Page 67 - Global Political Economy_Understanding The International Economic Order

CHA PTER T HREE
Despite claims of the universality of economic laws, economists have
extreme difficulty identifying such laws, and agreement on the valid-
13
ity of any specific law may be impossible to achieve. For this reason,
John Stuart Mill referredto economics as an inexact science andchar-
acterizedits laws as tendency laws; that is, as generalizations regard-
14
ing what will happen if no disturbing event should intervene. Obvi-
ously, differing national policies and social systems can become
intervening variables.

Nature of a Market
The concept of the market as a self-regulating andself-correcting
“smoothly functioning machine” governedby objective laws anduni-
versal principles is at the heart of economics. Moreover, this concept
leads to the conclusion that the free-market system, under certain cir-
cumstances andassumptions such as complete information andnon-
oligopolistic competition, leads to an optimal allocation of given re-
sources. Economists work to define the laws governing markets of all
kinds, andtheir principles andgeneralizations are the best available
guide to explain how markets work and, to a lesser extent, why they
sometimes do not work. Although all of us have observedandpartici-
pated in markets where goods, services, and money are exchanged,
“the market” conceivedby economists is an abstraction or intellec-
tual construct. While some markets may have a physical location like
a stock market or an auction, many markets do not have a physical
existence that one can experience directly. Indeed, the market econ-
omy as conceived by economic theory consists only of interdependent
equations that are solvedcontinuously andsimultaneously.
Economists believe that a market arises spontaneously to satisfy
needs. Human beings are by nature economic animals who, according
to Adam Smith, have an inherent propensity to “truck, barter and
exchange.” To facilitate exchange andimprove their well-being, peo-
ple create markets, money, andeconomic institutions. However, once
a market exists, it is believedto function in accordance with its own
internal logic and without central direction. Coordination among the

13
Obvious candidates are the laws of supply and demand and the law of diminishing
returns. However, even if they do qualify as laws, the claim that they are laws of
economics rather than physics or psychology is in dispute.
14
This discussion is based on Roger E. Backhouse, Economists and the Economy:
The Evolution of Economic Ideas. 2ded. (New Brunswick, N.J.: Transaction Publish-
ers, 1994), 225.
54