Reading through the German economist Walter Eucken’s work The Foundation of Economics (1951), I came across one of the most helpful charts for economic analysis I have yet to find. In it, Eucken gives every possible form of market in a single table:
Eucken adds four qualifications that are important to keep in mind:
- “These forms of market are actual forms which have been or are to be found in actual economic life (often blended with one another, and existing alongside the forms of a centrally directed economy). They are not given a priori. They are discovered with their distinguishing characteristics by studying the planning data of those taking part in the market….”
- “Under each particular form of market a man can act according to different principles, for example, that of maximum net receipts or that of optimum output….”
- “Each of these forms of market can appear in four types: both open, both closed, or closed on either side only.”
- “Fixing of prices by the state occupies a special position, since it can follow any form of market and has different effects accordingly…. For example, the significance of coal prices being fixed by the state varies according to whether perfectly competitive, oligopolistic, or monopolistic supply, or some other form of market, exists, or whether both sides of the market are open, or whether the supply side is closed by an investment veto. Governmental price-fixing is to be treated as a variant of the different market forms and not as a special market form of its own.”
So, what does this amount to?
In the first place, Eucken emphasizes that these forms are determined through observation of actual market arrangements and interactions. Furthermore, in any given economy these forms will coexist along side one another.
Thus, in the United States, we have instances of semi-oligopolistic arrangements of supply with competitive demand in the case of college textbooks, for example. Most textbooks are published by a few big publishers, who tend to exploit their position of privilege by publishing new editions every year to drive up sales prices and drive down resale prices. This is semi-oligopolistic because a professor may choose books of other or smaller publishers, or books of other formats, such as digital. Yet the place of prominence of a few textbook publishers and their sales practices affects the practices of everyone else involved.
At the same time, in the same country, we have a supply semi-monopoly in the case of the US Postal Service, who alone has the right to use citizens’ mailboxes. Competitors with no such exclusive privilege do exist (FedEx, UPS, and so on). Thus the USPS has a supply monopoly on mail delivery to one’s mailbox, but not on mail delivery in general.
In the second place, a wide variety of motivations may govern market actors — no form requires that a person be greedy or benevolent, for example. Though, I would add, the question of who is to benefit from a move from one to another does raise the question of motivation. Motivation may be various and undetermined, but that does not make it irrelevant.
Third, while the chart gives 25 different market arrangements, the number of actual forms is really 100. Both supply and demand can be either open or closed. “The ‘closed’ forms of supply and demand differ from the ‘open’ in a single but very important respect,” writes Eucken,
that is, the “closure” of supply and demand may be due to government prohibition or to the customs and opinions of the people.The closure can arise out of the general economic policy of the state or of a class or city, or it may be due to existing suppliers and demanders having a special interest to obstruct newcomers, or both these may work together.
By open and closed, here, Eucken refers to the possibility of new competitors to enter the market, either on the supply or the demand side. If supply or demand is open, it means that new market actors can enter the market as suppliers or buyers, respectively. On the other hand, if either is closed, then new actors have a barrier to entry — this is the goal of cronyism, to close supply as much as possible to concentrate economic power in only established companies.
Furthermore, it is worth noting that Eucken recognized borderline cases: “If the German craftsman in 1938 had to go through a particular process of training, pass a difficult examination, and fulfil [sic] certain personal requirements to be admitted to a firm, was this a case of ‘open’ supply? Usually the answer will be no.” We might add, then, the prefix semi- to open and closed, thus quadrupling our possible market forms again to a total of 400.
Last, in the midst of any of these arrangements, any given market may be affected by government price fixing.
For Christians seeking to make prudent economic policy prescriptions, keeping Eucken’s chart handy can prove invaluable. Furthermore, as Eucken notes elsewhere, the lowest price with the least cost comes the closer one moves toward perfect competition, or equilibrium. No doubt he would also add the benefit when both supply and demand are open. It is open supply that Joseph Schumpeter argued mitigated the effects of monopoly through the process of creative destruction. As such, perfect competition best serves both suppliers and demanders. With the lowest prices at the least cost to businesses, perfect competition best serves the poor in that goods are more affordable, choices more plentiful, and jobs more available in conditions of perfect competition.
Thus, those concerned with social justice can use Eucken’s table like a map to guide them. It helps us locate any given market interaction within the form of market (or interdependent markets, as is always the case) involved in any economic exchange. Knowing where we are, we can better assess where any particular policy might take us. A move from semi-monopoly to oligopoly, or from closed to semi-closed, may not seem like a good move if one only looks at the consequence and does not consider the starting point. However, when both are kept in mind, one can see how such moves are in the direction of greater economic freedom.
The last lesson that I would offer from Eucken’s table is that the common labels of capitalism and socialism need more precise definition to be useful. As Eucken notes, actually existing economies tend to be mixed in reality and display a wide combination of market forms. Yet, China is still communist and the United States is still capitalist. The main difference seems to be a preference for private (capitalism) vs. public (socialism) ownership. But we can find state monopolies in the US and open markets of private actors in China.
This complication raises another question for me. Since nearly all, if not all, modern economies are mixed, where then is there room for advocating a “third way”? Either everyone already is practicing a third way economic system, or the difference is a general preference between binary options, such as private vs. public ownership as outlined above, leaving no discernible room for a third way. Those Christians who advocate various third way, “Christian” economics (as if economics is necessarily anti-Christian if not labeled as such) need to spend some time wrestling with the various actual market forms in existence, not simply abstractly (a priori) but as they currently function in the real world and within the real limits that complicate their reform.