Markets

The economy is too important for it to be left to the impersonal machinery of markets. Economics only cares about money and profits, and totally neglects to consider that people matter.

The problem with capitalism is that it neglects the human being and instead deifies profits, productivity and efficiency, and it completely ignores humanity. Socialism, by contrast, cares about people. It’s there in the very word — socialism has social in it. Therefore, it must be good.

Markets are by construction amoral, if not immoral. Therefore, markets must be regulated by the government, and whenever markets fail to work out the socially optimal outcome –which is perennially and everywhere because markets are heartlessly driven by pure greed — the government must intervene and set things straight.

Markets invariably result in income and wealth inequality. Markets permit wealthy capitalists to exploit workers, impoverishing them. Karl Marx built a theory on that. It’s clear as day that if the workers were in control of the capital (the means of production), then they would be free from the greedy capitalist whose only concern is profits which they obtain by exploiting the proletariat. Only the government’s benevolent hand can force greedy capitalists to do what is good for society. Profits must be outlawed because profits impoverish the world

The preceding line of argument is extremely popular. I would estimate that around 90 percent of people in the developed world, and about 99 percent of the people in the developing world, hold that to be true.  Unfortunately, the entire argument is false, and tragically so because it and its many variations lead to avoidable misery — especially in the poorest parts of the world. It leads to the immiserization of precisely those it presumes to help.

Let us be very clear about this: that false argument is popular because it makes sense to its proponents. It makes sense because it is based on premises that appear to be common sense. But those premises are only superficially true but are fundamentally false. Sadly, it takes quite a bit of instructions to realize why those premises are false, and most people never get that opportunity.

I have to confess that I too believed in some parts of that false argument when I was young and stupid, not in any detailed analytical fashion but in a subconscious way. The rich were, I thought, clearly rich because the poor were poor. The rich must have taken more than their fair share of the goodies, and consequently the poor were so because of the avarice of the rich. There was only this much of the good stuff, and one can have more only if someone had less. I took that so much for granted that it didn’t even occur to me that maybe I ought to think about the matter a little bit. Luckily for me, I got a few lessons on how the world actually works and realized that I was wrong.

Much of what I talk and write about on this blog and elsewhere is about this simple truth: that our basic commonsense understanding of our world is wrong, and it is wrong for a very good reason: which is that our understanding of how the world works is consistent with our evolutionary history. But the world we live in today is not the world in which our brains developed over tens of millions of years. Our world of today is radically different from the world in which we evolved. We are maladapted in our own world.

It is as if we are Paleolithic people living in the Anthropocene. We are strangers in a stranger world. We are aliens in this world, a world that is millions of years out of sync with the world we evolved in. Our instincts are all out of whack with the world we find ourselves in. Our instincts developed over hundreds of thousands of years but the world we inhabit now is only a few thousand years old, and the most significant bits are only a few hundred years old. Biological evolution did not have the time to prepare us to live in this world that we have created.

For about 99.99 percent of human history, we lived in a zero-sum world. Let’s repeat that: all of our ancestors lived and evolved in a zero-sum world, a world in which one’s gain meant another’s loss. Therefore, it should be no surprise that the idea that one gains can only arise from another’s loss is hard-coded in our psyche.

Let’s explore one particular feature of the modern world: markets. It is uniquely human. No other animal has anything close to it. Economists have been explicating the nature of markets for a few centuries, and in a sense, the central focus of economics is the how and the why of the workings of markets.

As noted before, markets are uniquely humans. That means that humans are indispensable for markets, and without humans there would be no markets. The study of markets, therefore, is  the study of human behavior. (As an aside, I think the Department of Redundancy Department came up with the the popular “behavioral economics” name.)

Humans have an inbuilt — almost instinctive — tendency to exchange. Adam Smith pointed to that in his 1776 book Wealth of Nations (short title) —

This division of labour, from which so many advantages are derived, is not originally the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion. It is the necessary, though very slow and gradual consequence of a certain propensity in human nature which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another.

Markets are not some impersonal, fiendish mechanical contraption designed to suck the blood of innocents. It’s an abstraction which is firmly grounded in the nature of human beings.

What is a market? It’s where people exchange. An exchange requires two (and only two) parties: the buyer and the seller. All exchanges lead to benefits to both parties. What’s the necessary and sufficient condition for that? That there is no interference by a third party. If a third party gets into the act, one or both parties to the trade could lose.

Much of the human-imposed misery in the world can be attributed to third-party interference in markets. When that happens, market are no longer “free.” Free markets are those in which there are no barriers to entry or exit. In a free market, anyone who wishes to can be a buyer or seller, and conversely, anyone can refuse to be a buyer or a seller.

All trades in a free market happen because there’s agreement and there’s disagreement. Sounds contradictory. But the parties have to agree on the terms of the trade (which is what the agreed upon price is) and both have to diverge in their private valuation of the thing traded.

I am willing to pay $5  for the sandwich because I value it more than I value the $5 in my hand; you are willing to accept my offer because you value the $5 more than you value the sandwich.

When trades are not allowed, both parties lose. Add up tens of millions of disallowed trades — which invariably governments do — and slowly but certainly the people become impoverished. This is true.

The wealth that we enjoy could not have been possible without markets. How so? Because we have the possibility of exchanging what we produce, we are able to specialize in what we are good at producing. That allows division of labor, which in turn allows division of knowledge.

When I contemplate the miracle that is markets, I am convinced that the gods must have a particular liking for humans.