The historical development of the system of free enterprise has promoted markets in a peculiar manner. This peculiarity relates to the conditional character of the freedom enjoyed by different factors in the market. Free markets have typically fostered the freedom of certain factors at the expense of certain other factors.
Here freedom means the presence of all the conditions conducive to the continued development and augmentation of factors particularly, labour and capital. We would not be wide off the mark if we were to reduce the argument for the sake of brevity and say that traditionally and historically markets have been characterised by the relatively greater freedom enjoyed by capital vis-à-vis labour.
Based upon the relative freedom of one or the other factor, we can delineate two types of free market. One happens to be historical and present predominantly around the world as it is the current form taken by local, regional, national and global markets. This is a market where capital has been free at the expense of labour wherein capital enjoys relations of dominance. Let’s call this free market type-1 market.
The other is a counterfactual and is still waiting to see the light of the day lying scattered amongst a billion aspirations. This is that other market where labour would be free relative to capital. It would be a market where the interests of labour would be served primarily and those of capital secondarily but in a manner that would also leave ample scope for the accumulation of capital. However, this accumulation would not be an accumulation by centralisation but one based on decentralised distribution of capital. Let’s us call it type-2 market.
In a society built on type-2 market, salaries and wages would have to be both realistic and rational. They would be realistic when they are indexed to the cost of living. Determination of baseline remuneration would be made based on the commodity bundle representing perishables (food, drink and clothing), durables (domestic technological products or modern conveniences including private conveyance or public transportation), and what I call ultra-durables (education and socialisation that largely make up Solow Residual). Wages and salaries would be rational when remuneration would reward the specific mix of skills and knowledge possessed by individuals at any given time.
Type-2 market is also necessitated by the differences in nature between individuals, households and firms. Firms are composite entities and therefore can easily internalise costs. Households are also composite but less elaborate structures making it more difficult for them to internalise transaction costs.
One of the historical reasons for the evolution of the market was this difficulty of households to internalise transactions efficiently by means of subsistence production. Individuals, though sited in households, tend to be even more fragile and cannot even match the level of cost internalization by households, let alone the differentiated level of firms. From this viewpoint, individuals need markets more than firms do, so it is but reasonable that market transactions be based primarily on the needs of the labouring individuals and secondarily on those of firms or capital.
In order for type-2 to come into being, the ratio of rent to wage income will have to be rebalanced too. Rent here means income earned through investment or ownership of capital.
If the ratio of rent to wage were to be too high in favour of rent it would mean type-1 is flourishing. A very low rent-wage ratio would make the existence of market altogether impossible and may also severely undermine the general pursuit of freedom in society. This would be a society of the kind that was witnessed in the former Soviet Union and its satellites where state, instead of justly mediating the relationship between capital and labour in a manner that keeps capital conducive to the goal of versatile human development, became the ultimate site of non-market-based unfettered capital accumulation.
Even type-1 market cannot be exonerated from the responsibility of having increased the sum total of human misery in the world. The global history of the last three hundred years would suffice to corroborate this claim. The concept of social enterprise or social business based on cooperative production, horizontal distribution and communal consumption can be quite helpful when thinking of alternatives to type-1 or soviet-style accumulation.
Social enterprise stresses that profit earned should be so invested as to ensure its diffusion that levels an uneven social reality rather than concentration that leads to the formation and maintenance of steep social peaks and abysmal troughs. Latin America can provide ample examples of such diverse social experiments – some successful and others not so – in devising ways to bringing about more cooperative and less risk-prone market transactions and adapting them to our particular social situation.
The writer is a Senior Policy Analyst for OIC’s Standing Committee on Scientific and Technological Cooperation
