I grew up in the 1990s in a tiny Northern Bavarian town, at the border between what was then West Germany and Czechoslovakia. The hilly landscape with its quiet woodlands and baroque church steeples continued seamlessly on both sides. But on the Czechoslovakian side, all the buildings and the infrastructure appeared old and dilapidated. When my family took its first car trips after the fall of the Iron Curtain, my father would navigate around the potholes of neglected streets while I would sit in the back seat and anxiously stare at the washed-out facades of farmhouses, which the front gardens full of hollyhock and asters hardly managed to hide. The 19th-century villas in the once grandiose spa of Mariánské Lázně—where Goethe had met his last love, the 17-year-old beauty Ulrike von Levetzow—seemed sad shadows of their past glory. I saw hardly any supermarkets or other shop windows with wares; people seemed to buy food in faceless concrete buildings sitting at dimly lit crossroads.
Run-down buildings, with aging plaster peeling off, no loud billboards (though they would come very soon)—it seemed that the communist economic system that was meant to be a workers’ paradise was unable to provide them with paint for their houses. The fall of the Iron Curtain predictably generated a tidal wave of worker migration, with Czechoslovakians seizing opportunities in the capitalist West. In the rural border regions, we met Czechoslovakian music teachers (the spa orchestras from the communist era had been disbanded), construction workers, and nurses, for whom a salary in Deutsche Mark meant a fortune. Supermarkets and hardware stores from Western chains would quickly set up shops across the border. European Union projects to renovate streets and buildings followed.
The visual impressions were clear for those Europeans in the early 1990s who could witness both sides: capitalist countries were colorful, the former communist countries were grey. It was the time when political scientist Francis Fukuyama used the Hegelian phrase “the end of history” to declare that the combination of capitalism and democracy, the “Western” system, was the best of all possible systems. And at the core of this triumph was one institution that continues to fascinate friends and foes alike: the “free market.” It was the lack of free markets that explained why people across the border in Czechoslovakia, with whom we soon became friends, had had no paint for their houses and no food and wares in their stores. It seemed to me a clear and convincing explanation.
Philosophers and economists were among those who had, historically, explored the mechanisms behind this institution. While Adam Smith praised the alleged “invisible hand” of the market, Karl Marx decried its merciless, exploitative dynamics that would lead to more and more inequality, class conflict, and ultimately to the implosion of the capitalist system. But in the 1990s, it seemed that Smith and those who had followed him—David Ricardo, Friedrich Hayek, Milton Friedman, and so many others—had won. It was communism that had imploded, while capitalism seemed to thrive. On the left side of the political spectrum, Marxism perished, while a watered-down version of Keynesianism dominated: Don’t abolish markets, but tame them with the levers of the welfare state. When I began studying philosophy and economics in Munich in the early 2000s, my professors inculcated this picture, implicitly in many political theory classes, and explicitly (and often without the part about the welfare state) in economics classes.
But what is it that makes markets these wonderful motors of prosperity? The economic tradition provides two arguments. One is about human self-interest and the way in which markets can harness it for the common good. This argument had little currency with philosophers. After all, human motivations are so much richer and more complex than simply striving for profits, an insight that empirical psychology has long confirmed. The other argument, however, continues to intrigue many thinkers: it appeals to the ability of markets to make use of decentralized knowledge and thereby enable spontaneous coordination of behavior. According to this line of thought, consumers know best what their own preferences are, and producers know best what they can provide. Collecting all that knowledge from people, sending it to some public bureaucracy to be aggregated, and then making centralized decisions that would in turn have to be communicated back to all members of society entailed a cumbersome, error-prone process that could not compare with the swift decentralized coordination of markets.
Even many critics of markets’ distributive consequences and the social upheaval they can bring accepted the epistemic powers of markets. G.A. Cohen, for example, in Why Not Socialism, emphasized their informational benefits. In 1981, Joseph Carens developed a model of how the epistemic features of markets could be deployed without accepting the massive inequalities they usually brought, by replacing monetary rewards with tokens of social recognition. Many progressives saw markets as a bit like nuclear energy: certainly dangerous and difficult to handle, but too good to simply reject. And at the core of this ambivalence was the epistemic argument: markets process the knowledge of the many in a uniquely efficient way, while providing individuals with the freedom to choose for themselves. This argument became part of a dominant narrative about the beneficial power of markets.
Few worried that this story might be too good to be true. It was enthusiastically endorsed by many intellectuals from the former communist block who loathed the lack of freedom and material provision they had suffered. The financial crises of the 2000s, in particular that of 2008, raised questions about the specific markets affected, such as currencies and derivatives (the epistemic logic of which is, arguably, somewhat different from that of markets for goods and services). But they did little to destabilize faith in this idea, outside of very left-wing circles that had never quite bought it. And if what I hear from many students is correct, courses taught in economics and business management at universities around the world continue to presuppose the epistemic argument for markets.
My childhood memories of the German-Czechoslovakian border led me to believe the narrative of markets as epistemic machines for a long time. I argued fervently for more redistribution, better public schools, and the need for exempting certain areas, such as health care, from the market. But the coordinating function of market prices—their ability to process forms of knowledge that no individual or organization could ever possess on his or her own—sounded plausible to me. I spent many hours discussing with Marxist colleagues the need to embed, rather than reject, markets. However, over time I came to see more and more problems with the epistemic argument. I recount my intellectual journey, and the arguments behind it, because time and again, I recognize in academic and public discourse the beliefs and assumptions that I had once also accepted but then came to reconsider. They are often not even explicitly mentioned, but serve as the unquestioned background assumptions shared by almost all parties.
I have concluded that the epistemic argument for markets needs to be heavily qualified, if not put on its head: it is not an argument for “free” markets but for the careful regulation of markets. The “invisible hand” can only, if ever, do its work on material that has been diligently prepared, and continues to be monitored, by many visible hands. Otherwise, the result may be a mere chimera of the epistemic mechanism that I learned about when studying economics: it may seem to work fine on the surface but fail to realize the goals it is supposed to achieve, such as genuine preference satisfaction and the avoidance of inefficient economic behavior. This misleading image of the market can keep us trapped when we think about institutional design, inserting a pro-market bias instead of allowing for an objective evaluation of alternatives. And given the need to redesign many economic institutions in the face of climate change and massive socio-economic inequality, we cannot afford to be held captive by a picture, as Wittgenstein had once put it.
What is the miracle of intelligent coordination that markets allegedly provide? The epistemic argument for markets starts from a picture of individuals who have preferences that determine how they will behave in markets. In addition, individuals know what they want when entering the marketplace—an assumption later described by economists as “consumer sovereignty.” With these assumptions in place, it is the price mechanism that coordinates the behavior of demand and supply by signaling the demand for, and the supply of, goods and services. Adam Smith described this dynamic in his 1776 magnum opus, The Wealth of Nations:
The quantity of every commodity brought to market naturally suits itself to the effectual demand. It is the interest of all those who employ their land, labour, or stock, in bringing any commodity to market, that the quantity never should exceed the effectual demand; and it is the interest of all other people that it never should fall short of that demand.
The core of the epistemic argument is, then, that in markets, the information about the relevant quantities that can be bought and sold is indicated by price movements. If demand exceeds supply for a certain good, buyers will overbid each other to get some of it, which tells producers that they should bring more of it to the market. Contrariwise, if sellers cannot get rid of a product, they lower prices to find more buyers—and they take home the lesson that they should produce less of it. At the same time, producers would not be able to stay in business if they permanently made losses. They need to pass on the costs to buyers and will cease production if this is not possible. This limit ensures that items that are too expensive to produce, relative to demand, disappear from the market. And because there are many producers in competition with each other, the lowest possible costs will ultimately be passed on to consumers. Here, a third key assumption comes in: that prices reflect all the costs for producing a certain good or service. In paying for, say, a woolen coat—an example Smith uses—part of the price goes to the shepherds who produced the wool, part to the various craftsmen involved in the production, and part to the traders who transport it to customers.
In the picture that Smith drew, the adaptation of prices and behaviors happens on a constant basis, in myriads of smaller and larger decisions that market participants make. This symphony has an endearing democratic ring: everyone’s actions play a role in shifting prices and, thereby, the allocation of goods and services. Individuals decide freely what they want to buy, sell, or produce, which seems much more attractive than attempts to solve this allocation problem though a command-and-control approach. How would bureaucrats even know what people wanted, needed, or could produce? By the time the information reached a centralized decision-maker, it would have become long obsolete, with individuals pursuing new opportunities in the meantime.
This ability of markets to react quickly to change was one of the crucial arguments of defenders of markets on epistemic grounds, such as Ludwig von Mises and Friedrich August von Hayek. In the 1930s and 1940s, a number of socialist thinkers suggested that socialist governments might mimic the market mechanism through a kind of auction mechanism, achieving the same degree of efficiency. This led to the so-called “socialist calculation debate,” in which the defenders of markets held that without prices, or with simulated prices, it would not be possible to arrive at an efficient allocation of goods, in particular capital goods for investment. In 1945, Hayek appeared to end this debate with his famous paper “The use of knowledge in society,” in which he praised the epistemic capacities of markets.
Markets, Hayek wrote, can process “dispersed bits of incomplete and frequently contradictory knowledge.” Again, it is the price mechanism that delivers individuals the information they need in order to coordinate their behavior with that of others, making use of their own knowledge which is in turn signaled to others:
There is hardly anything that happens anywhere in the world that might not have an effect on the decision he [the individual] ought to make. But he need not know of these events as such, nor of all their effects. It does not matter for him why at the particular moment more screws of one size than of another are wanted, why paper bags are more readily available than canvas bags, or why skilled labor, or particular machine tools, have for the moment become more difficult to acquire. All that is significant for him is how much more or less difficult to procure they have become compared with other things with which he is also concerned, or how much more or less urgently wanted are the alternative things he produces or uses.
For Hayek, the price system is “a kind of machinery for registering change.” Thus, here again, at the core of the epistemic argument is the coordination function of the price mechanism that processes information and coordinates behavior without the need for centralized control. And although Hayek’s view is, in many ways, different from Adam Smith’s, the same three assumptions remain: one starts with individuals’ preferences, sovereign consumers know what they want, and all costs will be reflected in prices. It is these three assumptions that I target in my criticism, though they are by no means the only possible angles of attack. (Other possible criticisms of the epistemic argument include its neglect of sticky prices, the existence of less-than-fully-competitive prices, the role of cross-subsidies in pricing decisions by producers, the very notion of “value” used in economic theorizing, and the specific problems around financial markets as alleged “mirrors” of the real economy that incorporate all available information.) Before turning to them, however, it is worth saying a bit more about how these assumptions came to be so widely accepted.
I picked up this message about the epistemic mechanisms of markets step by step, when I turned to studying economics, alongside philosophy, in the early 2000s. But my education rarely considered actually existing economic phenomena (or, for that matter, texts from the history of economic thought). Instead, I studied models, models, models. Our homework consisted of mathematical exercises proving theorems and solving equations. Focusing on mathematics was what made economics rigorous, our professors told us, with barely hidden contempt for fields such as sociology or history that used narrative or qualitative approaches. We were drilled in calculations without any critical discussion of their assumptions, and without learning anything about the historical contexts from which the models derived. The only exceptions included a few classes in behavioral economics and economic history that were more critical—but the possibility of different assumptions was not integrated into the mantra my undergraduate education repeated about the epistemic benefits of markets. The central model, which was meant to convey the glad tidings about markets’ leading to overall efficiency, was the General Equilibrium Model, a mathematic version of the epistemic argument. Every other course started with it; I was taught it six or seven times.
In 2008, I graduated with my degree just as the global financial crisis struck. It would lead to the meltdown of the subprime mortgage market, the collapse of Lehman Brothers, and ultimately a global recession. I left economics with a huge sense of bewilderment and disappointment. Something was obviously missing here. Something was wrong with the formal methodology I had been drilled to use. When I received the invitation for the graduation ceremony, I almost burst into tears out of disappointment and anger. I had put so much energy into mastering all this math, but it had no bearing on what was happening out there, in the real world. Many of the models seemed to become obsolete day by day, as the financial crisis unfolded.
I felt nagging doubts. What if the models that described the wonderful machinery of markets were nothing but toy instruments for an imaginary world? What if they were more similar to the artificial thought experiments of analytic philosophy than to anything that happened in real life? I eventually came to realize that it was because of these models, and the way in which they paint a picture of reality that makes you see some things and neglect others, that I absorbed, without questioning or even realizing, the three assumptions of the epistemic argument: that economic theorizing starts from given preferences, that consumers know what they want, and that prices reflect all costs.
Of course, models can never fully capture reality, just as maps cannot be as large and detailed as the areas they depict—but how do we know whether they even correspond to something out there in reality? I read around in the philosophy of economics, the history of economic thought, economic sociology, and “heterodox approaches” in economics. Years later, when I came across Peter Spiegler’s wonderful 2015 book Behind the Model, the pieces finally fell into place. Mathematic models, he argues, can be useful if there are “stable, modular, and quantitative [entities], with no qualitative differences among instantiations of each type,” that can be grasped by mathematical terms. But to know what these entities are like and how to model them, we need methodologies other than modeling, such as qualitative research or interpretive techniques—methods used by sociologists or social psychologists that I had never learned about when studying economics, but that I had naturally felt drawn toward in my quest for understanding the economic reality beyond the models. If such methods are not used to ensure that models are anchored in reality, a gap can open up between them, when, for example, reality changes and a model’s assumptions no longer hold. This discrepancy is, arguably, one of the great challenges of applications of the epistemic argument today, for its assumptions stem from a time when, for example, questions about the environment were beyond the horizon of economic researchers.
Nonetheless, what continues to get taught in many economics courses are mostly these models. And because math is hard for many students, the focus in teaching is often on understanding the mathematical techniques. Meanwhile, the assumptions of the epistemic argument remain hidden in these models and are passed on to cohort after cohort of students, without being made explicit. And they flow into popularized, watered-down versions of the epistemic argument in favor of markets, in which it is sometimes distorted, misunderstood, or misapplied.
In no way do I wish to suggest that the epistemic argument is never correct, or that one could never find instances in real life that nicely illustrate how supply and demand function because the price mechanism coordinates behavior. But often, these explanations capture a surface phenomenon and hide the deeper questions that come up when we drill down into the assumptions of the argument. Doing so changes the message of the argument and often runs counter to what its popularized version is taken to show: that markets are best left with as little regulation as possible.
Defenders of markets have long emphasized as one of their attractive features that they allow for individual choice; they enable individuals to satisfy their preferences. The supply of consumer goods in the West was, and continues to be, abundant; often, the real challenge is choosing what to pick from the plethora of possibilities. Growing up in the triumphant 1990s, “going shopping” was a normal thing for young people to do: I would meet up with a group of friends, and we would take the train to another city, stroll through the pedestrian zone, try on clothes, listen to CDs—and then buy the small fraction of things that our pocket money could afford. In retrospect, all these trips blur into one long sunny day out, but there is one moment that sticks out in my memory, when, for the first time, a specific doubt about markets, which would nag me for years, awoke.
When we returned to the station to catch the train home, we crossed a beggar sitting in the underpass. We passed him by, holding our shopping bags, and I do not even remember whether one of us gave him a few coins. But I do remember that I suddenly felt ashamed. I had bought handfuls of things that I would enjoy for a bit and then forget about—while this person might go to bed (did he have a bed?) hungry. I told myself what adults always told us kids at that time: that there were places homeless people could turn to, and that the state would make sure they could cover their basic needs. And yet the contrast between this man begging for a few cents, and our group of teenagers passing by with bags full of new clothes we did not really need, hit me in the stomach.
Now, one could turn to the usual—and important—questions about the distributive consequences of market economies and the need for anti-poverty policies. But my focus, here, is on their epistemic features. According to standard economic models, the epistemic power of the price mechanism serves to satisfy the preferences of individuals. When explaining these models in our microeconomic classes, instructors spoke of preferring apples or oranges, or maybe—the more adventurous ones—of having preferences for different cultural goods, e.g., different kinds of music. None of them ever attempted to unpack the notion of “preferences” and to ask whether the “satisfaction”of these “preferences” was actually a valuable outcome. This was assumed, never argued for.
But what if the story about the “preferences” that markets satisfy is more complex? One very simple and basic point, which the story of the beggar illustrates, is that in order to function as information points in markets, “preferences” need to be backed up by purchasing power. (Adam Smith called this “effectual” demand in the passage quoted earlier, in contrast to the mere fantasies people might have about what to buy if they had more money.) The information about “preferences” that are not “effectual” in this way simply does not figure in the epistemic apparatus of the market. The allegedly egalitarian picture, of everyone contributing information to this big machine, is, in this respect, fundamentally wrong: those with less money count for less in the market’s information processing.
This discrepancy is why, in many societies, markets are wonderful at providing luxury goods for the rich, while many basic needs of the poor go unmet—which, in a sense, is the epistemic machinery accurately hitting a different target than is usually thought. Those who teach the models and tell the narratives about markets tacitly assume that the epistemic machinery works to satisfy the preferences of all members of society. In reality, markets pay more attention to those with more purchasing power, and it the knowledge about their preferences that they transmit. One can understand this as a kind of “epistemic injustice” analogous to the form described by Miranda Fricker: if we make the market such a central institution in our societies, but some people’s voices count for so much less in its epistemic processes than those of others, we commit an injustice. Only in societies far more egalitarian than ours, in which everyone has roughly the same amount of dollars, would it be fair to say that everyone’s voice counts equally in markets.
But that is not the only problem with the notion of “preference satisfaction” that the epistemic machinery of markets is meant to serve. In my economics classes, the focus on “preferences” was sometimes justified by saying that one should not second-guess people: they themselves know best what they want; who are we to tell them that it should be otherwise? That argument sounded tolerant and anti-paternalistic. But right after one of the classes in which this argument had been made, I had a class on marketing (not completely voluntarily—some courses in business administration were compulsory for economics students). And on the long corridors of the university, while rushing from one lecture room to the other, it occurred to me that I would now learn about something that was in direct contradiction to the argument I had just heard, about how companies can influence consumers to buy their goods—in other words, how they influence their preferences. And neither of the professors seemed to care about the consistency of their courses with each other.
The question of where our preferences come from, and how to classify them as “authentic” or “inauthentic” leads into contested philosophical territory. Even without markets, human preferences are, at least partly, socially constructed and depend on the cultural context one lives in. While Rousseau decried the way in which, in his view, people came to live only “in the eyes of others” in modern societies, Adam Smith had pointed out that the possession of certain goods—leather shoes, in his example—can play a crucial role in allowing people to appear in public “without shame.” But what about all the preferences that do not even arise out of the social norms in our private lives but are created by markets themselves? Producers spend billions of dollars on advertisements to get consumers to buy goods that they might otherwise not even have cared to look for.
What is it, then, that this wonderful epistemic machinery is meant to achieve? It seems only partly about satisfying basic needs and preferences that people have independently of markets. That seems to be the starting point of the models, but can we even know what such “preferences” would be, beyond basic needs such as those for food or shelter? Many preferences are shaped by market processes that include such maneuvers as PR, advertising, and product placement. The question of which of these goods and services is worth having, from an independent perspective, is left wide open. And if some might not be worth having, this also raises the question whether the machinery for providing them—the market—is worth having. The question is no longer whether it is worth having markets in order to satisfy independently given preferences. Rather, it becomes whether it is worth having markets in order to satisfy preferences many of which they themselves create. The epistemic argument simply does not speak to the question of where human preferences come from, and whether fulfilling them is valuable according to some market-independent standard. Moreover, the watered-down versions one finds in public and political discourse often wrongly assume something that is obviously not true, namely, that everyone’s preferences are equally backed up by purchasing power, and that markets are therefore equally good for everyone.
I experienced another eureka moment about the epistemic limits of markets—something I had never learned about in my economics classes—when I suffered my first bout of semi-serious health problems. As a PhD student, I had a silly bike accident, in which I banged a bag against my wheel and somersaulted into the middle of the street. Luckily, kind strangers dragged me to the curb before the next car came. But some of my teeth were badly damaged and I would need a dental bridge. Because of a complicated insurance situation—I lived between two countries—I would get only part of the costs covered and I had to choose the service provider myself. I spent hours and hours browsing online review sites and phoning different dental clinics. I realized that I had no idea which clinic would do a competent job, at a price that I could afford. Some offers were dubiously low, with doctors who had degrees from universities I had never heard of—but their customer reviews seemed fine. Others were more expensive and promised all kinds of extras—but I wondered how much of my money would pay for the rent of their fancy premises in expensive neighborhoods. I ended up with a mid-priced offer by a friendly elderly dentist who must have offered high quality, for I still have that bridge years later. But that felt like sheer luck: the story could have gone very differently.
According to the standard economic picture of markets, it is prices and prices alone that market participants need to make decisions about buying and selling goods. (In fact, there is also a non-standard picture: the economics of information asymmetries. These theories, however, are taught only at an advanced level and are not part of the mainstream narrative about the epistemic power of markets.) But that story leaves out a huge number of activities and institutions that also convey information about market products and which we rely on almost every day. The review sites I had consulted were one example; for other products or services, we ask friends, consult experts, rely on credentials, or use trial periods. It feels like a battlefield. On the side of producers, advertisements loudly promise benefits that are difficult to verify; on the side of consumers, people struggle to detect real quality and to understand which version of a product works best for their specific needs or wants. And as in other battles, the fight is not always honest: endorsements from experts and product reviews that are fake and paid for by producers abound.
Consumers find some of their informational needs covered by offers that are in turn provided in the market: by product review sites that are run on a commercial basis, for example, but acquire a reputation for trustworthiness. They can also often consult non-commercial sources of information, such as organizations that provide quality certification on a nonprofit basis. And in some cases, state institutions are involved in ensuring that basic thresholds are met. For example, in most countries dentists are allowed to practice only after having passed medical examinations, and the same holds for certain other fields. Forms of state supervision take place in far more markets than we might, at first glance, think. Take all the hygiene rules and control activities that take place before food products land on supermarket shelves, including the requirements to provide certain information to customers. If we as customers had to do all this epistemic work ourselves, controlling, for example, whether different brands of yogurts were produced under the same hygiene standards, we would be even more overwhelmed than we already are.
These “epistemic infrastructures” of markets, as I later came to describe them, are often highly contested. Companies know quite well that information that is or is not provided can make an important difference for consumer behavior, and often try to bend public authorities’ decisions about market regulation and oversight. Take the ways in which the content of fat, sugar, and calories is presented on food products. Living in the United Kingdom, I got used to the “traffic light” system of green, yellow, and red dots that is used there for signaling this information to customers. Back on the continent, I had to read the small print, and do rough calculations in my head, to get the same information. In fact, the European Union had plans to introduce a traffic light scheme as well—but lobbyists thwarted the effort in 2011. The big food corporations apparently convinced enough politicians that the science around these issues was uncertain, and the plans were binned.
This claim—that the science is uncertain—may ring a familiar bell, because corporate lobbyists who want to reject market regulation or the mandatory provision of information to customers routinely make it. It has been called the “tobacco strategy” by historians because of its inauguration by the tobacco industry in the 1950s. The connection between smoking and lung cancer was known decades before market regulation (including mandatory warning labels, bans of smoking in public buildings, and restrictions on advertising) kicked in. Part of the reason was that the tobacco industry had crusaded against public health officials and scientists, paying those who denied the harmfulness of smoking to manufacture the impression that the science was uncertain.
The regulation of markets, including the provision of their epistemic infrastructures, needs to integrate up-to-date scientific insights, to protect citizens from health hazards, or at least to allow them to make informed decisions. This imperative presupposes that the knowledge needed for making such decisions is in public hands—in public research institutions, or in private ones that follow a scientific ethos and make their results public. If private market actors deal with highly technical issues and public regulators do not have the capacity to evaluate them, it creates an epistemic imbalance that hollows out the very idea of market regulation and undermines the epistemic argument for markets.
Here the epistemic argument for markets, and in particular its popularized versions, blinds us to the full picture. If one believes in markets’ being self-regulating (or if one thinks that government regulation, while in principle justifiable, tends to make everything worse), epistemic questions that arise with regard to market regulation are simply outside the picture. But many markets function reasonably well only if such regulation is in place. And if the scientific fields that are relevant for such regulation are captured by industry money, regulation often ends up being insufficient, leaving customers vulnerable to products and services that can seriously harm them.
If the epistemic infrastructures of markets work well, on the other hand, consumers can delegate all kinds of epistemic tasks to public institutions and focus, instead, on price and quality alone—and then markets look Hayekian. But there is a more complex story to be told about what made them so. Front-stage, you see individuals choosing according to their preferences, and price movements coordinating supply and demand. But backstage, there is a whole epistemic apparatus to make sure that this system actually works and nobody is harmed. So, this is another way in which the epistemic argument misleads: that the market process appears spontaneous does not mean it happens all by itself. The reason why it works in the way intended is that it is propped up by a whole set of supporting structures, without which it does not function well.
We confront an additional problem concerning medicine and other areas in which the knowledge asymmetries between laypeople and experts are particularly large. Hardly anyone who is not himself or herself a doctor can really judge whether a certain diagnosis is correct, and whether the suggested treatment is the best option. For this reason, numerous regulations govern the practice of medicine, but in addition, the Hypocratic Oath morally binds doctors not to abuse their knowledge, but to do what is best for their patients. Their whole identity and the social structures around them—what they receive respect and recognition for, how they interact with their colleagues, and so on—are meant to embody this ethical stance, which differs from the stance we adopt in markets. Doctors must not maximize their profits when choosing a therapy, and most of them would shudder at the thought of doing so.
In the Anglophone world, such professionalism is expected from a limited set of occupations: traditionally, from medicine, law, and the clergy; nowadays also from fields such as engineering, with the boundaries remaining contested. Growing up in the German-speaking world, I learned this distinction between professions and non-professions only when I moved to Anglophone countries and read around in the sociology of the professions. In German, doing one’s job is a “Beruf”—a “calling”—that has a logic of its own. The car mechanic, the postman, the service woman at the registration office all have their callings just as much as a doctor or lawyer, and their “Berufsehre” (“professional honor”) requires them to try to do a good job, and to treat their customers or clients (a distinction not drawn in German) well.
The question, however, of how such a notion of “professionalism” can coexist with markets, is notoriously difficult to answer. In an ideal world, markets would reward those who do a good job for customers and weed out those who don’t. As Adam Smith writes, “[i]n the middling and inferior stations of life, the road to virtue and that to fortune […] are, happily in most cases, very nearly the same.” Such a situation is ideal for customers, relieving them from the need to rely on other sources of knowledge or to double-checking suppliers’ claims. But in today’s complex market societies, if such a dynamic can be brought about at all, it requires quite some degree of market regulation. Mechanisms other than the market price, such as the need for companies to build up and defend a reliable reputation, need to play a supportive role. But the danger remains that market competition introduces incentives for suppliers to cut corners—and the less buyers know about product or service, the more likely suppliers can do so without being detected.
From a consumer perspective, it is much more convenient if suppliers—not only doctors, but also sellers of other goods and services—follow standards of professionalism. It is even more convenient if one can choose between many suppliers who follow professional standards. But market competition can make it very hard to maintain such standards. “Maximal choice” and “choice between competent and well-intending suppliers” are not the same thing, conceptually and practically. The simple model of the price mechanism, which assumes that consumers know everything they need to know about products and services, does not answer the complex regulatory questions that arise out of such information asymmetries. We need to take a much closer look at the epistemic constellation (Who can know what? What are the incentives to use this knowledge in which way?) in order to think about the best design of institutions for providing such goods and services.
Economics courses and popular narratives about markets often assume that their epistemic powers work best if regulation is minimal. Here lurks one of the greatest errors in reasoning that mars the debate about the epistemic powers of markets. For it is only when markets exhibit no “market failures” that the signals sent by prices reflect the full costs of production. In situations of “market failure,” the allocation of goods and services by market forces alone does not lead to efficient outcomes, and economic value is lost. Such market failures are ubiquitous: natural tendencies toward monopolies or networks that undercut competition, public goods for which private suppliers have insufficient incentives, or negative or positive externalities that drive a wedge between what is efficient for market participants and what is so for society as a whole. Different economic schools hold different positions with regard to market failures. While Chicago free market thinkers tend to maintain that they are negligible and that government attempts to remedy them might create even worse outcomes, welfare economist and ordoliberals are much more willing to acknowledge their existence. And yet, while I learned about the negative effects of market failures on efficiency in my studies, it took me a while to realize how the epistemic mechanism of markets led to these failures. Let me take the case of “negative externalities” to explain this point, a sub-category of market failures in which certain costs are carried by neither buyers nor sellers but by third parties or society as whole.
The area in which this came closest to home for me was traveling. In the 2010s, with my PhD in hand and on the precarious labor market for postdoc positions, I had a crazy traveling schedule—conferences and colloquia talks, but also the commute to work or to teaching gigs in other countries. And very often, air tickets were eerily cheap. Airline pricing is a complicated business: considerations of customer loyalty and strategies of filling empty seats intersect with the attempt to skim off the differential purchasing power of different customers. But what was clear, overall, was that the prices for flying were far too low if one considered the impact of CO2 emissions on current and future generations, through anthropogenic climate change. While I was vaguely aware of the problem, and sometimes opted for protracted train journeys instead, I often ended up choosing flights because they were so much cheaper. (I am not proud of it, in retrospect.)
Given the enormous harm that CO2 emissions do to current and future generations, the costs of CO2 emissions should be reflected in market prices. But these costs are carried by society, not by customers or airlines (or only to a limited extent, through certain forms of taxation)—and that is why they keep their prices low, which leads to more flying than would be efficient from a societal perspective.
Here is a simple analogy. Imagine a bunch of kids in the neighborhood making cakes together. One mixes the batter and puts it in the oven; then he sells the plain cake to another kid. She puts in a cream filling and sells the cake for a somewhat higher price to another kid, who decorates the cake and then sells individual slices, ending up with a net surplus. In the end, each kid is left with a certain sum that seems to reflect his or her contribution (and let’s assume, for now, that because of the competition between kids to participate, the prices are not too far away from reflecting relative contributions). But as kids are wont to do, they simply took the ingredients from their parents’ pantries and forgot to clean their kitchens—so these additional costs fall onto their parents. Not taking these costs into account, the kids are so happy about the money they earned that they keep making more cakes, to the dismay of their parents, who have to stock up on more ingredients and continue to clean up after them. This analogy conveys how market prices fail to reflect environmental externalities and thereby lead to socially inefficient overproduction—except that here, the parents are responsible for the overconsumption and can presumably shoulder it. With climate change, future generations will need to deal with the mess, and the threat is existential.
The prices for air tickets mislead us. They suggest a reality that is different from the one we actually live in, namely, one in which CO2 emissions will not contribute to the harm they actually do. The same holds for a range of other prices, for example for agricultural products. The predominant narrative about market prices continues to be that they reflect costs of production, as the epistemic argument would also hold. But in many cases, they fail to reflect the damage done to the climate and the environment. And often, other market failures, with more distortive effects on prices, could be added on top.
However, politicians who argue for addressing such market failures and want to regulate markets so that prices reflect true costs, typically by imposing taxes, face a problem: consumers have gotten used to the artificially low prices of many goods and services. And they have incomes that would hardly suffice to pay fully for the costs that the production of these goods and services brings for our societies, today and in the future. This was a core aspect of the “yellow vest” protests in France that began in 2018: the announcement of a higher tax on gasoline brought people to the streets because they feared that they would simply be unable to afford their commute to work. So many aspects of our societies, from city planning to the understanding of work and leisure, are built on assumptions that no longer hold—and so many market prices continue to reflect the old rather than the new reality.
At the same time, socioeconomic inequality has grown to such an extent that one cannot simply change some elements of these market systems without threatening large swathes of the population with poverty. People have built their lives on the assumption that prices would behave in certain ways, and sudden changes in price structures would overturn their chosen way of life. That balance is why questions about correcting market failure, in particular with regard to CO2 emissions, cannot be separated from questions about the distribution of incomes: in the end, the epistemic and the distributive aspects of markets need to be considered together.
Markets in an Epistemically Well-Ordered Society
Where does all this leave us? Of course, what I have claimed does not amount to saying that the version of planned economies that we saw in the Eastern block had been economically more successful. Moreover, environmental awareness was hardly greater than in the West, not to mention their abysmal record with regard to human, civic, and democratic rights. But we should be careful about ascribing the higher standard of living that large shares of the population had attained in the West to markets alone. Especially in the 1950s to 70s, the “trente glorieuse” as they have retrospectively been called, markets were only one among a plethora of other institutions that contributed to prosperity, including unions, public education systems, publicly funded research institutions, and probably also stronger social norms against an unbridled pursuit of profit. It was in the 1980s that the Reagan-Thatcher narrative about the liberating and enriching propensity of free markets, with the claim about their epistemic powers and the ensuing efficiency at its core, really came to the fore politically. It has, since then, eaten away at public welfare provisions, regulatory authorities, antitrust legislation, and maybe even at our self-understanding as societies in which more than market values count.
But the epistemic argument in favor of markets has been fundamentally misunderstood as an unqualified endorsement of free markets, without the disclaimer that markets without regulation and without support by other institutions often fail to provide the epistemic benefits sought. At most, it justifies the claim that some markets can, under certain conditions, be designed and regulated so that they can have beneficial epistemic features. Going beyond the model, we can say that other epistemic institutions in a society need to work well to enable the epistemically beneficial design and functioning of markets. If there is no free press that can reveal abuses of power or breaches of regulations, or if there are no independent experts who can verify or reject claims made by corporations, or if whistleblowers need to fear for their lives, then we cannot expect market regulation and oversight to function well and remain stable in the long term.
The epistemic dimension of markets is, in the end, not the only one that matters for deciding whether a certain market, for certain goods and services, is worth having, all things considered. There are also questions about rights and liberties, and about other kinds of effects, including indirect ones on social mores and practices. And we should not expect a one-size-fits-all answer; depending on the goods and services at stake, very different kinds of market or non-market solutions might be optimal. Philosophers, economists, sociologists, and law scholars have these discussions, time and again, with regard to different kinds of markets. But in these discussions, one thing needs to change: the epistemic argument, all too often operating as a background assumption and taken for granted, needs to be carefully scrutinized as well. We need an honest reckoning of what markets can really do for us, epistemically speaking.
When I think of the ideal market, what comes to my mind is the friendly, cheerful picture of a farmers’ market on a sunny summer morning: stands full of fruits and vegetables, fresh flowers, maybe the smell of freshly brewed coffee from an organic coffee van. It is easy to forget about the food inspections that go on behind the scenes to ensure that the produce is organic and identified truthfully, and that many people don’t have enough money to buy the basket of strawberries or bag of little gems. The greatest irony is that these markets continue to exist only because many consumers are willing to behave differently from homo oeconomicus. They are probably rather “inefficient” if one considers only the provision of goods and services at the lowest possible price. But human beings value not only the sheer consumption value of goods. They might also value the fact that their food is regionally sourced, or that they can have a friendly chat with the vendor and enjoy the experience of strolling through the aisles of such a market. Farmers’ markets are hardly objectionable (though I prefer them with hygiene control rather than without, and I wish every member of society could enjoy them). But that’s because they are embedded in a whole set of non-market norms, preferences, and institutions. Maybe that should be our model for thinking about other markets as well.