureaucrats. It is a mammoth supplier as well, although in providing many of its services--elementary education, as an example--it usually gives away the "product" rather than sells it. Rather than let supply and demand set prices, it often does so itself: keeping agricultural prices high to aid farmers, or holding agricultural prices down to curb distress among the urban poor. It forbids some kinds of sales: most nations now prohibit slavery. It taxes, not simply to raise revenue but to curb some industries, like tobacco. One way or another it subsidizes most industries, almost all of which hold their hands out. It is a gigantic borrower and a frequent lender. It engages in sales promotion abroad to enlarge overseas markets for its entrepreneurs. It collects enormous funds to disperse through social welfare programs. And it is a powerfully active manager of supplies of money and credit both through its controls over banking and its own fiscal policy.     Some of these governmental activities are necessary to make a market system flourish. Some are at least helpful, some are wasteful. Some represent nothing better than raids on the public purse. However evaluated, they are part of the story of how market systems work.     Although buying and selling may be natural to humankind, market systems are not. They have in fact arisen only recently in history. Also not natural are the complexities of corporate law, the abstract shares in ownership called stocks and bonds, the rituals of collective bargaining. Neither natural nor God given, market systems are also not all alike. And just as today's differ from those of fifty years ago, they differ from those the future will bring.     One can imagine a market system in which all enterprises, or at least all the large ones, are state owned and operated as market enterprises. They are market enterprises because their outputs and inputs are decided by market buying and selling rather than by governmental command. One can also imagine a co-op market system in which all enterprises are owned by their customers. Another possibility is ownership and operation by employees. But the now ascendant market system is of course the one that Karl Marx called capitalism, now more often called the private enterprise system. That is the kind of market system that will get most of our attention, but not to the exclusion of other kinds of market systems and of interesting market-state hybrids.     Movement today to the market system intertwines with another great recent movement--from dictatorship to democracy. The Soviet Union expired in the pursuit of both. But the two movements differ: China's masters push toward market system but not democracy. And many countries with market systems have yet to attempt democracy or, like Mexico, only now reluctantly are doing so. If you applaud the movement to the market system as necessarily democratic, you are at least premature and possibly plain wrong: both China and Russia may carry market systems into and through the twenty-first century without democracy. In ostensibly democratic societies, market skeptics sometimes fear that the market system may bring an end to democracy. One of their fears is that big corporations already exercise powers inconsistent with democracy; and that multinational corporations overwhelm small nation-states. Again, we can begin by trying to get the facts straight, difficult as it is to unravel the many connections between market and democracy. What We Don't Know Market advocates say that Western experience has now conclusively shown that the market system can make a society wealthy. They also say that it is clear that it also protects personal freedom--market societies do not degenerate into such impositions as the forced labor camps of the USSR. Market successes prove, they might add, the obsolescence of tired old attacks on the market. So, they say, we now all understand the system. They believe that we need technical studies by economists to maintain its health--doctors for the body economic--but that we adequately understand the elementary anatomy and physiology of the market system.     Yet it might be that technology and industrialization rather than the market system deserve credit for making societies wealthy. And don't some countries with market systems--Indonesia, among others--trample on the very freedoms that market systems are alleged to strengthen? Or must we confess that many nation-states are troubled about just what place to give to market system--the Japanese government, for example, first heavily indulging and then backing off from its heavy state participation in market investment decisions? Most market societies also seem troubled by the task of combining market system with welfare state. They are also uncertain about market regulations to protect the environment. In some, an especially troubling question has arisen: Can market employment be made available for all able-bodied adults, or does the market combined with high technology now begin to render the least skilled workers redundant, in effect exiling them from the market system, to be supported by state welfare programs?     Issues like these pose a great deal more than technical problems that require only the professional skills of economic doctors. They are great issues of liberty and equality and of individualism and community, as well as more tangible issues, like conflict between growth and environmental protection. If one can hope for at least modestly intelligent choices on issues like these, they will come from a better understanding of what the market can or cannot do or, more precisely, what people can or cannot choose to do through their use of the market system. For example, if the market system in fact constitutes an irreducible source of income insecurity or extreme income inequality, that would set upper limits on the uses of tax and welfare policies to redistribute income.     Despite the growing consensus in favor of the market system, it is of course possible that the millions of people who now endorse it are on the wrong track. Such consensus as exists is a political phenomenon, not a scientific demonstration. We cannot simply ignore the many highly informed dissenters who believe that experience with the market system has already shown, to anyone who cares to look dispassionately at the evidence, that it has put us all on the road to disaster.     They argue that it exhausts the world's resources and also threatens an environmental catastrophe through, among other possibilities, global warming. They also show that it has already created health-threatening urban environments while simultaneously drawing ever more people into the cities. Clearly, they can also show, it has not put an end to the inhumanity of acute poverty. And all these ills, they argue, it will bring to the newly marketized societies. That alternatives to the market system might do worse is not a good reason for failing to examine what the market system may do to its participants.     None of these and many other claims for or against the market system--all significant for our futures--is obviously true or obviously false. Is the market system efficient, as its advocates believe? Look at its prodigious output. Is it inefficient? Look at poverty and inadequate medical care. Do market societies spoil the environment and exhaust our resources? Yes, but so do all societies--perhaps we mistake the cause. Does the market system degrade personality and culture? On that point, what shall we count as evidence--persons who pursue money to the exclusion of any other values, or the institutions for science, education, and art that flourish in market societies? Is the market system ally or enemy of democracy? What we call democracy does not exist except in market societies; yet the influence of money in politics arouses suspicion that none of these societies are very democratic.     Revealed in this debate are a few overarching questions about the market system. What does the market system do for the market-oriented societies? What accomplishments and ills has it brought them? Is it likely to do the same for the countries now constructing market systems? What future does it offer? What different kinds of market systems are worth considering? In short, to what condition has it brought us, and to what condition can we now take it?     Talking about the future now seems to require a new vocabulary. Terms like information revolution, photonics, cellular entrepreneurial networks, and globalization suggest the dimensions of the world's rush to a technologically sophisticated future. It looks as though information has become the basic resource, displacing in part the traditional trio of labor, land, and capital. How are these highly mobile new resources of information or knowledge to be organized or coordinated, not only nationally but globally? Almost no one proposes to use only the central authority of each of the nation-states. Nor have I heard many voices advocating the creation of a world state to coordinate the new technologies of information and knowledge. What I do hear is that the new forces will "open up vast new markets," that markets are "spreading around the globe," and that "information technology is accelerating the rate of change in market societies." All the more reason to understand the market system as, for good or bad, the big globalizer. It is the major institutional instrument for undercutting the autonomy of individual nation-states and for quickening the restless movement of labor and capital over the face of the earth.     Although dispute on the market system is endless, we are going to establish some key facts about it. It can coordinate human behavior or activity with a range and a precision beyond that of any other system, institution, or social process. But it is a harsh and often cruel coordinator. It is both an ally and enemy of personal freedom--ally because it opens up a range of choice for each participant, but enemy because it closes off some major choices that a free people could otherwise make. It destroys many mammoth historical inequalities and then introduces inequalities of its own. It achieves extraordinary efficiency because it permits participants to make precise and calculated choices. But it is grossly inefficient because of the choices it has closed off. Historically, it has supported democracy--there are no democratic nation-states except in market societies--but it has sabotaged important democratic features of ostensibly democratic states. It is also a rival to democracy because both market system and democracy allow people to exercise popular or mass control over elites in government and business. Its scope is much broader than often conceived to be; it can do more things than most people think it can. Yet, paradoxically, it does not operate in some arenas everywhere identified with it. We shall also find grounds for believing that no market system has yet been well supported by the state. Do I have a central or overarching thesis in this book? Yes, if you want one; no, if you don't. Some common theses are not mine. I do not try to convince you that you should, taking everything into account, admire or deplore the market system. Nor do I suggest that the historical argument on the market system has come to an end with a victory for the market system. My thesis is that there are great unsettled issues about a place for the market system in the future of any society.     But what moves me to write is a desire to examine the market system as an extraordinary social process, just as one might, in wonder or even awe, examine an enormously complex machine or biological organism, whether benign or threatening. Although the market system is roughly familiar to all of us, not even economists wholly understand it; and I as an economist want to extend my own understanding as well as that of the reader. I can think of many purposes to which an improved understanding can be put, and the gain in understanding is itself a pleasure.