When Things Go Wrong: the Political Economy of Market Breakdown

Prepublication version of ‘When things go wrong: the Political Economy of Market Breakdown’ in Westra; R and Alan Zuege (Eds) (2003) Value and the World Economy Today: Production; Finance and Globalization; pp91-118. London:MacMillan; ISBN: 1 40390 002 7 This paper constructs a theoretical framework for understanding what happens when markets break down. It argues that when this happens; the ‘invisible hand becomes visible’ and conscious agencies (classes; states; governments; etc) intervene in the economy. ‘External Intervention’ into the market is thus not an imposition on the market but a product of the market. The paper grapples with what is arguably the most basic question in economics: are breakdown and recovery endogenous or exogenous? Do markets fall or are they pushed? Conversely; do they mend themselves; or does someone have to stick them back together? The primary ‘finding’ of all dominant economic theories is that the market works: that breakdown is exogenous and recovery is endogenous. I show that this finding arises from the shared starting point of these theories; the equilibrium or comparative static paradigm. This is equivalent to assuming that; the market works so perfectly that nothing needs to change. It then becomes impossible to deduce endogenous market failure. This why is one of the primary shortcomings of mainstream economic theory is its inability to two-way causal links between political institutions and the market.