Markets, prices and competition

The essentials

A few key concepts to understand the market(s)

A few definitions

In this module, we’ll look at the “market” from three different perspectives, which are worth keeping in mind. One is empirical, focusing on the organization and regulatory framework of markets as they occur in the real world. These organizations have one thing in common: they enable a seller or buyer to identify counterparties to the desired transaction, while at the same time having access to information on similar transaction conditions, in particular prices. The second perspective is that of the discipline of economics, for which the market is a privileged object of analysis and theorization, with significant divergences between schools of thought. The third is the “market” as a political principle, which has become dominant since the early 90s, ordering the economic system as opposed to centralized and/or directed economies. So let’s start with a few definitions.

Markets, in the empirical sense

Empirically, the term market can refer to :

• a place for physical exchange (like traditional markets where food and other products are bought and sold) or virtual exchange (like stock exchanges).
• all exchanges concerning a sector of the economy (real estate market, wheat market, etc.).
• all trade concerning a region (Chinese market).

We’ll see later that the functioning of these “empirical” markets is not spontaneous, but requires the intervention of public authorities (in terms of property law and competition law in particular), and we’ll see how economists have tried and are trying to understand this functioning.

Markets in the economic sense: liberal theory now dominant

This concept is based on an idealized vision of the market, and encourages its extension to all areas of life.

Since the early 1980s, political discourse and practice, underpinned by the theses of liberal economists such as Friedrich A. Hayek ⁶ have been pushing for the extension of the market sphere. The argument is as follows: the mechanism puts those directly concerned at the center of decision-making. Competition produces a price that reflects the relative scarcity of the good being exchanged, as well as the interest that people have in it, based on the information they have (or seek beforehand). This vision is based on the highly debatable postulate that economic players are “rational”.

The “producer” (farmer, industrialist, service company) is motivated to obtain the most accurate information possible on his customers’ needs, their willingness to pay, as well as on his own costs and their structure (fixed costs, variable costs), and his production methods. He can act to improve customer service, innovate, produce differently, etc. Consumers make their purchasing choices according to their desires, budget, etc. Hayek insisted that an administration cannot have the capacity to access all this information and process it correctly. From this he deduced a unilateral plea for the market as the most efficient institution.

However, neither the market, nor the authorities, nor anyone else can have all the right information at the right time. And, more to the point, information can be uneven between seller and buyer, which is one of the justifications for government intervention or other forms of coordination. We’ll come back to this in Essentials 3.1, on how markets work.

The market and competition principle as a political vision

The market is not just an empirical reality or, conversely, an object of academic study. It is also a political vision, and sometimes the object of quasi-religious belief. ⁷ With the birth of political economy came the idea – revolutionary at the time – of autonomy (Karl Polanyi ⁸ speaks of “disembedding”) of the economy and individual choices in relation to social and political relationships. From its very beginnings, “economic science” has had a normative, and therefore political, aim, and the case of the market is emblematic of this, as these few striking historical examples show.

From the 18th century onwards, economists played an active and effective role in major debates (Thomas Malthus in the debate on poor laws, David Ricardo in the debate on free trade) which had considerable political impact. The free trade pushed by David Ricardo for example, altered the balance of power between landowners and industrialists, and affected workers’ working conditions. The activism of neoclassical economists is permanent (even if its effects should not be overestimated). Using reasoning and mathematical models, they try to show that the optimum is indeed the market (correcting it, if necessary, for its failings). But such reasoning and models are hard to convince: they presuppose extremely strong simplifications of economic and social reality, on which their conclusions depend to a large extent.

This political character is manifested in the works of Karl Marx and his successors, and in the political takeover of economic levers, in the communist vision established in Russia from 1917 and in China under Mao.

The scale of the 1929 crisis (see Essential 5.2) was in part due to the aforementioned belief in the markets’ ability to restore equilibrium on their own. For months, despite the major economic crisis unfolding before their eyes, the authorities believed in “letting it happen, letting it pass“. ⁹

After the Second World War, the creation of the GATT and then the WTO, in parallel with the implementation of the common market and then the single market in Europe, made free trade (and therefore the generalization of the market) the economic ideal to aim for. This is obviously a political choice, and there are alternatives between generalized free trade and unilateral protectionism.

Since then, the main political parties in various countries (in Europe and in France, but everywhere in the world except in the Communist countries) have taken a stance on what should be market-driven and what should not. The dividing line is not technical but ideological, with some parties supporting maximum liberalization and privatization, while others favor planning and nationalization of certain businesses, including credit.

In France, the Commissariat Général au Plan, for the economy, and the DATAR, ¹⁰ for regional planning, had their heyday in the 80s. The turning point of 1983 led to their political marginalization. More generally, the 80s (the “Reagan and Thatcher years”), which followed the oil crises of the 70s, saw the intellectual and political domination of neo-liberal, highly pro-market ideas. Despite the financial crises, particularly those of 2008-2009, these ideas remain powerful.

A French organizational innovation is the creation of a General Secretariat for Ecological Planning in 2022. This organization makes perfect sense, as we show in this module: the market alone cannot take Nature into account. History will show whether this innovation will stand the test of time. But the debate surrounding this type of structure is a political one: the notion of “ecological planning” was launched by Jean-Luc Mélenchon and the Front de Gauche party in the 2010s, ¹¹ and then taken up again by a President of the Republic claiming to be from the center-right 10 years later…

More recently, the “libertarians ¹² in the United States, Donald Trump, and in Argentina, Javier Milei, want to abolish the state and public services, in defiance of their citizens and of what we demonstrate in this module: the market cannot do everything, and especially not everything for everyone. Libertarian policies can only benefit a caste that crushes the vast majority of citizens. These are not just devastating choices for social cohesion and Nature: behind these positions lies an ideology of “survival of the fittest” that is totally assumed , and total cynicism. Its zealots know full well that it is they who benefit, against all others… .

Trade structures the economy

Every day, billions of people, companies, associations and public administrations use a particular form of transaction – monetary exchange – which they decide autonomously. ¹³ These exchanges involve billions of products ¹⁴ of products, services, labor, natural resources, rights (e.g., intellectual property, infrastructure use) and financial assets. These exchanges distribute part of an economy’s total production between different uses, and redistribute claims and income, as well as the rights to exploit certain natural resources.

Taken together, these exchanges form the continuous flow of goods and services between producers and/or extractors of natural resources, and between the latter and consumers. They determine the primary distribution of income. ¹⁵

Markets are essential to organize trade

Markets enable these exchanges, regulate flows and contribute to the integration and coherence of different sectors of the economy. Without organized markets, transactions would depend on random encounters. Buyers and sellers would not be able to foresee and plan the transactions necessary for their activity, production, sale or consumption. They would have to discuss prices and negotiate constantly (which is done in some traditional markets, but not in “modern” economies, notably for legal reasons).

It’s worth noting that “markets”, like trade, originated well before the beginning of the first millennium BC, and elsewhere than in Europe. ¹⁶ The expansion of the market sphere accelerated with the Industrial Revolution and the division of labor, as well as during the successive phases of world trade expansion since the 19th century. It now seems impossible to do without such exchanges, initiated by both buyer and seller. Dictatorial or totalitarian regimes that have attempted to consolidate their power have failed. ¹⁷ On a political level, these attempts are aimed at suppressing a fundamental economic freedom: the ability not to depend on political power to feed oneself and satisfy one’s needs. What’s more, the products on offer were unsatisfactory in terms of both quantity and quality. ¹⁸ There were shortages, as well as untold wastage. On the other hand, the state is indispensable to the functioning of markets, if only to ensure that transactions are respected(see Essential 3).

As for the environment, it wasn’t taken into consideration either. ¹⁹ than in a capitalist system. But, conversely, favoring market transactions is no guarantee of a democratic political regime or shared prosperity. ²⁰

The State decides what is marketable

In reality, in no country are all transactions monetary, nor do they all take place on established “markets” or “exchanges”. Non-market transactions may be based on interpersonal giving ²¹ redistribution, barter, public service or quantitative rationing by a central authority. ²² The decision as to what is subject to market exchange and what is not is largely a political one. Political power can prohibit or regulate the commodification of certain transactions for ethical and/or individual protection reasons (organ and/or blood donation, prostitution, surrogate motherhood, drugs, weapons). ²³ Conversely, governments can decide to guarantee access to certain public services (health, education or housing) without monetary compensation (or only partial compensation) and on the basis of non-monetary and social criteria. It can also impose by law insurance schemes, such as the public pension scheme, totally or partially ousting the commercial sphere from this sector. For economic and financial reasons, public authorities can also decide whether or not to transfer the construction and use of certain infrastructures (roads vs. toll freeways) to the commercial sphere. Finally, the way in which natural resources, including land, are exploited is a major issue for every society. It can be a commodity with varying degrees of regulation, or it can retain the status of a common good and be managed by agreement between stakeholders on their respective rights and obligations.

Non-market activities are also substantial

In addition, non-market activities (without monetary remuneration) are numerous and important both socially and economically: domestic work (cooking, DIY, education), voluntary activities (charities, sports, leisure, etc.), tasks carried out without any real remuneration (out of a sense of service, duty, dignity, etc.). They represent a significant proportion of a country’s activity. According to an old but revealing OECD study, unpaid work is equivalent to a third of GDP. ²⁴ in OECD member countries. A more recent study, limited to “care-work ²⁵ shows that it represents 9% of global GDP. ²⁶

The division between the market and non-market spheres varies over time and from country to country, depending on cultural and ideological developments, technologies and economic opportunities, and the outcome of social and political conflicts. ²⁷ Companies also contribute to this variability. They may decide to produce certain goods in-house (see Essential 4.3) to save on transaction costs. ²⁸ or, on the contrary, to outsource production in order to compete with external service providers.

Market mechanisms bring information and innovation and facilitate the matching of supply and demand

A market helps “supplier” companies (through knowledge of sales histories) to understand the “willingness to pay” of their customers and prospects, for which products and services, and to anticipate innovations. For consumers (citizens or companies), the market enables them to find out what offers will enable them to satisfy their needs or desires. In short, the market brings supply and demand closer together (if not on an equal footing).

Price is obviously a decisive piece of information for both buyer and seller: it’s information they necessarily know, unlike other information that may be deliberately hidden or simply not disclosed. They therefore necessarily pay special attention to it. From the point of view of economic theory, it is legitimate to give specific consideration to the role of this information in economic decision-making. However, an informed decision presupposes knowledge of the properties of the product purchased, including durability and potential impact on health and the environment. In addition, there are growing expectations regarding the traceability of product origins (which can increasingly be met by various digital processes). Legal provisions are needed to encourage companies to provide this information, and to enable legal action to be taken in the event of misinformation.

The stimulus of competition has a positive effect for the consumer – and more generally the purchaser – who can compare products and their value for money. They are not dependent on a single supplier or service provider. It’s also a source of innovation.

How (and who can) regulate market prices?

The decentralized information on millions of economic agents processed by markets cannot be known by an administrative authority whose capacity to set a price is limited. But competition is not a system that imposes itself and stabilizes spontaneously without the intervention of a regulator. In some cases, public authorities intervene directly to correct the undesirable effects of free pricing and competition, as in France for the price of all books, or in many countries for certain rents. And as may happen in the event of a crisis in basic necessities such as energy ²⁹ or food.

Consumer power (the consom’acteur concept) is a decentralized power that is an important condition of “freedom of choice”. In principle, it enables the consumer to choose, within the limits of his or her means and relative prices, what seems most useful to him or her. By buying, the consumer can influence economic life. However, this power has its limits, and it would be naive to believe that it is sufficient to “govern” economic life. Companies influence consumer choices through advertising campaigns which can draw on advanced research in behavioral psychology and vast amounts of statistical data. ³⁰ They have access to information that consumers do not have – and which has been multiplied considerably in the case of companies in the digital sector. They have access to political powers through trade associations and, for the larger ones, directly. This enables them to exert pressure on standards, regulations and taxation, all of which ultimately impact on consumer choice. Citizen checks and balances are therefore essential.

Entrepreneurial freedom is an essential political freedom

To be able to work for a decent wage, or to undertake freely (subject to compliance with social and environmental rules) and thus be able to “earn a living”, is a fundamental freedom. Depriving people of this freedom leads to economic dependence, which is politically dangerous if it becomes widespread. Conversely, ensuring that everyone can develop useful skills and live decently is a duty of justice for any society, and a guarantee of its lasting cohesion. Entrepreneurial freedom should therefore not be confused with the obligation to do so in order to live, or even survive. Collective bargaining and labor law are necessary to compensate for the de facto inequality between employees and the company, and not to leave the conditions of the employment contract to individual negotiation alone. Adam Smith himself was no fool of this asymmetry. In The Wealth of Nations, the founding book of the “invisible hand” myth ³¹ he wrote: “It is not difficult to foresee which of the two parties (masters or workers), in all ordinary circumstances, should have the advantage in the debate, and necessarily impose all its conditions on the other. The masters, being fewer in number, are able to consult each other more easily; and what’s more, the law authorizes them to consult each other, or at least does not forbid them to do so, whereas it forbids the workers. We have no acts of Parliament against leagues that tend to lower the price of labor; but we do have many that tend to raise it… It is said that we hardly hear of coalitions between masters, and every day there is talk of that of the workers. But you’d have to know neither the world nor the subject in question to imagine that masters rarely form coalitions among themselves. Masters are at all times and everywhere in a kind of tacit, but constant and uniform league, not to raise wages above the current rate. To violate this rule is everywhere an action of a false brother and a subject of reproach for a master among his neighbors and kindred spirits.”³²

We’ll see inEssentiel 8 how the construction of the European market has been, and still is, highly regulated, with a very high level of intervention by European and national administrations working in close liaison with trade associations.

Market equilibrium: an enduring myth despite the facts

The famous “law of supply and demand”: the reduction of markets to the quantity/price pairing

In this chapter, we focus on a particular vision of markets, the so-called “neoclassical” vision (see box), which emphasizes price and the role it plays in linking “supply” and “demand”. We’ll look at other approaches inEssentiel 5. But this dominant vision, taught in all economics courses, deserves a special focus. The basic idea is that, on a given market, the price of a product is formed by the confrontation of supply and demand. Quantities offered increase with price, those demanded decrease, and there are equilibrium prices equalizing supply and demand on all markets. At these prices, all sellers and buyers are satisfied, because they find a counterparty that suits them.

For Friedrich A. Hayek, what needs to be taught is that “prices generated by the just conduct of market participants – that is, competitive prices, free from fraud, monopoly or violence – were all that justice required”. ³³

In this vision, producers would produce at the right price the right quantity of products, which would be bought at that price by consumers. There would be no unsold products or shortages. Markets would therefore balance spontaneously, in the sense that the decentralized confrontation of supply and demand would automatically lead to an equilibrium price. The vision of market equilibrium can be interpreted in two different and complementary ways from the perspective of neoclassical economists.

The first meaning is an empirical hypothesis. There is a mechanism that establishes the “equilibrium price” on markets. The second meaning is normative: when all transactions take place at the equilibrium price, transactions are Pareto optimal: it is impossible to improve the satisfaction of one agent without worsening that of another.

The neoclassical theory of price formation

Let’s start with transactions on one or a limited number of highly interconnected markets. ³⁴ This is known as partial equilibrium. The price formation mechanism depends on the structure of the market or markets. For example, if the seller holds a monopoly and is faced with a crowd of buyers, he will be the sole master of the price, which he will set at the level that maximizes his profit (possibly by trial and error). If there are only a few sellers (oligopolies), the price will be set either by agreement (generally prohibited by competition law), or by mutual observation and successive adjustments (Cournot equilibrium). ³⁵ ).

Neoclassical economists developed the ideal model of a perfectly competitive market by associating the following attributes with it:

• atomicity (no single seller or buyer has a market share that allows it to influence price);
• the market is defined by a homogeneous product whose qualities are as well known to buyers as to sellers;
• there are no restrictions on market entry or exit, which maintains competitive pressure;
• rational” actors (homo economicus) logically use available information to maximize their profits and utility function.

In the absence of dominant players, we need to add an equilibrium price formation mechanism at which “all” transactions are executed. Ideally, this mechanism presupposes “perfect, continuous and cost-free communication between all participants. Each potential buyer knows and chooses between the offers of all potential sellers”. ³⁶ This crucial assumption, however, is not tenable in general: the formation of prices and the execution of all transactions must be organized. The economist Léon Walras who first mathematically represented the competitive “market”, was well aware of the difficulty, and introduced a “deus ex machina” for this purpose: the auctioneer who, by trial and error, identifies the price at which each seller finds a buyer, and vice versa.

The market would produce “optimal” prices: a certain vision of the social optimum

What about the normative evaluation of this partial equilibrium? The equilibrium price corresponds to a Pareto optimal situation in the following sense: at this price, all exchange gains are realizable and no further mutually advantageous exchanges are possible. By construction, this is not true at any other price level. If Walras’ auctioneer makes a mistake and announces a price higher (or lower) than the equilibrium price, sellers (or buyers) will not find a counterparty and some would be ready to lower (or raise) their price in order to carry out an exchange that would remain mutually advantageous without damage to the other participants.

Following Léon Walras, neo-classical economists also explored two questions: the possibility and uniqueness of a generalized equilibrium, i.e. one in which all markets are in competitive equilibrium as described above; and that of the “social” optimality of such an equilibrium. While continuing to leave aside the question of actual price formation, in 1954 Arrow and Debreu, along with McKenzie, identified the conditions necessary for such an equilibrium, in addition to those defining a competitive market. ³⁷

One of these conditions is non-creasing returns to scale in production. ³⁸ Competitive” prices agreed between “rational” consumers/producers with the same level of information reflect the relative productivity of inputs and the relative “utility” of outputs. The allocation of resources corresponding to the equilibrium is optimal according to Pareto: substituting the production and therefore consumption of one good for that of another would necessarily be to the detriment of the utility of at least one other consumer/producer. This is a definition of optimal resource use that is indifferent to the distribution of income prevailing at equilibrium, and is based on an individualistic conception of satisfaction. ³⁹ We shall see later that many of the assumptions crucial to the achievement of a general equilibrium are not fulfilled in reality.

How markets work in reality: institutionalized mechanisms

Let’s return to the hypothesis of how markets work. It seems that “acts of exchange at the personal level create prices only if they take place in a system of price-creating markets, an institutional structure that is in no way generated by simple chance acts of exchange”. ⁴⁰ Concrete markets, i.e. the organizations that regulate market transactions and enable their expansion, have in fact always been the product of political decisions that make them possible (local weekly markets, freedom to establish a business, to provide a service), that frame them (sanitary conditions, professional qualifications, various legal provisions…) and set norms and standards(see Essential 3). In some cases ⁴¹ public authorities delegate a legally-defined regulatory function to an agency. These decisions are often the result of a “partnership” or private/public cooperation, and may depend on highly specialized technologies (globalized financial markets, digital platforms, etc.).

Historians show that as early as the 13th century, the creation and regulation of weekly markets in France was a royal prerogative. ⁴² These markets brought producers and consumers together at fixed dates and places. The authorities provided additional services by securing the place against thieves and ensuring the accuracy of weights and measures. And, of course, they provided a source of tax revenue. In 1220, in a German-language work, we read: “A market can never be properly organized, if the naive can be deceived”. ⁴³ The role that a regulating power must play in price formation had been recognized at least as far back as ancient Greece. Plato asks:

But within the city itself, how will citizens share the fruits of their labor with one another? For it is for this purpose that we have joined together and formed a state. Clearly, it will be by buying and selling. Hence the need for a market and a currency, a sign of the value of the objects exchanged.

Plato, The Republic, Book 2

In reality, market regulation – and hence the way markets operate and the prices they command – is never static. They may need to evolve in response to the emergence of new “business models”, changes in political orientation or new public policy objectives, such as the energy transition. This is why an essential question that always arises is “who makes the rules, for whom, with what objectives”. ⁴⁶

Many price formation mechanisms co-exist in our society

The price-formation mechanisms themselves take a variety of forms, most rarely that of the auctioneer as assumed by Léon Walras. These mechanisms are the fruit of negotiations between the participants, who are generally unequal. This can legitimize public intervention to validate arrangements or correct biases in these mechanisms. The multiplicity of the latter reflects the heterogeneity of participants and products.

In addition to the online marketplaces already mentioned, here is a list of others:

• Exchanges, which have become electronic, where buy and sell orders – sometimes generated by computer software – are executed instantaneously for standardized, dematerialized products (shares, bonds, promises to deliver raw materials, etc.); the wholesale electricity market and the ETS market for_CO2 quotas. ⁴⁷ market are also special examples.
• As a general rule, they set a non-negotiable price, leaving it up to the buyer to compare prices and the merchant to adjust the price according to sales. But there are also markets where negotiation is the order of the day.
• Small retailers themselves may be reduced to accepting prices imposed by wholesalers or producers, or conversely, like supermarket chains, may be able to negotiate their purchase prices.
• Auctions for fairly homogeneous products that “need” to be sold quickly (fish, crops).
• Auctions for works of art, real estate or stock liquidations, which are “unique” even if in competition with other similar goods.
• Bilateral contract negotiations.
• Collective bargaining (wages, prices of agricultural products between farmers, manufacturers and supermarkets).
• Invitations to tender.

In addition, public authorities intervene. On the one hand, by prohibiting sales at a loss, and on the other, by prohibiting cartels and establishing the rules of competition. Public authorities sometimes intervene directly in price formation. This may involve :

• Administrative decisions to set or limit prices; this is still the case in France for electricity tariffs, certain food products (EGALIM law) and some housing rents subject to the 1948 law. ⁴⁸ … but there were many after the war, which saw a period of rationing. Similarly, following Russia’s invasion of the Ukraine, several countries introduced measures to moderate price rises for essential goods (energy, food), which had become unaffordable for part of the population and/or businesses.
• Prohibitions on certain transactions, such as the purchase of Russian gas in the wake of the war in Ukraine.
• Setting a minimum wage.
• Economic intervention by public authorities in a decentralized process (e.g.: book prices in France are governed by the Lang law, and no bookseller can offer a discount of more than 5% on a new book compared with the advertised price; this system has saved small bookshops from competition from the big chains).
• Since the post-war period, agriculture has been steered by interventions on prices and/or production quantities.

General equilibrium: from theory to the dominant normative ideal

However, by reducing market analysis to the price/quantity relationship and “disembedding” it from the institutional context, neoclassical economists pulled off an ideological masterstroke. This analysis links two meanings of the word “economy”: the optimal use of means to achieve an end, and the empirical social organization of production, exchange and consumption.

Recourse to the theory of competitive markets enables us to develop an overall vision of how the economy works, reflected in the existence of a general equilibrium that also satisfies certain optimality criteria. However, as we shall see inMisconception no. 2, the self-regulation of markets and the very existence of a general equilibrium depend on a number of crucial assumptions, the removal of which fundamentally calls into question the conclusions reached.

The market has nonetheless acquired a founding role ⁴⁹ in explanations of how economies work, and its expansion became a “naturally” imposed, supposedly neutral objective, before becoming a political program. The market is then presented, from a normative point of view, as an ideal for the functioning of the economy ( as we saw in 2.1.1 ) rather than a tool for analysis and explanation.

The ideological and political philosophical basis of a “market economy” is the representation – very seductive at first sight – of a system that combines maximum individual freedom with efficiency (in the Pareto sense). For Milton Friedman, one of the most fervent apostles of neoliberalism, the market is THE democratic mechanism par excellence: “The political principle underlying the market mechanism is unanimity. In an ideal free market based on private property, no individual can force another, all cooperation is voluntary, and all who cooperate either benefit or do not need to cooperate”. ⁵⁰

This approach leaves aside all political, social and ethical issues, and treats the question of income inequality independently of the economic process. If the market produces an undesirable distribution of income, redistribution through direct taxation and transfers can intervene, but care must be taken not to interfere with the price and wage mechanism. It is certainly recognized that the market needs a third institution to function: the state. But the state’s role is limited to securing ownership and the performance of contracts, and correcting market failures. ⁵¹ a point to which we’ll return later. For these economists, the state does not create the market: it must guarantee the minimum conditions for its operation and, where necessary, make the corrections required to bring the reality of transactions closer to the competitive ideal.

General equilibrium theory: an illusion far removed from the facts

However, market theory did not stop with the abstract identification of a “competitive general equilibrium”. Later contributions lifted some of the assumptions made in the initial mathematical theory, and studied the consequences. In Essentiel 3, we will return to the subject of market regulation, some market “failures” and possible solutions. Let’s limit ourselves here to describing four phenomena that call into question the existence of a general equilibrium in structurally stable markets.

Effective and notional supply and demand

The first is based on the distinction between “effective” demand (or supply) and “notional” demand. In the absence of the Walrasian auctioneer, a “seller” may not find a buyer. His notional offer (that which he was prepared to satisfy if an equivalent demand was expressed) does not materialize, and he is left with a stock of unsold goods which forces his effective demand to fall short of his notional demand, i.e. that corresponding to a situation in which he would have carried out the planned sale. A typical example is a situation where the unemployed spend less than they would if they were in work, which discourages companies from producing more.

We’ll come back to this major point in more detail inEssential 5. The idea of the possibility of a general equilibrium resulting solely from the interplay of supply and demand is based on Say’s law, known as the law of outlets. According to this law, also known as the law of outlets, supply creates its own demand, since production generates purchasing power equivalent to that production, which will therefore find a buyer. It’s true that the cost of production for a company is equal to the income (from employees, suppliers, subcontractors, bankers, etc.) it distributes. But for the company to finance these expenses, it must sell all its production. So it’s sales that generate purchasing power, not production itself. J.B. Say’s reasoning is circular and implicitly based on the conclusion he wants to draw. The crisis of 1929 demonstrated this error in a spectacular and, unfortunately, violent way for its victims.

Speculative phenomena

The second is based on a price formation mechanism that sustains speculative bubbles (see box). This is the case when market participants act not according to economic rationality, but on the basis of what they think will be the behavior of other participants. This type of phenomenon is most common in financial asset markets. Financial regulation is needed to control the negative consequences (seeMisconception #4: Financial markets are efficient). But other assets such as real estate, or even tulip bulbs as in 1636-1637 ⁵² can also be the object of speculative movements.

Natural monopolies

So-called “natural” monopolies include networks (rail, road, electricity, water, etc.). For the network operator, the marginal monetary cost of an additional user is zero or very low (a little more maintenance). But fixed costs justify setting a price well above marginal cost. As the operator is in a monopoly situation, this price must be regulated when the network is not public.

For the example of electricity, see our fact sheet on opening up the electricity sector to competition.

The example of increasing returns: the gap between theory and reality

The original hypothesis of non-creasing returns to scale

The notion of diminishing returns is intuitively understandable: there would be a point beyond which increasing the number of hours of labor (one of another production factor), with a constant number of machines, does not proportionally increase output. The cost of the last unit produced is higher than that of the previous units. Or, to put it another way, the profitability of this last unit is lower than that of the previous ones. David Ricardo made diminishing returns an economic law by observing the case of agriculture. At the time, farmland was cultivated in descending order of yield: “good” land first, bad land last. Today, this is the case for mining deposits for energy or mineral resources, but as we shall see, it’s far from being a general rule.

This central assumption of increasing costs of the last unit produced (and therefore decreasing returns) is essential in establishing the theory of general equilibrium. Firms are thus limited in their production: there comes a time when it is not in their interest to produce more. If demand for a product increases, they can raise the price – up to a certain limit – which sets the price. Conversely, if demand falls, they can cut production without loss (since they are reducing marginally less profitable production).

Conversely, if – and as long as – the cost of the last unit produced remains equal to or lower than the previous one, it is in the company’s interest to increase sales and production. This means that the biggest companies, or those with the financial strength to grow faster, can wage a price war while covering their fixed costs. This war gradually ruins smaller companies. Concentration ensues, and the market is eventually dominated by an oligopoly or monopoly, capable of controlling prices, which is the opposite of the perfect competitive equilibrium resulting from general equilibrium theory.

The gap between theory and reality

In practice, increasing returns to scale can be observed in many sectors. This can lead to the formation of monopolies, high concentrations and oligopolies.

In IT, and particularly in the software industry, returns are increasing. ⁵⁵ These are fixed-cost industries, with zero marginal cost: the last copy of software costs nothing. The main cost is that of setting up the team, running it and developing the software, all of which are fixed costs. In this case, the company does not sell according to the cost price of the unit sold (with a possible margin), but always has an interest in selling as many products as possible, while avoiding a price collapse.

Many industries have high fixed costs and low marginal costs. Just think of the publishing or audiovisual industries. In the energy sector, highly capital-intensive energies such as nuclear or solar power have very low or zero marginal costs (for more details, see our fact sheet on the electricity market and the one on the cost of financing renewable energies).

Increasing returns can also be seen in the automotive sector, where the top ten of the world’s fifty automakers account for 70% of total production. ⁵⁶ The banking sector, which has become considerably concentrated, is subject to increasing returns, mainly due to money creation mechanisms. The larger a bank’s network, the fewer “leakages” it has to contend with, and the more money it can therefore create and earn on its lending activities. But size also plays a part in absorbing fixed costs linked to legal, advertising and marketing and structural costs.

In more traditional industries, fixed costs are generally high, and it is not at all obvious that the marginal costs of products sold are decreasing. Manufacturers are all looking for technical advances that will enable the opposite to happen. In many sectors, production costs fall as cumulative output rises (this is the notion of the experience curve, see box).

Such oligopoly-controlled sectors pose a dilemma for competition policy. Concentration is unfavorable to consumers, as it enables companies to set high prices that are not, or only slightly, mitigated by competition. It also makes it easier for the few dominant companies to influence regulation (see Essentiel 3 and our module on Enterprise). On the other hand, imposing a reduction in company size to increase competitive pressure can prevent “economies of scale” from being achieved. Some observers believe that Europe’s overly rigorous competition policy (see Essentiel 8) has prevented the emergence of “European champions”, particularly in the highly innovative digital sectors. Another cause, however, could be the fragmentation of European research budgets compared to the US federal budget. In fact, competition policy has not prevented the consolidation of major European groups with global reach in the automotive, chemicals or banking sectors, nor, when a few states have been willing to cooperate, has it prevented the emergence of Airbus, the only aerospace group capable of competing with Boeing.

In conclusion, these examples show that increasing returns are the norm rather than the exception. So why have neoclassical economists focused on diminishing returns? For two reasons. Firstly, historical: it’s true that land was farmed in order of diminishing returns. As agriculture was dominant in the 18th century, the hypothesis was unreservedly extended to other sectors. Machinism had yet to prove its worth. The other reason is less noble: the demonstration of the general equilibrium theorem is based on the hypothesis of diminishing returns… To highlight this simple fact too clearly is to risk knocking this fine theoretical edifice off its pedestal.

The work of the neoclassical school on market imperfections

Economists were quick to note, however, that returns can be increasing. Keynesian and Marxist economist Joan Robinson, for example, observed that companies seek to build monopolies that enable them to set prices and make higher profits. This is what economist Edward Chamberlin would later call “monopolistic competition”. In 1977, economists Avinash Dixit and Joseph Stiglitz developed a model of monopolistic competition ⁵⁷ (which shows how increasing returns to scale interact with product diversity in imperfectly competitive markets).

These questions are at the heart of the industrial economics school, of which Jean Tirole (“Nobel Prize” in economics ⁵⁸ in 2014) is one of its pillars. ⁵⁹ This school provides new tools and concepts for analyzing market structures (monopoly, oligopoly, monopolistic competition), firms’ strategic behaviors (pricing, innovation, barriers to entry, differentiation) and the effects of these behaviors on economic efficiency and consumer welfare.

It deduces the regulations needed in a world where imperfect markets are the norm, to avoid abuses of dominant positions while generating incentives for innovation and investment. These studies suggest tariff mechanisms for network industries and for regulating digital platforms. Nevertheless, in seeking to “correct market imperfections”, these studies remain within the same intellectual framework: that of the market as the central reference point towards which the real economy must “converge”. They do not allow us to envisage, or even think about, other types of coordination mechanisms.

Operating and regulating competitive markets

In 2008, speaking before the US Senate on the causes of the financial crisis, Alan Greenspan, who had been a fervent defender of free markets and Chairman of the Federal Reserve (the US central bank) until 2006, admitted that he had been mistaken about the supposed self-regulating capacities of financial markets. A few months earlier, Sir Nicholas Stern had declared climate change to be the greatest market failure of all time. In March 2021, the Servier laboratory was convicted in the first instance for having marketed Mediator, a drug proven to be dangerous and responsible for several hundred deaths. But the French National Agency for Drug Safety was also condemned for failing to suspend the drug’s marketing authorization quickly enough. In 1976, the Seveso industrial disaster ⁶⁰ in Italy caused 30 direct deaths and an ecological disaster. Dieselgate”, the fraudulent use of techniques to reduce the quantities of pollutants emitted by Volkswagen Group cars, put an end to widespread practices in the automotive industry that were seriously damaging human health and the climate.

These examples demonstrate the importance of regulations in the pursuit of the general interest, and the need to have the capacity to enforce them. In reality, there is no reason to believe that “markets” – that is, private enterprises motivated by profit maximization– left to their own devices, serve the general interest. In this Essential, we will first review the various market “failures” that require correction, and the various instruments available to correct them.

The current public policy approach of seeking to “correct” market failures is indicative of a “market economy” framework of thought, in which economic policy is designed to reduce the gap between the ideal of competitive markets and reality.

Making markets work

Before looking at the failings of the “markets”, let’s recall the rules that are essential to their operation in practice, and stress that there’s nothing “natural” about these rules.

Property rights are the basis of markets

The first rule is that there is no market unless property rights are clearly established, and their holders are confident of being able to enforce them. What is commonly referred to as a “market” economy is in reality an economy of private or public “property rights” defined in such a way that they are transferable. The definition of rights is far from trivial, and varies according to the object: land ownership, intellectual property (copyrights, patents), ownership through financial assets (shares). Their protection can be more or less solid, more or less difficult to enforce, more or less dependent on judicial assessment. The exact definition of property rights ⁶¹ is always political, and therefore liable to change, in particular to take advantage of new economic and profit opportunities. Political decisions guide both the speed of economic restructuring and its social consequences. Historical examples abound. One of the most famous, considered by Karl Marx to be decisive for the expansion of capitalism, is the enclosure movement, the transformation in the UK of communal property, or property open to common use, into large hedged plots for the exclusive benefit of sheep farming. Begun in the 13th century, it culminated in the adoption, in the late 18th and early 19th centuries, of legislation virtually ending communal property and allowing its transformation into large private estates. ⁶² A current example is Total’s appropriation of land belonging to the Tanzanian state but traditionally used by peasants. ⁶³ Intellectual property, i.e. the privatization of the use of knowledge – by its very nature a common good that does not wear out when it is used – is a major political issue with immense distributive consequences. ⁶⁴ (see alsopreconceived notion n°11Thecommodification of knowledge through highly protective patents guarantees a rapid pace of innovation). At the heart of the digital industry, questions of data security and personal data ownership are major issues that divide the world, with Europe being more protective, with the RGPD law and the Digital Services Act. As for “artificial intelligence”, its use raises numerous intellectual property issues (notably for training AI systems) that we won’t go into here.

No courts, no markets

The second condition for the functioning of an open market economy is trust in the respect and fulfillment of contractual commitments. In general, state justice is in charge. Sometimes, however, the contracting parties agree in the contract itself to have recourse to private arbitration tribunals, particularly for international trade contracts. ⁶⁵ In return for protecting the contracting parties, the law provides a framework for contractual freedom.

In the eyes of the law, not all contracts are authorized and “respectable”, either because of the personality of the contracting parties (abuse of weakness, minority), or because of the purpose of the transaction (prostitution, surrogate motherhood, drugs), or because of “abusive” clauses.

Shakespeare’s play Merchant of Venice brings to a climax the dilemma of public power in a situation where enforcing a contract – a necessity to protect the economic order – would have consequences contrary to the supreme order of the city, which is to protect the lives of its citizens. A similar problem is currently posed by the Energy Charter Treaty (ECT). This Treaty, which aims to protect private international investment in energy against expropriation or changes in legislation affecting profits, is now proving extremely costly for states wishing to implement a disengagement from fossil fuels to combat global warming. Let’s not forget that in Shakespeare’s play, the protection of the physical integrity of citizens ends up taking precedence over the respect of the contract through a threat leading the creditor to renounce of his own accord. He may well get his due, but he will be prosecuted for the incidental consequences.

Structuring markets: combating concentration

Attention must be focused on the inequalities between players. This is what competition policies are all about, and we’ll look at some European examples inEssentiel 8. Let’s take an American example. The Sherman Antitrust Act of 1890 was the first piece of modern competition law to outlaw certain anti-competitive practices:

• Cartels (agreements between companies aimed at restricting competition, such as price fixing or market sharing);
• Monopolies: the law also prohibits the creation or domination of markets by a single company in such a way as to eliminate competition. If a company uses a dominant position to exclude competitors or distort competition, it is breaking the law.
• Unfair commercial practices, such as the use of coercive means to exclude competitors, or the exploitation of partnerships and commercial agreements in such a way as to harm competition.

The literature on this subject is extremely rich, and we’ll confine ourselves here to a few examples.

Many economic sectors are dominated by a few companies

The digital sector is the first to come to mind, whether in hardware or software. ⁶⁶ (Apple, Microsoft, Google, Acer, Nvidia, Samsung, Huawei…) or platforms (Facebook, Amazon, Uber… and their Chinese equivalents (Alibaba, Temu…). What’s more, many traditional industrial and service sectors are dominated worldwide by a very small number of companies. We have already seen a few examples above. Let’s complete the picture. Four companies – Maersk (USA), MSC (Italy), CMA CGM (France) and Cosco shipping (China) – account for half the world’s maritime trade. The agricultural sector ⁶⁷ is characterized by a large number of farms, surrounded upstream and downstream by some of the world’s most powerful companies. Four companies, John Deere (USA), CNH industrial (Netherlands), Kubota (Japan) and AGCO (USA) capture 53% of the agricultural machinery market. Four companies, Bayer-Monsanto (Germany), Syngenta-ChemChina (China), Dupont-Dow (USA), BASF (Germany), capture 84% of the crop protection products market. Downstream from farmers, 90% of the trade in agricultural products is carried out by four companies: Cargill (USA), Louis Dreyfus (France), Archer Daniels Midland (USA), Bunge (USA). Added to this is concentration in the production and distribution of apparently distinct brands of beverages ⁶⁸ such as beer. The pharmaceutical industry is also highly concentrated. The top five groups worldwide (Johnson & Johnson, Roche, Pfizer, Bayer and Novartis) account for around a quarter of the market. ⁶⁹ (This list of highly concentrated sectors is by no means exhaustive).

In the “Business in the Anthropocene Era” module, we discuss the harmful consequences of such concentration (and the resulting corporate gigantism).

The main drivers of economic concentration

In addition to the economic rationale of increasing returns, these concentrations have been favored by three main factors: the liberalization of world trade, and the fall in unit transport costs, in particular due to the gigantism of cargo ships, ⁷⁰ and the geographical and long-term extension of intellectual property protection. ⁷¹ Mergers enable production chains to be fragmented geographically ⁷² by pursuing strategies of vertical integration, from access to raw materials to marketing, and thus achieve economies of scale. They also make it possible to dilute legal risks (notably social and environmental) that do not accrue to the parent company.

Negative consequences for society as a whole

Such concentrations pose a number of problems. The first, quite classic, is the direct and immediate impact on buyers: prices that are too high in relation to costs, and a weakening of quality. The second problem arises from the ability to influence legislators and supervisory agencies, ⁷³ including through blackmail. The third, particularly visible in the agricultural sector, is the ability to shape production patterns throughout the sector. The economic dependence of many farmers has become such that it has become extremely difficult for them to move away from the intensive agricultural model. Agroecology, despite its ability to feed the world while respecting the planet, clashes head-on with the interests of those companies that have shaped the current model, and made it adopted by the majority of agricultural players, consumers and public authorities. In the pharmaceuticals sector, the geographical fragmentation of production chains contributes to restricting supply, resulting in shortages of basic medicines. In the energy sector, the absence of competition and the ability to influence political decisions enable dominant companies to manage the speed of substitution of fossil energies by renewable energies at a rate that maximizes their financial profitability, but which remains too slow. ⁷⁴ from the point of view of climate change.

Faced with such mergers, competition authorities are not in a position of strength. They cannot pursue the illusory goal of atomistic competition. When European competition authorities are called upon to judge mergers, they weigh up the potential benefits of economies of scale and the securing of production chains, particularly in the case of vertical mergers, against the weakening of competitive pressure. They must ensure that the market remains “contestable”. ⁷⁵ They must ensure that the market remains “contestable”, i.e. that established companies are unable to erect barriers to entry. ⁷⁶

Correcting the main market failures

A first category of “failures ⁷⁷ that need to be corrected are the so-called externalities externalities , i.e. the actual or potential impact of activities on populations, third-party activities or the environment. Examples include emissions of pollutants (liquid, solid or gaseous), greenhouse gases, noise pollution and the risk of industrial disasters.

A second category of deficiencies relates to theinformation required for an “informed”transaction . Consumers need to be assured that what they consume will not harm them. They may also wish to know whether the goods they buy are produced in conditions that respect workers and the environment. The multiplicity, diversity and complexity of goods consumed preclude an individual assessment, which would be ineffective because information is a common good.

Thirdly, public authorities must regulate “natural monopolies”, in particular infrastructure networks for transport, energy or the exploitation of natural resources (mines, water, etc.). They can do this either by making them public property, or by setting conditions for their exploitation.

Market short-termism: the “tragedy of horizons

Fourthly, markets are short-sighted, leading to the tragedy of horizons, to borrow a phrase from Mark Carney, then Chairman of the Financial Stability Facility and Governor of the Bank of England, who in 2015 used and popularized this remarkable formula, in relation to climate change. ⁷⁸ It is clear that, in this field, the “law of the market” does not allow us to take into consideration economic effects (positive or negative) that are revealed over the long term. Markets are short-termist for a simple mathematical reason. The calculations of economic players, and financial players in particular, are made by “discounting” present and future income and expenditure. For listed companies, the discount rate is necessarily close to the rate with which they finance themselves, i.e., the rate weighting the “cost” of equity and debt. To take an example, if the return expected by shareholders on equity is 15%, if debt is raised at a rate of 3% and if it represents 60% of financing, the weighted rate is 7.8%. ⁷⁹

The usual practice in France for large companies is to use a rate of between 8% and 12%. A rate of 10% leads to a doubling of values every 7 years, i.e. a multiplication by 16 in 28 years. In other words, the horizons considered with this type of calculation are very short (since, conversely, an expense or income appearing in 28 years is worth one-sixteenth of what it would be today!) Another way of expressing the same thing is to note that the investments made by these companies must, according to the financial departments, be recouped in order of magnitude over 3 years.

This “short-termism” is clearly a “market failure”. It applies not just to climate change, but to the whole issue of sustainable development. The market is intrinsically too short-termist to consider long-term issues on its own. Certainly, some shareholders have long horizons, at least for part of their assets, and seek long-term capital gains rather than immediate returns.

But that’s not the majority of them. To reintegrate the long term into the choices made by companies and financiers, we need resolute action from the public authorities.

Finally, there is no reason to believe that “market” mechanisms lead to a socially and politically acceptable distribution of income. The same applies to access to certain essential goods and services, such as health insurance or opening a bank account.

In the following Essentials, we’ll look in more detail at the regulation of two very specific types of transaction that neoclassical theory equates with a “market”: “financial” products and “natural resources”.

Investment, incentives, regulation, pricing: how government can correct market failures

We will confine ourselves here to identifying the various public policy instruments that can be used to steer markets. They fall into three broad categories: public investment, financial incentives (taxation and pricing, transfers and subsidies, credit policies), and the use of public funds. ⁸⁰ and regulation. Regulatory instruments include transparency and nature protection obligations, prohibitions on collusion or discrimination, mandates (obligations to provide certain services), prudential obligations (insurance, equity capital), labor law, including employee consultation and participation in company decisions (joint decision-making or otherwise), pollution and safety standards – which can take the form of either result-based obligations (maximum emissions of pollutants) or means-based prescriptions (anti-explosion or fire-fighting measures).

In general, policies need to combine several instruments. One reason for this is the need to take account of the impact of measures on all the objectives pursued, particularly on income distribution. Another is that several markets may be “failing”. At first glance, the idea of combating global warming by heavily taxing all greenhouse gas emissions, irrespective of their origin, seems seductive. Those who advocate such an approach suggest redistributing tax revenues to compensate for the loss of purchasing power of the most vulnerable. But there is also the problem of access to credit and the interest for an investor, even an affluent one, of a heavy investment in thermal renovation whose return is only guaranteed in the very long term, and who does not have all the information enabling him to judge the necessity of the means and the quality of the results. This investor, thinking in the shorter term, would see his short-term liquid capital or debt capacity cut back, with no immediate return and no certainty that technological innovations would not render his investment obsolete sooner than expected. This market failure can be corrected by combining a legal obligation to act with subsidies and certification of resources and results by accredited bodies.

The economy can’t be reduced to a market-state pairing

In previous Essentials, we analyzed economic processes in binary terms: on the one hand, markets; on the other, the state – securing transactions and regulating them. We shall see that this binary vision, dominant among many economists, impoverishes the analysis of economic relations and the debate on public policy. It can easily lead to errors of diagnosis and prescription. Here, we describe other ways of contributing to the coordination of economic activities. These modes of coordination complement or replace the state and/or the market, and interact with them. They often fly under the radar, but are nonetheless essential to understanding how the economy works.

The importance of relational networks, particularly in the job market

Wage formation and labor relations are largely shaped by various institutions and regulations, the legacy of decades of political and social struggle. These institutions include labor law, ancillary social rights (retirement, health insurance, unemployment insurance), the right to strike, the right of association and representation by professional organizations, and social dialogue. ⁸¹ These formal institutions are complemented by relational networks.

As we saw at the end of the first Essential, Adam Smith poked fun at those who believed that “the equilibrium wage” was linked to the invisible hand ³¹ of a competitive market. He pointed to the existence of tacit coalitions between bosses which, with the complicity of the authorities, kept wages down. This was made all the easier by the fact that employee coalitions were forbidden and repressed.

The mechanism that holds the coalition together is reputational, i.e. the risk of being excluded from a social network that favors transactions between “trustworthy” people. There’s no doubt that the members of this entrepreneurial “elite” used their collective power for more than just keeping wages down. We can assume that within this coalition, information circulated on the personalities of the workers, on the trust that could be placed in a particular “foreign” merchant, or even on the financial situation of a particular coalition member, and on the best way to organize, and then use, political power to protect “one’s” property rights and rents. ⁸³

At the other end of the social scale from Smith’s coalition, immigrant networks in host countries (diaspora) illustrate some of the mechanisms that emerge when formal institutions or the market fail. The main reason for the emergence of such networks is the replication, in the host country, of solidarity or mutual recognition existing in the country of origin. For their members, these networks are a source of economic and social support, insofar as they facilitate transactions between them, thanks to mutual trust or “spontaneous” solidarity rooted in belonging to the same community. They are also a source of information for new arrivals on the opportunities offered by the host country, particularly in terms of informal employment, even if illegal. ⁸⁴ Conversely, an employee’s membership of a diaspora can be a source of information for a potential employer, and at the same time constitute an implicit guarantee on the part of the diaspora that the promised service will be provided. Similarly, networks of alumni of recognized professional schools, sometimes organized into formal associations, circulate information and can guarantee certain “qualities”, as can networks based on communities of belief.

However, networks and associations are no more of a panacea than markets. Like markets, they can have major negative external effects requiring state intervention. They can develop parallel economies and clientelism that exclude non-members rather than strengthen the community’s ties with third parties. They may also develop clan and patriarchal structures. Just think of organized crime, whose methods of disciplining members are generally coercive and punitive to the extreme. ⁸⁵

Networks, professional associations and civil society representation

The emergence of reputational networks or the formation of associations can also be a means of securing transactions between companies. In general, it is all the more likely and necessary when the state is weak (and access to justice is costly, unreliable or inequitable). The state may also consider that the investment it would require to regulate a very specific market is disproportionate to the general interest, or that the “market” can be too easily relocated and placed beyond the reach of jurisdiction for it to regulate effectively. In such cases, members of informal networks may be encouraged to form formal associations and set their own rules and procedures for arbitrating disputes. This is the case, for example, of the New York Diamond Dealers Club. Membership of this association is also a signal to third parties that certain standards have been met, and that arbitration is possible. In this case, the “Club” takes the place of the legal legal system both for relations between its members and in its relations with third parties. The “Club” also has a representation function vis-à-vis public authorities when general interests are at stake.

Formal or informal networks of mutual (re)acquaintance can be the necessary complement to legal systems to create the trust needed in business relationships. This was shown by empirical studies carried out in Central and Eastern European countries during the transition period following the fall of the Berlin Wall. At the end of the 90s, the diagnosis was that the legal system had made sufficient progress to effectively regulate property rights and transactions as a last resort, but that it was important for governments to support the development of institutions such as chambers of commerce or professional associations capable of circulating reliable, non-discriminatory information. ⁸⁶ The contribution of formal and informal networks to fruitful cooperation and the “economic miracle” of East Asian countries was also recognized. ⁸⁷

In highly regulated economies such as that of the European Union, trade associations play an important role as privileged interlocutors of administrations and political powers in the making of law. The argument put forward is that these associations bring together and aggregate the perceptions and opinions of their many members, which facilitates the legislator’s task, and that they can provide expertise superior to that of the administration. Of course, this immediately raises the question of counter-expertise and counterbalancing lobbies. The proliferation of non-governmental organizations (NGOs) defending common interests, for example in environmental protection, the fight against tax fraud, or respect for fundamental rights in the context of economic activities in countries with weak administrative and judicial capacity, is part of the answer. However, their ability to act as an effective counterweight depends mainly on three factors: their security (which is not always guaranteed – see the murders of environmental activists in South America), the resources at their disposal, and their de jure and de facto recognition as a legitimate player in political, administrative and judicial decision-making processes.

Cooperative banks

One sector in which relationships and mutual knowledge play a particularly important role in Europe (although to varying degrees from country to country) is that of cooperative banks. These banks traditionally account for a significant proportion of bank credit in many European countries, notably Germany (20% of bank credit in 2022). ⁸⁸ and Italy (21% of bank credit to SMEs) ⁸⁹ or in France, with the banking networks of Crédit Agricole, Crédit Mutuel and Groupe Banques Populaires and Caisses d’Épargne. The territorial units are relatively small, with strong roots in the local economy. They specialize in small and medium-sized local businesses or family-run enterprises. Using information obtained through their network of customers and cooperators, they can make informed loans to companies whose transparency would be insufficient for commercial banks, which select their debtors according to standardized “accounting” criteria.

Under pressure from regulators, but also from a financial or economic rationale, cooperative banks have formed networks or integrated into vertical structures, enabling them firstly to gain credibility by signalling or guaranteeing mutual support if necessary in the event of liquidity or solvency problems and, depending on the degree of integration, to achieve economies of scale on common infrastructures (e.g. IT). Several models have emerged in Europe in recent years. These range from networks of banks that are independent, but benefit from an “institutional protection system” (IPS) and are supervised at national level (Germany, Austria, Spain), to fully integrated groups in which local banks are merely branches with no capital of their own (Portugal and Luxembourg), to conglomerates involving a parent-subsidiary relationship (France, Italy) and supervised at European level.

However, this system can also have weaknesses. As the Governor of the Bank of Italy noted in a 2018 intervention, “the line is quickly crossed between a bank that supports local interests and a bank trapped by the region”. ⁹⁰ From the point of view of financial supervisors, governance reforms in line with the prudential requirements tightened after the financial crisis, and the adoption of credit risk assessment methods in line with accounting standards seemed to be imperative, including in view of the need to reduce the stock of bad debts. But this orthodox approach also runs the risk of destroying the ability to finance sustainable local economic activities.

The contribution of networks and cooperatives to economic activity has been largely neglected by economic research. The latter has developed a vision of the economy that is disconnected from society and made up solely of markets and states. By way of illustration, the table below shows the number of academic references returned by the Econlit bibliographic database, going back to 1900.

Managing the “commons”: the work of Elinor Ostrom

Elinor Ostrom, political scientist and 2009 co-winner of the Nobel Prize in Economics ⁹¹ attacked the binary representation of economics. She has shown that this representation is particularly detrimental when it comes to conserving a “common”, for example a natural resource in limited supply or only renewable at a finite rate: the climate, aquifers, fishery resources, a meadow, a beach. The metaphorical representation of these issues by economists is that of a “tragedy” leading inevitably to failure, unless a coercive power (the state) intervenes or the common good is privately appropriated. The best-known metaphor for tragedy is that proposed by the economist Garret Hardin ⁹² The most well-known metaphor of tragedy is that proposed by the economist Garret Hardin: a pasture left freely accessible, which each herder will exploit to the maximum because he anticipates the overexploitation of the meadow, with other herders doing the same. Of course, this result is due to the assumption of free access and the unreflective, non-cooperative approach of the herders. This metaphor can be reformulated in terms of a strategic game similar to that of the prisoner’s dilemma, which facilitates its validation by economists postulating the absence of any human predisposition to cooperation. If the metaphor uses the image of the prairie, the same reasoning is often applied without differentiation to a financial or monetary “common”. ⁹³ or to questions of international cooperation (international trade, development aid, biodiversity protection, the fight against climate change, tax evasion, etc.).

State management or privatization are false solutions

Elinor Ostrom shows two things ⁹⁴ The first is that the solutions generally advocated – coercion by a state power (“the Leviathan state”) or privatization – however attractive they may seem at first glance, are rarely operational. An effective state solution presupposes that the state has the relevant information on the load ensuring the regeneration of the grassland, on the behaviour of breeders, on the right level of sanction and that it controls the cost of management. ⁹⁵ The privatization solution presupposes that it is possible to divide up the common in an accepted way (by simple or qualified majority, unanimously, by a dictator?), which poses a problem in the case of heterogeneous plots. The privatization solution becomes even more problematic, if not impossible, when the commons is fluctuating or difficult to encircle, such as aquatic or fishery resources, and even more complicated when the climate is a global commons.

At what level should the commons be managed?

The second observation is that solutions exist if we remove the assumption of non-communication between stakeholders, and assume that the latter are social beings endowed with reason who are neither mute nor deaf to the arguments of others, and who wish to find a profitable compromise (in short, Aristotle’s “political animals”).

The research program led and inspired by Elinor Ostrom has always been nourished by a back-and-forth between empirical observations and the construction of a theory of the government of the commons. The first observation was that, contrary to tragic predictions, many commons have existed and continue to exist in many sectors and geographical areas. ⁹⁶ The second is that it is possible to identify certain regularities in the way they are managed, even if there is no miracle solution or single solution, or at least no known solution to every common management problem.

The management and preservation of the “commons” depend on agreement between the parties involved. This agreement essentially concerns the rights and obligations of each party, sanctions and monitoring mechanisms, as well as procedures for adapting these rules. The idea is that the stakeholders, better and faster than a third party such as a central administration, should have the information they need to define the rules, react to unexpectedly damaging developments or penalize non-compliance. Another way of approaching the issue is to differentiate between rights to the “common”, and overcome the simplistic assumption of free access. It is, for example, possible to distinguish five “different” rights over a domain or natural resource that can be attributed to stakeholders: the simple right of access without the right to take, the right to take, the right to manage and regulate, the right to exclude access and the right to sell or lease. ⁹⁷ It is from their combination that a sustainable and accepted solution for the use of the Hardin meadow will emerge.

Decentralized management does not rule out a higher level imposing a constraint or objective. If cooperation is not “spontaneous”, one possible solution is for a third-level authority to prohibit the use of the “common” before agreement has been reached between the parties involved. In this way, the European Union is both committed to the international community by the Paris Agreement on greenhouse gas emission reduction targets, and committed to national targets that leave member states a wide choice of means and how they will mobilize national players. In another example, the causes of water resource scarcity in certain European regions require a balance to be struck between what needs to be imposed by a higher authority, whether jurisdictional or politico-administrative, in order to adjust total demand to sustainable supply, and what needs to be agreed between the various users.

The example of the Hardin meadow shows that the sustainability of a common good is jeopardized if access to it cannot be restricted by local stakeholders. The question becomes more acute when a service is associated with the management of a natural resource in a territory that is by definition non-extendable, such as a ski area. The “community” of local resident professionals, such as alpine guides, has a vested interest in its preservation and reputation (safety). Allowing opportunistic and episodic arrivals of “stowaways”, professionals who are “foreign” to the area, can easily lead to a deterioration in the local community’s interest in safeguarding this resource.

The question of the relevance of Ostrom’s teachings arises at a time of crisis for the global commons – climate, biodiversity and ocean pollution – with the cascading crisis of the local commons – public health, the drying up of water tables, deforestation through burning or logging, air quality in urban areas and near industrial sites, and water. We will return to this contribution inEssentiel 7, devoted to the commodification of nature.

Faced with ecological crises, linking the local and the global

In practice, the fight against climate change requires the mobilization of all levels of decision-making, from local to global. Let’s insist on the territorial level. A large part of the necessary reductions in greenhouse gas emissions involves restructuring the use of public roads in towns and cities, and the use and maintenance of land and water resources in rural areas. Thermal renovation of apartment buildings and decentralized communities producing/consuming electricity from renewable energies are also part of the solution. What’s needed, then, is a form of governance capable of linking the local and the global. While price signals can “help”, they are by no means sufficient. The deployment of electric vehicles presupposes a coherent approach to the deployment of electric recharging (private and public), the adaptation of electricity grids and vehicle sales. Coordination between regions, départements and communes for public transport networks is decisive, as is the often local support for the renovation of thermal flats, often inhabited by people with low incomes who are unable to invest whatever the price of energy. Similarly, local banks may or may not play a role in supporting SMEs and households in this transition. Finally, the investments to be made must generally take account of climate drift, for which the carbon price signal provides no information.

An idealized vision of markets does not allow us to build effective public policies, even if they have to play on the price signal and, if need be, according to modalities that can vary according to numerous criteria, far from the purity of the models. In all cases, they must mobilize other instruments and a complex governance architecture from local to international levels.

Part of our business takes place outside the marketplace

Originally, neo-classical theory focused on market transactions. In this vision, the firm is reduced to a (mathematical) production function, and the entrepreneur to a deus ex machina who efficiently combines the factors of production. ⁹⁸ This assumption is counter-intuitive when we observe modern economies shaped by complexly organized companies. However, it underpins the postulate that the ideal competitive market is supposed to produce an optimal equilibrium.

Employment contracts

In this simple expression, neo-classical theory is unable to explain the existence of capitalist companies that organize production and services internally, not on the basis of market exchanges, but according to rules defined and implemented in a hierarchical system. This is particularly evident in labor relations. Unlike a service contract with an independent counterparty ⁹⁹ the employment contract is not a market transaction in the sense of a monetary exchange for a service or good. It creates an explicit bond of subordination within the limits defined by law and the employment contract. This bond of subordination enables the employer to control not only the product, but also what task is performed and how it is performed. More generally, the movement of services or goods between two departments of the same company is not a market exchange, but rather one maintained by routines or instructions. ¹⁰⁰

Avoiding transaction costs: relations between internal departments in companies

Ronald Coase was the first to point out, in 1937, that it was not possible to be content with a vision in which the “economic system works on its own” thanks to the price mechanism, when there are many situations in which economic activities are induced by instructions given in hierarchical systems (companies). ¹⁰¹ The question was taken up again in the 1960s by Kenneth Arrow and Oliver Williamson. ¹⁰² Their original research question was to find an explanation for the vertical integration of companies. ¹⁰³ If the market is efficient, what is the point of a company merging with upstream or downstream partners?

The answer, inspired by Coase (1937), is that recourse to the market has a so-called “transaction” cost. These transaction costs are essentially made up of the costs of obtaining information on potential counterparties, advertising, information on the good to be exchanged, negotiation, finalization and monitoring the completion of a contract, as well as the risks of default by one of the parties.

Some transactions can be carried out at lower cost within the company. They are then said to be internalized. Let’s take the example of a construction company that needs stability studies. But this requires, among other things, that it establishes terms of reference as precisely as possible, shares information that it would prefer to keep confidential, ensures that the study will be completed on time (with the risk of legal proceedings) and that the firm will have worked in its best interests (minimizing construction costs while taking regulations into account). It can also develop a relationship of trust with a design office and work exclusively with it, construction after construction, thereby reducing the risks to the quality of the result; or integrate the design office into its own structure, which also enables it to control the way things are done. Such integration may, incidentally, require investment in internal control and incentive mechanisms to compensate for any information asymmetries between the manager and the contractor. ¹⁰⁴

Vertical integration, subcontracting and off-market coordination

Statutory companies have another advantage: they are more sustainable and their governance is more transparent, including the legal conditions for their bankruptcy. This increases predictability for their financiers, whether shareholders or creditors, making it easier for them to commit. As a result, companies can increase their sources of financing. This, in turn, facilitates their ability to achieve economies of scale, benefit from the accumulation of experience and preserve know-how.

International agreements to protect investment and intellectual property, and the liberalization and expansion of financial markets have, over the last few decades, increased the opportunities available to companies to expand globally. The vertical integration of production has changed: typically centralized production chains have become fragmented. This fragmentation has led multinational companies to outsource, relocate and seize opportunities offered in different countries in terms of labor costs, (weak) environmental protection and/or taxation and, where applicable, civil or criminal liability. Even if the companies concerned are legally independent, this does not generally alleviate the dependence of suppliers on their principals and the need for “off-market” coordination.

It’s understandable, then, that the limits of the company, the choice to “buy or produce”, “internalize or outsource” certain activities, “own or not own” supplier or customer businesses, are not set in stone and are subject to successive experimentation.

History of market self-regulation

As we’ve seen, the founding myth of market equilibrium dates back to the end of the 18th century, at the start of the thermo-industrial revolution. The 19th century saw numerous economic crises, which economists of the time and of the early 20th century called “business cycles”. The 1929 crisis was a major turning point: it did not resolve itself. The economist John Maynard Keynes theorized the need for state intervention, against classical thinking. The war brought the Western economies out of crisis, and the post-war period saw the emergence of economic models that were regulated in various ways and sometimes “directed”. At the same time, the Keynesian revolution gave rise to a counter-revolution: neoliberalism, which inspired the most liberal economic models. Let’s take a closer look at these few points.

The economic cycles of the 19th century

The 19th century was marked by the emergence and development of industrial capitalism, and saw a number of economic cycles. ¹⁰⁵ called Juglar cycles, after the economist who first identified them, alternating between phases of growth and recession. Economic crises, which are key turning points, reflect tensions and imbalances in the system. Clément Juglar identifies around ten of them throughout the 19th century, each separated by around ten years. In short, he shows that these cycles are linked to those of credit: in phases of economic expansion, prices rise and banks lend easily, until they reach a turning point, which is in fact a crisis of poor sales (or overproduction). The banks then turn off the credit tap and raise interest rates. Prices fall, and bankruptcies multiply, until the fall in prices gives rise to a new dynamic and a recovery that will once again spark innovation and anticipation, until a new crisis strikes.

The crisis of 1929

The crisis of 1929 was one of the major economic events of the 20th century, fundamentally challenging conventional economic thinking. Authorities (including the Fed in the US) expected the economy to recover on its own, as in the cycles of the 19th century. Nothing of the sort happened. Let’s summarize the history of this crisis.

On October 24, 1929, known as “Black Thursday”, investors began to sell their shares en masse, causing prices to plummet. The panic intensified over the following days, culminating on “Black Tuesday” (October 29). In the space of a few weeks, the New York Stock Exchange lost almost 90% of its value, ruining many shareholders. This stock market collapse marked the start of a global economic crisis. In the United States, thousands of banks fail, wiping out the savings of many households. Credit became scarce, paralyzing the economy. Industry and agriculture suffered a sharp drop in activity. Unemployment reached 25% in 1933. Millions of Americans found themselves unemployed and often reduced to poverty. The crisis quickly spread internationally, as economies became increasingly interconnected. American exports collapsed, affecting countries dependent on their markets, such as Germany and Latin American nations. Protectionist policies, such as the Hawley-Smoot tariff s (1930), aggravated the situation by reducing trade.

Faced with the scale of the crisis, the authorities’ initial (lack of) responses were rooted in classical economic thinking. In the United States, President Herbert Hoover remained committed to a policy of non-intervention, exacerbating the effects of the depression. As for Fed Chairman Roy A. Young, he did not intervene to save the banks. ¹⁰⁶ and, on the contrary, tightened credit conditions, aggravating the crisis. It was not until 1933, with the election of Franklin D. Roosevelt, that significant measures were taken. Roosevelt launched a program of economic and social reforms (the New Deal) aimed at boosting demand, supporting employment and regulating the financial sector. These measures include the creation of a social security system, major public works and banking regulation (Glass-Steagall Act).

Worldwide, governments began to move away from economic liberalism towards interventionist policies. In Germany, Chancellor Brüning’s deflationary response worsened the economic and social situation and facilitated Adolf Hitler’s rise to power.

The crisis of 1929 never really went away: in 1939, world war broke out, and the rise of a war economy put the economy back on track.

Keynes’s critique of laissez-faire

John Maynard Keynes was both an actor and a committed observer of the 1929 crisis. He fundamentally challenged the dogma of market self-regulation, or “laissez-faire, laissez passer”. For Keynes, it was not true that the crisis would resolve itself. In his seminal book The General Theory of Employment, Interest and Money, published in 1936, he wrote:

The proposition that “supply creates its own demand” is fallacious if interpreted in the sense that it implies that all the income created by production must always be spent on consumption. Some of it can be saved, but if it is not invested, it will not contribute to effective demand.

Chapter 2, from which this quotation is taken, is devoted to a critique of classical postulates, including J.B. Say’s law of opportunities, which forms the basis of general equilibrium theory, the heart of neoclassical economics.

The neoliberal vision of the market

The neo-liberal ideology came into being under the impetus of Friedrich Hayek, in reaction to Keynesianism and the rise of communism around the world. For the neoliberal school of thought, the market is the best regulator of economic activity, and the mission of politicians is first and foremost the legal protection of private property and the enforcement of contracts. The second is not to hinder the free movement of goods and services, people and capital. The State must confine itself to setting the rules of the game and intervening to compensate for market failures, rather than substituting for them. It must set and respect the rules of the economic game. It must be a regulator. In short, the State must serve private interests.

The unrealism of competition policies aimed at establishing and preserving atomistic markets is recognized. Neoliberals are therefore not opposed in principle to economic concentration. They believe that competition policies should seek – with nuances between jurisdictions – to strike the right balance between the efficiency gains generated by economies of scale and the fight against abuses of dominant positions that put up barriers to new entrants. This is also the case for the “labor market”, which needs to be flexible to enable optimal allocation of the workforce and improve economic competitiveness. Trade unions are seen as obstacles to this flexibility.

Different market approaches coexist around the world

Here, we’ll be looking at how, in reality, countries emerging from the Second World War have regulated markets according to their culture, institutions, laws, power relations… and events. We will exclude here the case of China ¹⁰⁷ which is very specific.

How can we make sense of the complexity of today’s world? The first distinction to be made is between more liberal, Anglo-Saxon capitalism and more cooperative capitalism (continental Europe and Japan). In his book Capitalisme contre capitalisme (Seuil, 1991), who proposed this distinction, calling the more cooperative capitalism “Rhenish”. This distinction is quite intuitive. The Anglo-Saxon business world (United States, Australia, Canada, Australia, New Zealand) believes more in the need for individuals to make their own way, to achieve individual success, and quickly equates state intervention with deprivation of freedom and inefficiency. Companies exist to serve the interests of their shareholders, and this is how they work towards the general interest, which is identified with economic performance. The difficulties faced by the poorest are relativized or considered as inevitable. In contrast, the so-called “Rhineland model” believes in the need to protect the weakest and most disadvantaged, and seeks to temper the free play of the market when it creates excessive inequalities or even poverty. This model is more sensitive to the long term than the liberal model.

This broad distinction can be seen, for example, in the open conflict (in 2024 and 2025) between the “proponents of Corporate Social and Environmental Responsibility” (and the need for extra-financial reporting and constraints on companies to ensure they take social and environmental issues into account, following the example of the European CSRD directive) and those who consider that there is no need to constrain companies in this way. This conflict is at the heart of a challenge to the European Green Pact agenda. ¹⁰⁸ Behind the not entirely unfounded criticism of overly cumbersome administrative regulations, the fundamental criticism of certain private players is always the same: “Let the public authorities leave us to it; we know better than anyone what we have to do”.

This distinction was explored in the so-called Variety of Capitalisms theory.¹⁰⁹

The “Varieties of Capitalism” approach

This theory distinguishes between liberal market economies (LMEs) ¹¹⁰ and coordinated market economies (CME, the name given to Rhenish capitalism). It is concerned only with the so-called developed economies.

The former are characterized by fierce competition in the goods and services markets, flexible employment, a responsive financial system that encourages rapid restructuring, and a low level of public social protection. ¹¹¹ The latter are distinguished from the former by the presence of institutions that facilitate mutually beneficial cooperation.

To overstate the case, a “typical” coordinated market economy in a developed country is characterized by cross-shareholdings in companies, and powerful associations of employers and entrepreneurs favoring the flow of information and technology transfer. This, in turn, creates a favorable climate of trust, enabling access to “patient” capital that is less dependent on short-term results than recourse to competitive financial markets. Financial systems in EMCs are oriented towards long-term relationships. Companies rely less on stock markets and more on banks and other financial institutions for financing. This limits the pressure for short-term results and encourages sustainable investment.

In terms of employment regulation and governance, the definition of product standards is largely in the hands of trade associations. Wages are set not at individual level, but in negotiations at national or branch level between employers’ associations and equally powerful employees’ unions. Vocational training is organized at branch level under the control of employers and trade unions. It is based on shared know-how and responds to the specific needs of companies in the sector. Within companies, significant rights are granted to employee representatives, facilitating long-term management.

The “five capitalisms” approach

The “Five Capitalisms” approach ¹¹² differentiates the ideal type of EMC in developed countries into four main groups. In brief, it distinguishes :

• the Scandinavian countries (social-democrats), which give a central role to the social partners and are very egalitarian in terms of social protection and wage scales, with very active policies for training and professional reintegration.
• the model of central-northern (continental) Europe, less egalitarian and where income protection is limited to the poorest.
• Southern European (Mediterranean) countries, with greater employment protection and less social protection than in Northern Europe.
• The fourth group is made up of Asian economies, based on the development of large firms operating in informal collaboration with the state, and a centralized financial system. Employees of these conglomerates are de facto protected by a stable career policy.

Here is a table summarizing the differences between these models:

Globalization versus coordinated market economies

Let’s not forget that financialization and globalization were the result of political choices initiated in the United States under President Reagan and in the United Kingdom under Margaret Thatcher, and imitated in several other countries. Let’s also remember that the rise of China (with its very specific form of “state capitalism”, if we dare call it that) has also greatly destabilized the “coordinated” economies. This powerful dual movement has put them in difficulty, both through its strong appeal to consumers (low prices from China and constant innovation from the United States, particularly in digital technology and telecommunications (with smartphones and all their installed applications) to simplify matters), and through insufficient protection for producers from international competition.

These countries have responded, and continue to respond, to this pressure in a variety of ways. Partial adaptations are taking place, but at this stage they have not led to “pure” Anglo-Saxon-style institutions. There are winners and losers, and their implementation depends on the resistance to them and their supposed impact on the social groups likely to form majority political coalitions. At European level, however, this resistance is weakened by the construction of the neoliberal European market (see Essentiel 8).

Let’s illustrate this point with the example of Germany.

The deregulation of the labor market initiated by the Schröder government in the first half of the 2000s did not call into question the power of employees within companies, despite pressure from management to roll back parity representation on supervisory boards and weaken works councils. Collective wage bargaining still covers 55% of employees (compared with 65% in the early 1990s and, by way of comparison, 13% in the USA).

On the other hand, the lifting of regulatory limits on temporary work and the tightening of unemployment insurance conditions have led to the casualization of low-skilled employees and a dualisation of jobs: on the one hand, well-paid skilled workers with permanent contracts, and on the other, low-paid precarious workers. The ensuing rise in inequality and pressure on low wages led to the introduction of a minimum wage in 2015, under pressure from the unions and the Social Democratic Party.

In the early 2000s, the commercial banks exerted pressure, relayed by the European Commission, to bring the savings banks owned by local authorities and the development banks owned by the Länder (regions) under the common commercial regime. The German political class almost unanimously resisted, in order to avoid the foreseeable dismantling of a savings bank network with strong local roots and popular appeal. A compromise was reached to safeguard the privileged status of the savings banks. ¹¹³ This public-law status has been preserved to this day, despite recurrent pressure from commercial banks and calls for privatization by orthodox economists.

Examples like these could be multiplied, but the German case clearly demonstrates the ambivalence of European construction in its reaction to the violence of the liberal model (EML).

Anarcho-capitalism

Far removed from the state regulation of the market we have just discussed, anarcho-capitalism ¹¹⁴ referred to by Javier Milei, President of Argentina, and above all by Donald Trump and his entourage ¹¹⁵ challenges the state in all its functions. Its promoters dream of territories where business is free from laws, taxes, environmental regulations, labor laws, etc., and is governed solely by transactions. Canadian historian Quinn Slobodian describes, in his book Le Capitalisme de l’apocalypse ou le rêve d’un monde sans démocratie (Seuil, 2025), he describes “zones” that approach this ideal and fragment the “regulated” world. He counts 6,000 such zones worldwide ¹¹⁶ of 82 different kinds.

According to anarcho-capitalists, compulsory levies and regulations (legislation, decrees, administrative measures, etc.) are illegitimate. And they see no need for the state to guarantee private property. They favor the privatization of all services. They oppose all forms of non-voluntary redistribution by the state, which they regard as theft.

Needless to say, this system is both extremely violent for those who cannot survive on their own, and anti-democratic. Even though it claims to want to get rid of public power, it requires strong power (contrary to the idea of anarchism) to quell the inevitable uprisings of the system’s “damned”. Today, this ideology is favored in the United States by a handful of billionaires. ¹¹⁷ close to Trump, obsessed with their own enrichment and totally indifferent to the fate of other human beings.

It is curious to note that this anarcho-capitalism is not without proximity to what economists Pierre-Yves Hénin and Ahmet Insel ¹¹⁸ have called “National Authoritarian Capitalism” (NaCA), the most notorious example of which is China, and the one closest to home, Hungary. In both cases, democracy disappears in favor of a plutocracy that increases the “wealth pump” from the bottom up. Donald Trump is likely to be tempted by both visions.

Financial markets

Definition and role of a financial market

In this section, we focus on financial markets, whose development and international openness are at the heart of today’s economic system. Company managers have gradually come to see competitive financial performance, determined on international markets, as their primary, if not sole, evaluation criterion.

A financial market ¹¹⁹ is a place, physical or virtual, where market participants (buyers, sellers; who may be financial institutions, companies or individuals) trade financial products, which may be listed continuously, or at certain times of the day. Operations can be automated(algorithmic trading, part of which is high-frequency).

Financial markets provide financing for the economy, investment for investors, risk allocation and management, and liquidity for securities. For example, to meet their financing needs, companies, governments and public authorities rely in part on banks. They may also issueshares,bonds and other debt securities.

The different types of financial markets

These financial securities are issued on a “primary” market. For example: an IPO, a capital increase or a bond issue.

Once the issue is complete, these securities will be traded by various buyers and sellers, on what is known as the “secondary” market.

Classifying financial markets

There are several types of financial market, characterized by different criteria: economic, organizational and by the nature of the commitment.

In economic terms, markets are distinguished according to the financial securities traded on them:

• the equity market for capital financing of companies (including banks);
• the bond market for financing companies (including banks), governments and local authorities through long-term debt;
• the money market for financing banks, companies and local authorities through short-term debt (less than one year);
• the derivatives market for risk hedging ;
• the foreign exchange market ( Forex) ¹²⁰  ;
• the commodities market and _CO2 quotas.

From an organizational standpoint, a distinction is made between organized markets and over-the-counter(OTC) markets.

An organized market is a trading venue where the mechanism for disseminating and matching buy and sell orders is governed by rules approved by the market regulator (such as the AMF in France). Once the transaction has been completed, a clearing house (such as Euronext in Paris) guarantees the successful completion of the operation, ensuring that the commitments of the buyer and seller are respected.

This type of market offers information to stakeholders (it is transparent to a certain extent) and liquidity, with rules designed to protect investors. Examples include stock exchanges (New York Stock Exchange, Euronext, Tokyo Stock Exchange, etc.) and derivatives exchanges (Chicago Mercantile Exchange, where futures on commodities, currencies, interest rates, etc. are traded; Euronext Liffe, where options and futures on stock indices are traded, etc.).

However, organized and regulated markets are not immune to general dysfunction, as the major financial crises have taught us. Nor, at the microeconomic level, are they efficient (seeMyth #4 – Financial markets are efficient). As Robert Shiller has shown ¹²¹ corporate stock values can be linked to market euphoria and fads rather than to substantial economic underpinnings. However, these markets are by definition safer and more susceptible to regulation than OTC markets.

In an over-the-counter (OTC) market, financial intermediaries are in direct contact with each other: they negotiate and process the terms of the transaction themselves. Generally ¹²² the OTC transaction is not handled by a clearing house, which would guarantee its successful completion. In this case, therefore, the risks are higher for the parties involved. ¹²³ in return for greater flexibility, personalization and confidentiality. At macro-financial level, the lack of transparency in OTC transactions is a source of systemic risk, as demonstrated by the 2008 crisis, which has led to attempts at regulation.

A few examples: electronic currency trading platforms such as Reuters Dealing or Electronic Broking Services, the OTC Markets Group in the USA, where shares in unlisted companies are traded, etc.

Finally, financial markets can be distinguished by the nature of the commitment made by stakeholders.

• On the spot market ¹²⁴ the buyer pays the agreed amount and the seller delivers the financial security within a timeframe that is generally two days after the trade. However, this is not the case for high-frequency (algorithmic) trading, where transactions take place almost instantaneously. Settlement times, in terms of delivery and payment, can be close to zero, as positions are often opened and closed in an extremely short space of time.
• On futures markets: buyer and seller commit to a transaction at a future date for an agreed product, quantity and price.

Financial innovations and their link to the real economy

The evolution of capitalism has been accompanied byfinancial innovation and the rise of financial markets since the first stock exchanges in the 15th century. The financialization of the economy accelerated considerably from the 1970s onwards. There are two main reasons for this acceleration.

On the one hand, the end of the Bretton-Woods agreements, decreed unilaterally by the President of the United States in 1971, put an end to fixed exchange rates between the major currencies. The reappearance of this exchange rate risk created a need for “risk hedging” on the part of companies. In response, currency futures were introduced on the Chicago Mercantile Exchange (CME) in 1972. This was one of the first organized markets enabling companies and investors to hedge against currency risk. It’s quite clear that this need for hedging is real: industrial companies generally consider that it’s not their business to manage such risks. They transfer it to a financial player, acting in the same way as when they take out an insurance policy (the only difference being that insurance is often compulsory).

On the other hand, financial mathematics underwent a fundamental innovation in 1973, with the publication of the article The Pricing of Options and Corporate Liabilities by economists Fischer Black and Myron Scholes. ¹²⁵ This article laid the foundations for a revolutionary mathematical method for valuing options and other financial derivatives. ¹²⁶ which contributed to the boom in derivatives markets. From the publication of the formula ¹²⁷ the Chicago Board Options Exchange (CBOE), the first exchange to specialize in options, was founded in 1973. The formula was quickly adopted for options pricing, and many exchanges followed the CBOE’s lead in introducing equity options and other derivatives. In the 1980s, with the rise of computers in the financial sector, the Black-Scholes formula became a common tool for traders and financial analysts, who could now automate the calculation of option prices.

Financial markets have exploded in diversity, size and depth. From the point of view of companies and (wealthy) citizens, they can be seen as providers of key services, as seen above (provision of financing, investment, liquidity and risk management). But they have also acquired an autonomy from the real economy: high-frequency trading, for example, developed because it was in the interests of operators, not in response to market demand. But this is also the case for many derivatives, as economist and former trader Thierry Philipponnat shows in his book Le Capital, de l’abondance à l’utilité (Éditions de l’échiquier, 2017).

“The purchase of a credit or foreign exchange derivative generates flows only between financiers and cannot therefore be considered an investment.”

Thierry Philipponnat, 2017

We will also see that, contrary to popular belief, financial markets are not efficient.

Smoke markets

Not only are financial markets inefficient, they have also lost a property that neoclassical economists consider essential: the fact that price is an indication of relative scarcity. The rarer a product (or raw material or by-product), the more expensive it is. At a deeper level, price is information considered necessary for entrepreneurial decision-making, as Friedrich Hayek makes clear:

“It’s more than a metaphor to describe the price system as a kind of machinery for recording changes, or a telecommunication system that allows individual producers to simply watch the movement of a few indicators, as an engineer might watch the hands of a few dials, in order to adapt their actions to changes of which they can only ever know what the price movement reflects.” ¹²⁸

But in highly financialized markets, this is not the case. Price volatility increases, blurring the price signal. As Nicolas Bouleau has shown ¹²⁹ . Let’s summarize the arguments in his words:

1/ Instantaneous prices, or spot prices, provided by the financial markets are very turbulent. If we compare international prices for wool and cotton, we can see that the relative price often doubles in the space of two years. In times of crisis, the price of oil can vary from 1 to 4 in the space of a month, and commonly by 50% in a year. And as we have shown in a fact sheet on the price elasticity of energy, the volume of oil consumed worldwide does not appear to be price-dependent. Similar movements can be seen in metal prices (gold, antimony, cadmium, zinc, nickel, palladium, silver), which are not obviously correlated with each other or with oil.

2/ The reason for this agitation is speculation, a term expressing the possibility of instantaneous purchase and resale. Let’s imagine a market in which we are obliged to keep what we buy for a certain period of time – for example, the real estate market, given the length of time it takes to register notarial deeds, which is several months in France. In such a market, the instantaneous trend is clearly perceptible, and indicated by the agencies. The transition to “continuous time” (instant buying and selling) creates a rupture: agitation or speculation become decisive, rendering trends invisible or uninterpretable.

3/ In a speculative market, it is not possible to reveal trends: the methods supposed to reveal them are inoperative. If they gave an objective result, not dependent on the method, it would immediately be used to make a profit, and the price would change. Worse still, there are specialized teams on every continent, equipped with vast computing, mathematical and statistical resources, who spend their time detecting the slightest possibility of “arbitrage” and manage to profit from it. But this is precisely what puts such trend readings beyond the reach of economic players. It’s impossible for an entrepreneur or even a lone trader to do better than these specialized teams.

This blurring characteristic has a very profound environmental consequence. It implies that the price does not inform about the scarcity of the resource. ¹³⁰ The fact that the price of oil exceeded $140 a barrel in 2008 (its highest price ever) is no indication that it was going to run out, and conversely a low price could be observed before a real shortage. This calls into question the famous “Hotelling rule”. ¹³¹ .

Markets and the environment: can we bargain with nature?

Business accounting and household accounts do not take into account the positive or negative impacts of our activity on nature, nor the services “rendered” by nature. ¹³² This is because nature does not get paid for the services it renders or for the damage it suffers, and, conversely, does not pay human beings for any “reparations” it may receive. As a result, the “economic calculations” of economic players based on these accounts do not take these impacts and services into account. Only that which is counted counts. In other words, the price does not represent all the costs and benefits generated by the economic activity.

From an economic point of view, this simple observation can justify the creation of mechanisms to reintegrate these costs and benefits into economic life, simply by assuming that economic players are not rational in the sense of neoclassical theory, but more modestly in the sense that these players take into account the price and quality of the goods and services they purchase in their purchasing decisions.

We can imagine (and note the presence of) several devices designed to take Nature into account:

• bans (e.g. nature reserves on land or at sea, which prohibit human activities in the area concerned, or bans on the marketing of toxic products);
• regulations limiting withdrawals, waste or pollution/destruction or requiring treatment (in the case of waste). ¹³³ or to “compensate” for them (in the case of withdrawals or pollution) ¹³⁴  ;
• monetization of services and pollution through taxes, subsidies, payments for environmental services, or legal action;
• monetization through the creation of tradable rights markets;
• the creation of “climate derivatives” (see box);
• community management of natural resources (where the economic dimension is “internalized” by the community).

These measures may concern the climate and the reduction of greenhouse gas (GHG) emissions, the use of water, forests and natural areas, as well as chemical pollution, the extraction of resources (mining), and so on.

We focus here on market solutions applied to the case of GHG emissions, discussing their justification, their limitations, and the alternatives as advocated in the wake of Elinor Ostrom’s work. But first, let’s take a look at the debate among economists between carbon taxes and quotas, both of which are based on the idea that they fill a market failure.

Carbon tax or allowance market?

Arthur Pigou is responsible for ¹³⁵ the idea that a tax can remedy the “market failure” mentioned above. The introduction of a tax encourages the polluter to reduce the pollution for which he is responsible, even though he does not do so spontaneously. If he fails to do so, the tax “sanctions” the pollution, in accordance with the polluter-pays principle. ¹³⁶ The money collected can be used to finance public action to reduce pollution.

In terms of climate change, the carbon tax is the application of this principle. Its impact on reducing emissions can be assessed by evaluating the elasticity of consumption of products subject to the tax, in relation to its amount.

We owe to Ronald Coase and John Dale, the theoretical idea, both bolder and more debatable ¹³⁷ to correct allocations of rights when they are inadequate (and, in particular, do not allow for the creation of a market). In other words, for Coase, if the initial allocation of a right (to pollute within a certain limit, for example) is not “efficient”, then the creation of an exchange system (a market, in other words) will correct the situation.

How does an emissions trading scheme work?

It was in the Kyoto Protocol (negotiated in 1997 and ratified in 2005) that it was decided to set up a system of_CO2 quotas. This idea was put forward by the American delegation, drawing on its successful experience with _SO2 quotas. ¹³⁸ Ironically, the Americans did not ratify the agreement, and the Europeans, who were initially more in favor of a tax system, were the first to set up a quota market. Launched in 2005, theEmissions Trading System (ETS) creates emission rights and makes them tradable on a market – in this case, accessible to obligated parties (_CO2-emitting companies subject to the system) and financial players, thus enabling the emergence of financial derivatives.

A quota market consists of allocating an annual emissions ceiling to an industrial site, creating tradable_CO2 quotas, and forcing industrialists to buy quotas if they exceed the emissions ceiling, knowing that they can sell quotas in the opposite case. By matching needs and surpluses on the market, an allowance price is set. Find out more about_CO2 allowance markets in our Neutrality and carbon offsetting factsheet.
The first advantage, for the designers of this system, is that the amount allocated makes it possible to control authorized emissions; something that a tax, whose effect on the quantities of pollution emitted is uncertain, cannot do. Two other arguments are put forward by the promoters of this market: it is not a budgetary or fiscal instrument, which means that the corresponding sums are not subject to budgetary and fiscal logic. They decentralize the trade-offs to be made to the “obligated parties”, according to their knowledge of their constraints and possibilities, which is, in their view, more efficient than any centralized solution.

The European Union Emissions Trading Scheme (ETS)

However, the main reason for choosing the ETS within the EU is institutional: member states are sovereign when it comes to taxation. To be implemented, a European carbon tax requires the unanimous agreement of all members, which is impossible to achieve in practice. All the ETS needed was a directive, which requires only a qualified majority in the European Council (and no blockage in Parliament). As a result, the system within the EU is a hybrid one: the most concentrated emissions are subject to the ETS, and the others to taxes where appropriate, as is the case for France, Sweden, Finland, Denmark, the Netherlands and Slovenia.

This situation could change withETS 2, scheduled for 2027, which provides for a second market in allowances for building and housing emissions.

We won’t go into more detail here about these systems, their evolution or their evaluation, to concentrate on the two-fold controversy that animates economists on these issues.

Carbon credits and the voluntary carbon market: reduce or offset

Alongside quota markets, the use of carbon credits has developed. These are mechanisms whereby private-sector companies finance actions to reduce GHG emissions for which they are not directly or indirectly responsible (i.e., which are not part of their scope 3). ¹³⁹ ). Carbon credits are the counterpart of such decarbonization actions. These carbon credits can then be traded on a market that is currently voluntary, unregulated and not bound by international regulations. A private player can therefore buy them and thus, in theory, contribute to GHG reduction or sequestration.

Without going into detail here (see our Carbon neutrality and emissions offsetting fact sheet), let’s mention the two main problems posed by carbon credits in a voluntary market.

On the one hand, if these credits are certified by agencies or consultancy firms, they are not always solid proof of effective and sustainable action, as a major survey published in the Guardian revealed. ¹⁴⁰ in 2023.

On the other hand, the companies that buy these credits use them, most of the time, to “offset” their own emissions, and consequently do not launch the corresponding emissions reduction actions, which must nevertheless be carried out with a view to achieving zero net emissions in the long term: in fact, the available sinks are far from sufficient to neutralize current emissions. We therefore need to act on both fronts.

The argument put forward by economists is that it would be desirable, in terms of economic efficiency, to carry out the least costly operations (those that generate credits). This argument only holds if the “offset” emissions were the subject of work (including research) aimed at reducing them, but this is not the case as long as it is possible to buy inexpensive credits. In a way, they disappear off the radar.

As long as carbon credit market mechanisms make it cheaper to “compensate” elsewhere than to reduce our own emissions, the necessary in-depth transformation of the economy will not take place.

Carbon credit markets are a perfect illustration of how belief in markets as an absolute solution can have harmful consequences for society.

Market mechanisms and biodiversity

Biobanks

In the United States, a number of financial players began looking into the subject in the 1980s. It was at this time that “biobanks” were born. ¹⁴¹ private institutions, financial or insurance companies, which assign a cost to the various components of Nature (an endangered species, a natural area, etc.) and sell securities or “biodiversity certificates” to companies for “building permits”. In practical terms, biobanks acquire land on which endangered species live, and sell securities to companies to finance the purchase of the land. Companies thus have the satisfaction of having acted to safeguard biodiversity (and the possibility of communicating their “good deed”), while continuing to build sites that are more or less polluting.

In principle, this operation satisfies the interests of the companies, the biobanks and Nature itself. Indeed, by purchasing securities from biobanks, companies obtain “certificates of good conduct” which are valued by their customers and investors in general; biobanks, for their part, will become richer, and an endangered species will theoretically be protected.

For example, the Malua Bank biobank, set up in 2008, purchased 34,000 hectares of Sabah forest (Borneo, Malaysia), home to endangered orangutans, for 34 million euros. The biobank sells “orangutan certificates” to palm oil extraction companies so that they can be exempted from suspending their destructive activities. However, palm oil has provoked a real outcry from animal and environmental activists.

Biodiversity certificates

Let’s recall the context. As the IPBES reports remind us ¹⁴² reports, urgent action is needed to reverse the decline in biodiversity. The Global Framework to halt the loss of biodiversity is the outcome of COP15 Biodiversity in Kunming-Montreal, which took place in 2022. It sets global objectives for this action, including the mobilization of the necessary public and private funding. This is the content of target 19, which calls for “a significant and progressive increase in financial resources […] including private resources”. It explicitly mentions the promotion of “innovative systems”, including “biodiversity credits”. The President of the European Commission gave a boost in September 2024 ¹⁴³ for the introduction of “nature credits” along the lines of the carbon quota market.

These certificates aim to guarantee the integrity and non-additionality of a biodiversity restoration action. ¹⁴⁴ The underlying idea is that they can serve as a basis for private funding from a player seeking to contribute to this fight against biodiversity loss, and then for a trading market.

The problems revealed by the voluntary carbon certificate markets will be repeated here. It is therefore imperative that lessons be learned. In particular, it is essential that such markets for biodiversity be regulated and not voluntary. But, in addition, biodiversity certification is more difficult for several reasons. ¹⁴⁴ Here are the two main ones.

• There is no universally recognized metric for biodiversity.
• In the case of carbon, the concrete issues at stake have a much stronger territorial and local dimension.

The limits of price signals

The first controversy about relying on markets to preserve the environment – whether climate or biodiversity – concerns the effectiveness of the price signal alone (whether from quotas or a tax). Jean Tirole “Nobel Prize ¹⁴⁶ in economics recommends, “like the vast majority of economists”, a market-based solution, i.e. “making all countries, all economic sectors and all players pay the same price for carbon emissions”. ¹⁴⁷

This idea is dominant, in the sense that it is supported by Europe’s most respected economists, such as Jean Tirole and Christian Gollier. We mentioned its basic logic above. The reasoning of these economists is more profound: they consider the market to be the only efficient institutional organization, since it is based on the interests of players whose confrontation, in their view, leads to optimal efficiency, except in the case of market failure. As the case of GHG emissions is recognized as constituting such a failure, they propose correction by a price signal, and consider it necessary and sufficient. They consider that any other public intervention (through subsidies, regulations or other means) is necessarily more costly (even if these costs are hidden) and basically superfluous.

Other economists draw attention to the limitations of price signals. Firstly, on an empirical level, the following shortcomings can be observed:

• The price signal level is very difficult to calibrate correctly.¹⁴⁸
• The resulting price increases are ultimately passed on to consumers, making citizens hostile to this type of taxation. In other words, the role of the state is seen more as a protector against market failures/excesses (in the event of rising energy prices, for example, the state is called upon to limit them, and in this case is seen as legitimate) than as an incentive. Tax incentives are seen as just another tax, the use of which eludes citizens, who see only its weight. This is the experience of the Gilets Jaunes in France.
• Estimates of the price level that would need to be put in place in order, on its own (without other public policies), to curb emissions in line with the trajectories of the Paris Agreement, are very high compared to the current level (e.g. 256 euros per tonne ¹⁴⁹ in France in 2030, the current level being 45 euros and having been enough to trigger the Gilets Jaunes movement).
• This price level cannot be independent of the price of the “underlying” (in this case, for the carbon tax, the price of energy), as consumers are sensitive to the price inclusive of tax and not to the price of carbon, which is only part of it. The idea of elastic taxation ¹⁵⁰ has been put on the table, improving on the “floating TIPP”, tested then abandoned in 2000-2002. But this suggestion strays far from the “purity” of the economic reasoning behind taxation.
• People can’t instantly change the way they “work”, especially if this requires investment (in vehicles, heating, etc.), and even more so if they don’t see any alternatives (e.g. public transport).
• In practice, the arsenal of public measures is much more comprehensive (information, training, regulations, standards, public spending, subsidies, etc.).

An exclusively market-based approach will not decarbonize the economy

For orthodox economist Jean Tirole, it’s true that “political scientist Elinor Ostrom, winner of the 2009 Nobel Prize in Economics, has shown how small, stable communities are able, under certain conditions, to manage their local common resources without falling victim to this tragedy, thanks to informal incentive and sanction mechanisms”. ¹⁵¹ But “these informal approaches to limiting the free rider problem are obviously not applicable to climate change, because in this case the stakeholders are the 7 billion people currently inhabiting the planet as well as their future descendants.” ¹⁵² As mentioned above, he recommends a market-based solution.

In contrast, Elinor Ostrom has put forward proposals for managing the commons based on lessons learned. ¹⁵³ She puts forward a polycentric approach in which several commons, from the local to the global, would be interconnected. This approach would take advantage of the co-benefits of the fight against greenhouse gas emissions (improved air quality) and the potential complementarities between adaptation (locally essential) and mitigation (to global effects). Exchanges of experience and the resulting changes in social norms will help to boost confidence and limit opportunistic behavior. This approach is as different from the unrealistic market/price approach (seeMisconception 5 on the privatization of Nature) as it is from an authoritarian state approach. For Elinor Ostrom, “the problem of collective action does not disappear if it is a government that deals with an externality. Even a government must be able to rely on the willingness of its citizens to cooperate”. ¹⁵⁴ The relevance of this proposition should not be dismissed out of hand. The success or failure of the ecological transition, whether in terms of adaptation or mitigation, will largely be determined at local level.

The special case of the European market

Since the Second World War, Europe has gradually created institutions and rules to build a vast integrated market. This project is based on the theoretical idea of market efficiency, but also, after the Second World War, on Montesquieu’s idea of “doux commerce”. ¹⁵⁵ This approach, impacted by major events such as the fall of the Berlin Wall, the wars in Yugoslavia, the rise of China, the 2008 crisis and the war in Ukraine, has evolved over time in response to new economic and political dynamics, while remaining faithful to its common thread. The main milestones of this integration are marked by four major treaties: the ECSC Treaty (1952), the Treaty of Rome (1957), the Single European Act (1986) and the Maastricht Treaty (1992).

Towards the internal market: gradual integration

The creation of the European Coal and Steel Community (ECSC) in 1952 was intended to place the production of these strategic resources under a supranational authority, with the aim of achieving lasting peace between France and Germany. It was therefore first and foremost the expression, on a European scale, of a post-war need for industrial policy, in the broadest sense of the term, corresponding to intervention organized by the State to steer the market towards a production system it deemed preferable, according to politically-defined public utility criteria. ¹⁵⁶ After the war, France set up the Commissariat Général au Plan (CGP), an “anti-hasard” planning tool, following the liberal erring ways of the interwar period.

The direction of European integration was to change gradually, however, with the emphasis shifting back to “the power of the market”. The Treaty of Rome (1957) extended the ECSC’s ambitions by creating the Common Market, eliminating customs duties and adopting a common external tariff. This economic integration was deepened in 1986 with the Single European Act, which abolished internal trade barriers. The Cassis de Dijon ruling (1979) ¹⁵⁷ and the neoliberal ideas of the 1980s accelerated this movement, culminating in 1992 with the completion of the Internal Market. The parallel with the disappearance of any hint of industrial policy in France is striking: the CGP, gradually falling into disrepair, was further weakened by the oil shocks and this neoliberal turn, and stopped publishing a “Plan” in 1993.

European policies for the creation of the single market

Market opening and competition policy

Since 1962, in Europe ¹⁵⁸ competition policy has been aimed at preventing and punishing cartels and abuses of dominant positions. On January 1, 1993, border crossings between EU countries were abolished for the passage of goods. The economic (and ideological) underpinning of the Cecchini report ¹⁵⁹ was a diptych. The first pillar was the mutual recognition of norms and standards (a good authorized for sale in one country is also authorized for sale in another), or European harmonization. These norms and standards concern the products themselves (e.g. product safety) or production methods (e.g. respect for the environment). This approach puts European producers in competition with each other, while lowering the cost of access to a larger market enables them to achieve economies of scale. It has been accompanied by a competition policy designed to punish cartels and abuses of dominant positions.

The European Commission has investigative powers and also controls mergers to prevent monopolies. The Directorate-General in charge of this policy (DG COMP) is one of the Commission’s most powerful. These rules have led the Commission to adopt numerous regulations and standards that are politically desirable or supposedly necessary to ensure that competition is “free and undistorted”. ¹⁶⁰ The result is an apparent paradox: the birth and development of a liberal bureaucracy. ¹⁶¹

To make up for its lack of information, this bureaucracy has to cooperate with trade associations and representatives of civil society (e.g. environmentalists), although there is no guarantee of equal treatment between the various stakeholders in a complex legislative process involving the European Commission, the Council of Ministers and the European Parliament.

The Maastricht Treaty reinforced European rules designed to promote competition within the EU (see the example of the railways developed in Received Idea 7).

Free movement of goods, services, capital and people

While the liberalization of trade in goods was rapidly facilitated, the liberalization of services was slower due to national reticence, particularly in view of member countries’ attachment to public services, some of which (railways, telecoms, electricity) were about to be opened up to competition. However, changes did take place in the financial, telecommunications and transport sectors. The free movement of capital became total in 1990. ¹⁶²

Finally, the right to free movement of workers and freedom of establishment, recognized as early as the Treaty of Rome, were strengthened and extended with Maastricht and subsequent treaties. Freedom of movement and residence, extended to all European citizens regardless of their occupation, are enshrined in Article 3 of the Treaty on European Union, and Article 21 of the Treaty on the Functioning of the European Union (TFEU). They are also guaranteed by article 45 of the European Charter of Fundamental Rights.

Sectoral policies: agriculture, industry and cohesion

The Common Agricultural Policy (CAP), introduced in 1962, led to far-reaching restructuring in this sector, promoting productivist agriculture and encouraging farm consolidation. This restructuring was both socially violent and ecologically disastrous. ¹⁶³ Farm consolidation ¹⁶⁴ have destroyed thousands of kilometers of hedgerows, havens of biodiversity, and channeled watercourses, to the detriment of their capacity to regulate excessive rainfall. As for the social impact, the figures speak for themselves: the number of farms in France fell from 2.5 million in 1955 ¹⁶⁵ to less than 500,000 in 2020.

Structural policies such as the European Social Fund (1958) and the ERDF (1975) aim to reduce regional inequalities. The amounts mobilized are not insignificant: for the period 2021-2027, the EU plans to mobilize some 316 billion euros over seven years for economic and social cohesion, i.e. around 45 billion euros per year. ¹⁶⁶

Conversely, industry has remained mainly under national control. This is not the result of resistance on the part of governments (as in the case of services liberalization), but of a genuine ideological bias. After an immediate post-war period of national control of the industrial apparatus, priority was increasingly given to competition policies for the distribution of products and services, which were supposed to reduce costs for consumers, even if this meant job losses and/or relocation. This reasoning is coupled with Ricardo’s comparative advantage argument: we can’t do everything well, so it’s inevitable that others will do what we do less well. This is the logic of neoliberal reasoning, widely shared by national and European authorities.

Industrial policy, on the other hand, looks at things from the producers’ point of view. It took the crises caused by COVID and the war in Ukraine for national and European industrial policies to become legitimate, even desirable, and for support measures to emerge. At European level, the launch in 2024 of the Regulation for a “net zero” industry aims to make the EU “the epicenter of clean technology production and green jobs”. In France, it’s the France 2030 programs, with calls for tender to support the decarbonization of very large industrial projects. The scale of the challenges involved in decarbonizing the economy, and the failure of policies based on unconditional support for the market and big business, call for a completely different approach, one that is more collective, systemic and long-term. ¹⁶⁷

Lack of harmonized tax and social policies

Two other areas, taxation and social affairs, remain largely national. Although progress has been made, particularly in the areas of VAT andtax evasion, differences between member states and a lack of overall determination stand in the way of harmonization. In the social field, modest progress has been made in protecting workers’ rights, such as the directive on posted workers. ¹⁶⁸ or the introduction of a European minimum wage in 2022.

As a result, competition between multinationals is distorted by these disparities, and they invert the problem by putting states or regions in competition (when they are powerful enough to do so). The result is a race to the bottom in fiscal and social terms, with deleterious effects, both economically (competition within Europe being stronger than cooperation) and politically, in terms of support for the European project.

The Maastricht Treaty: a new stage

In 1992, the Maastricht Treaty marked a turning point with the introduction of Economic and Monetary Union (EMU). This led to the creation of the euro, governed by convergence criteria. ¹⁶⁹ This treaty also strengthened the free movement of capital ¹⁷⁰ and develops a framework for an integrated financial market, prefiguring the Capital Markets Union (CMU), still under construction. The Treaty strengthens the liberalization of transport and energy (electricity and gas), with the ultimate aim of creating a single energy market.

At the same time, the creation of the ETS quota market and directives on energy efficiency and renewable energies have led to a reduction in greenhouse gas emissions. ¹⁷¹ thanks to a real shift in the energy mix (with a reduction in the share of fossil fuels and the growth of low-carbon energies).

Challenges and prospects

This long march towards an all-market economy is now coming up against realities that are taking their toll on the European Union. Several promises, notably those set out in the 1989 Delors Report ¹⁷² paving the way for monetary union, have not been kept. They can be summed up in a few words. The Union was supposed to bring economic growth and jobs, economic stability, economic convergence, reduced social inequalities and European power. It has to be said that, in all these respects, the results are questionable to say the least.

In the 2010s, the EU experienced a major sovereign debt crisis. Inequalities remain high between the “countries of the North” and those of the South and East, where unemployment remains high. While the euro has become a reserve currency, it remains far behind the dollar and continues to suffer from the absence of a coordinated foreign and economic policy. The absence of an industrial policy and the loss of sovereignty on the part of European states have become glaringly apparent, following the COVID crisis and the economic and energy consequences of the war in Ukraine. Admittedly, the Green New Deal is a major initiative of the Van der Leyen Commission (2019) to make the European Union the leader in ecological transition. But this project is currently stumbling over the industrial aspects and the legitimate fears of companies in the face of increasingly aggressive global competition, particularly from the USA and China. In addition, the transition from “convergence criteria” – initially intended to bring the various national economies closer together – to budgetary discipline framed by increasingly complex rules, is weakening the European Union. In 2024, it led to the adoption of pro-cyclical national budgetary policies, whereas the economic situation required the opposite, and the Draghi report ¹⁷³ calls for a major investment program (800 billion per year at European level, i.e. 5% of European GDP, a large part of which would be publicly funded). This report, submitted to the President of the European Commission in September 2024, focuses on three areas to “restore European competitiveness”: innovate and close the technological gap; have a common plan for decarbonization and competitiveness; strengthen security and reduce dependencies.

All in all, recent crises have highlighted the need for more united and resilient policies, particularly in the fields of energy, industry and defense. The geopolitical situation and tensions with China and the USA reinforce this need. Donald Trump’s decision, at the beginning of 2025, to ally himself with Russia, against the European Union, is an electroshock, which we can hope will shake Europeans out of their vision, which is not naïve, but completely ideological and disconnected from the reality of power relations (and their consubstantial links with economic reality).

But to date, the single capital market (UMC) remains the Commission’s flagship project. ¹⁷⁶ Admittedly, it is undeniable that European integration is not complete, that banking markets ¹⁷⁷ and financial markets remain fragmented. ¹⁷⁸ But are these the most pressing and fundamental challenges facing Europe? Is it proven that SMEs and SMIs will be more robust and greener if they rely more on capital markets and less on banking intermediation? And above all, how can we believe – and, above all, make people believe – that this project is the answer to Europe’s challenges?

Faced with the many challenges of the 21st century (climate, biodiversity, inequalities, the decline of democratic ideas…), the response of European leaders cannot be limited to an initiative concerning capital markets and banks.