Understanding the market
Europe and Liberty
Bakuriani, July 2008
The market (or markets?)
What is economics?
« Economics is a
science which studies
human behavior as a
relationship between
ends and scarce
means which have
alternative uses »
Lionel Robbins, 1932
The classical approach of the
market
p
demand
supply
Q
Alfred Marshall
(1842-1924)
Economic analysis of minimum
wage regulation
Wage
wH
w*
wL
Quantity of labor
unemployment
Economics = Social engineering ?
1920s = Socialist calculation debate
What do we need the market (and private
property) for? Centralized decision
making is more efficient (Barone,
Neurath, A. Lerner, O. Lange, …)
Economics system should be compared
according to their use of knowledge
(Hayek). Without property rights (and
prices) economic calculation is impossible
or extremely poor (Mises)
The knowledge problem
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Knowledge is
dispersed
Knowledge is partly
“tacit”
Scarcity
problem
Knowledge is changing
N.B. The quality of our
solution to the scarcity
problem depends
entirely on the quality
of the solution to the
knowledge problem
Knowledge
problem
The challenge
Finding the “system” that best deals with
the knowledge problem.
We are not so much interested in allocating
scarce resources with alternative uses
than to increase our knowledge (in
particular, knowledge about resources)
and make sure that this knowledge will be
used.
e.g.: leaving individuals decide for
themselves boosts the use of tacit
knowledge
The market

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A meeting point for
traders
A way to save time
and money
A place for learning
A place for discovery
A place of wonder!
A place where some
rules prevail (pieds
poudrés)
Transactions to be
taxed…
A spontaneous order!
Greeks’ understanding

Physei = natural order


Nomos = (unnatural) order
resulting from human action

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Seasons, life cycles, biological evolution,
etc.
Language, money, markets, Law
Thesei = (unnatural) order
resulting from human design

Firms, associations, governments,
contract
From the Greeks to Smith…
Tradition of the nomos
Denying of the nomos
(Aquinas, B. de Sienne)
Late scolastic (Molina)
Descartes, Voltaire
Püfendorf, Grotius
Hobbes (social contract)
Mandeville, Hume, Ferguson
Bentham (utilitarianism),
Rousseau (new social contract)
Smith
French v. Scottish Enlightment

Descartes:

Voltaire:

Ferguson: Nations stumble upon establishments,
One must only hold as true that which one can
deduce logically from clear and distinct premises
“If you wish to have good laws, burn those you have
and make new ones”
which are indeed the result of human action, but not of
the execution of any human design (quoted in LLL, I,
150) = spontaneous order

Montesquieu:
“Intelligent beings may have laws of
their own making; but they also have some which they
never made” De l’Esprit des Lois, I, p.i
From Smith to present days…
Tradition of the nomos
Denying of the nomos
Say, Bastiat, M.Villey
Stuart and James Stuart Mill
Auguste Comte
Von Humboldt, von Savigny,
Spencer
Most 20th century economists
H. Maine, C. Menger
Welfare and New welfare
economics, Kelsen
Hayek, Popper, M. Polanyi,
B. Leoni
Most 21st century Law and
economics
Organization v. order
(taxis v. kosmos)
degree of
purposeful
nature
spontaneous
order
no
abstract
high
organization
yes
concrete
low
complexity
type of
rules
general
(negative)
commend
Market as a process
equilibrium
prices?!
A spontaneous process of
interactions framed by
property rules and whose
outcome at each point in
time is somehow orderly
and desirable.
“Paris gets fed” says
Bastiat
Carl Menger
The “invisible hand” of Adam Smith
“by directing (his) industry in
such a manner as its produce
may be of the greatest value,
he intends only his own gain,
and he is in this, as in many
other cases, led by an invisible
hand to promote an end which
was no part of his intention”
Essay on the Nature and Causes of the
Wealth of Nations (1776)
The fingers of the invisible hand
“Whoever offers to another a
bargain of any kind, proposes
to do this. Give me that which I
want, and you shall have this
which you want, is the meaning
of every such offer; and it is in
this manner that we obtain
from one another the far
greater part of those good
offices which we stand in need
of. It is not from the
benevolence of the butcher, the
brewer, or the baker, that we
expect our dinner, but from
their regard to their own
interest. We address ourselves,
not to their humanity but to
their self-love, and never talk
to them of our own necessities
but of their advantages.”
(A. Smith)
The price system and the
entrepreneur

150
100

sell
buy

140
110

Profit = 30-costs

The entrepeneur
perceives a profit
opportunity
Some directly benefit
from its action, others
loses
Some actors receive
better knowledge (of
what is possible and
what preferences are)
There is convergence
towards a unique price
Nature of profit
A closer look at the market process
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It gives strong incentives to the use of tacit
knowledge
It does not waste “scientific” knowledge thanks to
the price system
It generates new knowledge
It is unpredictable
It leads to extremely complex social phenomena
Market and progress
The dynamics (progress) of societies
(and economies) is due to “true”
learning, that is, entrepreneurial
discovery
“Nothing is more certain than that the degree
of economic progress of mankind will still,
in future epochs, be commensurate with
the degree of progress of human
knowledge.” Carl Menger, Principles of
economics, 1871, page 73
Worries about market competition
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It is a waste of energy (may be the oldest argument)
Economic power can threaten democracy (Sherman)
People will not undertake what is not profitable (public
goods)
Producers will collude and block competition (cartels) or
use “unfair” strategies to win the competition
Some market participants will do poorly and therefore
the market is unjust