introduces basic concepts that frame ethical debates in Parts 2
. These foundations include: markets, property rights, and law.
As captured British officer R. A. Radford entered the gates of a German prisoner of war camp during World War II, he was prepared to adjust to a new world, but not all of it was new. He found a thriving economy, with markets in many goods, and a highly responsive pricing system with a currency measured in cigarettes. It is perhaps the only known currency that people could smoke. “Around D-day,” he recalled in an article he wrote after the war, “food and cigarettes were plentiful, business was brisk and the camp in an optimistic mood. Consequently, the Entertainments Committee felt the moment opportune to launch a restaurant, where food and hot drinks were sold while a band and variety tunes performed.”1
In another case, a group of economists, curious about the limits of rational choice, entered an insane asylum and found thriving markets despite great restrictions placed on inmates’ freedom.2
The basic message of both studies was the same: that human needs and desires lead people to create markets even in the most unfriendly and seemingly unlikely environments. Not even sanity is required.
Markets are all around us. There are few places to travel in the world today where people live without markets. Even the poorest places on earth typically display a dizzying array of market stalls and trading. Why is this? Evidence of markets date back at least to the last Ice Age, and some form of market and commercial life is writ into nearly every stage of human existence.
Consider a typical day: you may open the refrigerator with foods purchased from a local grocer run errands to several stores, make Internet purchases from Amazon.com
, Craigslist, or other sites through a device from the comfort of your sofa (both of which were probably purchased through some market exchange). After work, through some job associated with its own labor market, you may choose among dozens of restaurants or go home to watch the news about the stock market or international oil prices. You may call it a night in an apartment leased through a local rental market or a home purchased through the housing market. For all of us, the more we look into the activities of our lives, the more amazed we become by the impact and extent of the markets that surround us.
This chapter introduces the concept of a market.
Markets have taken many forms throughout history. Before considering the modern system, let’s start with the basic idea. Markets refer to willing buyers and sellers exchanging items that they value. We will also call this activity market exchange. The items exchanged may include tangible goods (such as bread, cars, or computers) or intangible services (such as your labor or getting a hair cut). A restaurant experience, with the food served and the surrounding ambience, includes both tangible and intangible goods, as do many other items that we value.
One way to deepen understanding of the distinctive human activity of markets is to consider at least two important types of nonmarket environments.
First, rather than a system of markets, we may have a system of takings
through violence. A taking is an unwilling exchange or transfer. The English political philosopher Thomas Hobbes*
, in his Leviathan
(1651), offers the most spectacular imagery of humans thrown into a state of nature without any formal rules governing behavior. We are to imagine what would happen. He was not optimistic. War, violence, and brutal coercion: these are all human possibilities that would be realized in a state of nature, he hypothesizes, and none of these violent acts would describe markets. They would be takings. To offer another literary example, William Golding’s novel Lord of the Flies
provides a vivid image of a violent human nature, as a group of boys shipwrecked and stranded on a remote island devolve into a primitive and savage state. Both of these allegories, with their dim views of human nature, illustrate the idea that violent takings are different from market exchanges.
But takings do not have to be violent to fall outside the concept of a market exchange. Let’s fast forward to a United States Supreme Court case, Kelo v New London, where the Court found that the City of New London, Connecticut, was constitutionally permitted to exercise eminent domain to seize the homes of Susette Kelo and others. Eminent domain refers to the power the government derives from the Fifth Amendment of the U.S. Constitution to take property from citizens if the taking is for a public use and with just compensation. For example, the creation of the 1950s interstate highway system was possible only through the federal government’s extensive use of eminent domain to take private land and convert it into interstate highways. In Kelo, the point of the taking was to redevelop the land to encourage economic development in that city. On the one side of the case, an older couple did not want to move. They valued memories more than the money offered to relocate. On the other hand, people were out of work and wanted the government to intervene to create economic development and jobs. Justice John Paul Stevens began the opinion of the Court by writing, “In assembling the land needed for this project, the city’s development agent has purchased property from willing sellers and proposes to use the power of eminent domain to acquire the remainder of the property from unwilling owners in exchange for just compensation.”
This excerpt offers an apt contrast: the initial purchases from willing sellers are market exchanges; the takings from unwilling owners, using a government power of eminent domain,
are nonmarket exchanges. Takings, whether justified or not, violent or peaceful, happen outside of markets. In general, when the government acts by using its coercive powers, the direct activities that result are not market exchanges.
A second major contrast to market exchanges is the huge world of giving. Unlike political philosopher Thomas Hobbes’s and novelist William Golding’s views of unchecked humanity, a system of giving
describes another vision of humanity. All over the world, people offer gifts, many times over, with the purpose that they are not intended as a trade. Nothing in return
is sometimes people’s guiding principle. Gifts
occur when a person offers a good or service to someone without an exchange from the other as a condition of the offering. This human activity may seem marginal next to trillions of dollars of global sales and trading in our economic world, but it is not. Three examples. First, according to Giving U.S.A., the amount of philanthropic contributions fueling the U.S. economy in 2017 amounted to $390 billion, including donations by individuals, charitable bequests, foundation grants, and corporate giving. Over $200 billion of this amount, they found, came from individual donations.3
Philanthropy often creates personal benefits as well, such as tax breaks, so it’s not necessarily “nothing in return,” which raises pointed questions about what motivates people to act (see box). Still, those gifts are not typically interpreted as exchanges between a buyer and seller.
Second, at the personal level, giving goes well beyond gifts in wrapped boxes. Gift-giving governs many people’s lives in how they allocate their time—through charity, volunteer work, family time, and friendships. Time is a gift. Many of these activities occur outside market exchanges.
Third, business transactions are sometimes euphemistically called gifts when they are straightforward exchanges, which can be an ethical problem in business if they take on the characteristic of bribes and kickbacks that are deceptively concealed from the formal transaction (Chapter 11.7). Cultural differences with their varied business practices (Chapter 3.3) can create fine lines of interpretation between whether an activity was a gift or an exchange.
What Motivates Giving?
The discussion of violence and gift-giving raises basic questions about human motivation and what best explains why people think, feel, and act as they do. Do people have a basic human nature? What is it like? How malleable is it based on our circumstances and upbringing? In what direction should people mold their nature if they can? These questions have driven much of the pursuit of philosophy and literature for thousands of years, inspiring writing and scholarly research today. To give one example, New York Times columnist David Brooks draws on recent brain research to understand these questions in his The Social Animal: The Hidden Sources of Love, Character, and Achievement (Random House, 2011).
Psychological egoism is the view that people are always ultimately motivated by a desire to advance their own self-interests. Hobbes, for example, was a psychological egoist who would explain the motives behind gift-giving in terms of the self-interest of the giver. Altruism describes an alternative account of human motivation, stating that people can advance others’ welfare without reference to self-regarding desires.
Arguments about humans’ motivational capacities and limitations in markets are part of many discussions ahead (see Chapter 4.7 for an important distinction between psychological and ethical egoism).
To summarize the conceptual points so far: markets are patterns of exchanges between willing buyers and sellers. They are not takings, which can be exchanges but are nonmarket. They are also not gifts, which are not exchanges at all.
There are several generally recognized distinctions that can help avoid potential confusion. First, the term market can refer to a physical place, such as the local farmer’s market (or marketplace) with its many goods for exchange. It can refer to a class of goods or services independent of a physical location, such as the market for sports cars. In economics, markets often refer to the supply and demand conditions of specific goods and services, where buyers and sellers interact to create a price. Markets can also refer to the financial sector, as when people ask, “How are the financial markets doing today?”
There is no single correct usage of the term market; all of these descriptions are common and have their place in context. The terms business system, market system, and economic system often refer to an entire network of economic and political institutions that surround exchange, though there is no universally accepted way to define these terms. By starting with the fundamental idea of market exchange, this chapter is not yet in the thick of analyzing large and intricate economic systems, a topic that comes after the study of property rights.