November 8, 2016

There is no such thing as THE market

Comment on Editor on ‘There are two price levels in capitalism’


In standard economics, the market is a clear-cut thing and it is depicted as SS-curve―DD-curve―equilibrium, or what Leijonhufvud famously called the Totem of Micro/Macro. This construct is the one-size-fits-all formal description of THE market.

It is known since the founding fathers, though, that there are at least TWO different types of markets that run on different principles. Consequently, Ricardo excluded the pricing of ‘rare statues and pictures, scarce books and coins’ from his formal theory of value and called them non-produced consumption goods (Mandler, 1999, p. 68). The labor theory of value was always meant to apply to produced consumption goods only, more specifically to non-durable consumption goods.

The subjective value theory of Jevons/Walras/Menger blurred this distinction again. The peak of absurdity was reached with the “solution” of the famous water/diamond paradox, that is, the explanation of the respective price of water (= consumption good) and diamonds (= store of value, asset) by marginal utility.

Since non-produced consumption goods have indeed been produced, albeit some time ago, their price has to be determined in the secondary market. The pricing in the secondary market is entirely different from the pricing in the primary market. Hence it is not correct to speak of THE market without qualification. As Tobin put it: “’Market’ is one of the most overworked and imprecise words in economics.” (1980, p. 796)

In actual fact, the representative economist has NO idea how interdependent markets work. It is one of the greater blunders of Orthodoxy to apply the silly supply-demand-equilibrium plaything across the board. The price determinants of the primary and the secondary market are entirely different (2011).

But the situation is in fact far worse. The markets of consumption goods and investment goods run on different principles as Keynes made clear. Finally, the market for financial assets/liabilities also runs on different principles as Minsky made clear. Therefore, the standard supply-demand-equilibrium tool is not applicable to these markets.

The worst thing, though, is that economists have not realized until this day that THE product and THE labor market run on different principles. As a result of this, economists have not realized that an elementary market system that consists of a consolidated product market and a consolidated labor market is unstable. This means that, as a matter of principle, there is NO such thing as an overall equilibrium in the market system. The system is NOT self-regulating, there is NO such thing as an Invisible Hand and this has NOTHING to do with market imperfections or rigidities, or information asymmetry. This is a STRUCTURAL feature that is built into the core of the market system.#1

The orthodox market theory is provably false, but traditional Heterodoxy has not developed a valid alternative that could replace supply-demand-equilibrium as the most ridiculous construct in the history of modern science.#2

Egmont Kakarot-Handtke

Kakarot-Handtke, E. (2011). Primary and Secondary Markets. SSRN Working Paper Series, 1917012: 1–26. URL
Mandler, M. (1999). Dilemmas in Economic Theory. Oxford: Oxford University Press.
Tobin, J. (1980). Are New Classical Models Plausible Enough to Guide Policy? Journal of Money, Credit and Banking, 12(4): 788–799. URL

#1 Unemployment is high because economics is false
#2 For the correct approach Essentials of Constructive Heterodoxy: The Market