“The Limits of Market Economy,” entry in Encyclopedia of Islamic Economics,to appear [4151 words]

The Market Economy and Its Limits

2 May 2009: Draft of Entry for “Encylopedia of Islamic Economics”

Dr. Asad Zaman

1. Introduction

By the “Market Economy,” we mean a method of organizing economic affairs within a society so that an un-regulated market is the means for conducting nearly all material transactions within the economy. In such economies, decisions about production of goods, valuation, trade, distribution, etc. are all settled by individuals or small groups acting with maximum possible freedom, and a minimal set of legal or social constraints. Since this is the dominant mode of organizing economic activity currently, it appears natural, and alternatives are hard to imagine. In fact, as Polanyi (1946) notes, “Previously to our time, no society has ever existed that, even in principle, was controlled by markets.” To understand the functions and effects of the market economy, it is necessary to delve into the history of its emergence and rise to a global system. The results of this analysis can be summarized as follows:

1. A market economy requires supporting institutions, social structures, political structures, ideologies, and ways of organizing knowledge. Labelling all of these elements combined as a “market society,” we can say that market economies can only exist within market societies.

2. Social structures required for market economies conflict with traditional social mechanisms. This implies that transitions to market economies are accompanied by violence and destruction of traditional social norms. Recent history is a record of resistance and conflict between traditional society and market society.

3. The global dominance of market economies has led to glorification and praise of their virtues. The tremendous damage inflicted on the world and society by the emergence of market economies has been suppressed A realistic assessment shows that urgent action is needed to rescue man and society from the brink of disaster to which the market economy has brought all of us.

Because of the damages caused to society by the market economy, Polanyi (1946) in The Great Transformation forecast its demise following the largest crisis in his time, namely World War 2. The unexpected recovery and rise to global dominance of the unregulated market, and its dreadful consequences have been documented by Klein (2008) in SThe Shock Doctrine: The Rise of Disaster Capitalism . Many of the central elements of the analysis which follows are borrowed from these two sources, referred to simply as Polanyi and Klein hereafter.