Why markets matter more than money
To function well, they need the state to protect private property rights, uphold the rule of law, maintain a level playing field and ensure free entry
People often see money and markets as the same thing. When moralists complain about the corrupting influence of money, they are confusing the two. What they are actually complaining about is the growing influence of markets over our lives.
Economics is mostly about markets and prices, not money. In economics, markets are institutions or platforms where exchanges take place, while money is a medium of exchange and a unit of account. Most propositions in economics do not depend on whether money is used in the market.
Prices coordinate market exchange and production activities by first determining who gets to use the commodities that are exchanged, and second, directing commodities to their most valuable use.
Many activities in our lives are organised through markets. While a person may value a commodity more than its price because of such reasons as rarity or memories and feelings attached to it, the production and exchange of fruits, garments, cars, and millions of other commodities are delivered through the market, with obvious exceptions.
School and university places are seldom allocated solely through markets, but are typically rationed through competitive examinations and assessments, and tuition fees are charged together with the provision of scholarships for those without means. Medical care in most places is organised through hybrid arrangements that combine both market and non-market mechanisms to deal with risk-sharing and ability-to-pay issues. There are many more such examples.
Why haven’t all activities been organised through markets? And why have a growing number of activities come under market organisation?
Markets excel in delivering efficiency, but they are not always the best institution when the primary objective is something else – for example, when equality trumps efficiency considerations.
Children are almost never raised through market institutions. The late Professor Gary Becker, who pioneered the economic analysis of the family, showed that the family was the most efficient institution for raising children, especially quality children, compared to all others including the market.
Children need a lot of care and nurturing to grow and develop. The process takes many years, sometimes even decades, and requires an uncountable number of decisions over long periods of time. Markets are not efficient at delivering such open-ended, long-term contractual exchange and production arrangements.
Still, markets have expanded into more sectors of our lives because they are more efficient at organising many activities, and they have replaced or reduced the role of other institutions in serving the needs and wants of individuals and households.
For example, the rising status of women is a result of the expansion of job markets. Some women still believe they are disadvantaged, but compared to the past they have made huge strides. They will continue to do so as more women are admitted into higher education than men.
Iran developed a state-regulated market for kidneys out of necessity. The revolution of 1979 led to the confiscation of the country’s assets abroad, and its treasury was further drained by an eight-year war with Iraq. There was little money for dialysis. The government could no longer sustain a practice of paying kidney patients to go abroad for transplants. In the mid-1990s, the government eventually decided to pay donors for kidneys. By 1999, the waiting list for a kidney was essentially eliminated. The market solution became the only viable choice to address Iran’s kidney disease problem given its circumstances.
Markets do need some protection, though. To function well, they need the state to protect private property rights, uphold the rule of law, maintain a level playing field and ensure free entry into open markets. This requires governments to act vigilantly in these matters, but in a measured and restrained way in others.
Knowing when and how to be coercive, and when to be constrained, is essential for good governance. Most governments have abused their powers on behalf of certain interests and those interests have sometimes captured governments. These are abuses of power, not the corrupting influence of markets, as moralists often mistakenly claim.
Markets should not organise all sectors of our lives, with the family as an obvious example. But very often a combination of market and other institutions works well in responding to the needs of society.
Moralists should not become apologists for badly functioning institutions. We need them to tell us how best to improve our institutions for society’s good. A good society has to be one where our institutions can solve our problems. The influence of markets has grown because they have been good at solving problems.
Richard Wong Yue-chim is Philip Wong Kennedy Wong Professor in Political Economy at the University of Hong Kong