Seminar notes: Markets and human needs
Reed Whittemore, 1956
From Robert Kuttner, Everything for Sale, 1997
Adam Smith, Wealth of Nations, 1776
I:2
In civilized society he stands at all times in need of the co-operation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons. In almost every other race of animals, each individual, when it is grown up to maturity, is entirely independent, and in its natural state has occasion for the assistance of no other living creature. But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favor, and show them that it is for their own advantage to do for him what he requires of them. 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. Nobody but a beggar chooses to depend chiefly upon the benevolence of his fellow-citizens. Even a beggar does not depend upon it entirely. The charity of well-disposed people, indeed, supplies him with the whole fund of his subsistence. But though this principle ultimately provides him with all the necessaries of life which he has occasion for, it neither does nor can provide him with them as he has occasion for them. The greater part of his occasional wants are supplied in the same manner as those of other people, by treaty, by barter, and by purchase. With the money which one man gives him he purchases food. The old clothes which another bestows upon him he exchanges for other old clothes which suit him better, or for lodging, or for food, or for money, with which he can buy either food, clothes, or lodging, as he has occasion.
IV:2
But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing with that exchangeable value. As every individual, therefore, endeavors as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labors to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that 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. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.
“A look at capitalism”
Hayek, The Use of Knowledge in Society, 1945
Hayek_1945_The Use of Knowledge in SocietyPareto optimality
Pareto optimality, or Pareto efficiency, is a state of allocation of resources in which it is impossible to make any one individual better off without making at least one individual worse off. This concept does not necessarily imply an equitable distribution of resources, but rather an efficient one, where no further mutual gains can be achieved through reallocation.
Marginal utility
Marginal utility represents the additional satisfaction or utility that a consumer gains from consuming one more unit of a good or service. According to the principle of diminishing marginal utility, as a consumer consumes more units of a good, the utility gained from each additional unit tends to decrease.
The relationship between them
- Efficiency and Utility Maximization: An allocation of resources is Pareto optimal if and only if it maximizes the overall utility across all individuals. This involves balancing marginal utilities across goods and individuals, as a reallocation that increases the marginal utility for one individual without reducing it for another moves the economy towards Pareto efficiency.
- Marginal Rates of Substitution: In a Pareto optimal allocation, the marginal rate of substitution (MRS) between any two goods must be equal across all individuals. The MRS, which reflects individuals’ willingness to trade one good for another based on their marginal utilities, aligns with the idea that no further welfare-improving trades are possible at the point of Pareto optimality.
- Edgeworth Box and Contract Curves: In the context of an Edgeworth box, which is a tool used to analyze exchanges and allocations, the contract curve represents all Pareto efficient allocations. At any point on this curve, the marginal rates of substitution (and thus marginal utilities) between goods for all individuals are equalized, indicating no further gains from trade.
- Market Equilibrium and Pareto Efficiency: In a competitive market equilibrium, assuming no externalities and perfect competition, the allocation of resources is Pareto efficient. This is because prices in such a market reflect the marginal utility of goods for consumers and the marginal cost of production for producers, leading to an allocation where marginal utilities are equated across goods and individuals, satisfying the condition for Pareto optimality.
Rand Paul on Covid vaccines
Michael Sandel
0:52 Paying for access to rides or to congressional hearings
Marketing drugs
3:25 How we fight our wars — outsourcing wars to private companies
Market society
If everything is for sale, inequality comes to mean much more
- money determines everything
- “rampant commodification of life”
Market values as crowding out other values
6:53 The walrus hunt
- the right to sell the right to hunt walruses
- everybody is better off
Morally objectionable that rich people should have access
“A very long boat ride to kick a bean bag chair”
Some preferences should not count — money should not be able to buy certain things
Paternalism — cultures remaining the same over time
- a certain conception of its own good
20:30 Military service during the Civil War
You could buy your way out
- hire a sustitute
- both parties are better off
Volunteer army vs. mercenary army
What makes military service special?
- you have a right and a civic duty
Free markets in votes?
24: 32 Summary
Social practices and duties cannot be commodified if other, higher, values are at stake
Markets taint the goods they are trading
- subjecting social practices to markets will crowd out other values
- it’s not a value-neutral science of choice
What are the goods at stake in the practice?
Will marketizing the practice drive them out?
Economics has to reconnect with its roots in morality
- a subfield of political and moral philosophy
Emptying of larger meaning in politics
Never engages with questions of social meaning
We shy away from arguments about the meaning of goods
- we are letting the market make the decisions
- decentralized instead of actively discussed
We have to decide were markets belong and where they do not
- cultivate civil virtues of discussion and learning
Aristotle on wealth-making
- oikos and nomos — the “rules of the household”
Compare the framework of Aristotle’s political philosophy
- how you would be unfree as long as you were ruled by your desires
In Aristotle’s “Politics,” specifically in Book I, Chapters 8-10
Natural wealth-getting
- which is part of the management of a household and aims at obtaining a sufficient living
Unnatural wealth-getting
- which aims at unlimited wealth accumulation
Book I: chapter 9
There is also another species of acquisition which they [1257a] particularly call pecuniary, and with great propriety; and by this indeed it seems that there are no bounds to riches and wealth. Now many persons suppose, from their near relation to each other, that this is one and the same with that we have just mentioned, but it is not the same as that, though not very different; one of these is natural, the other is not, but rather owing to some art and skill; we will enter into a particular examination of this subject.
The uses of every possession are two, both dependent upon the thing itself, but not in the same manner, the one supposing an inseparable connection with it, the other not; as a shoe, for instance, which may be either worn, or exchanged for something else, both these are the uses of the shoe; for he who exchanges a shoe with some man who wants one, for money or provisions, uses the shoe as a shoe, but not according to the original intention, for shoes were not at first made to be exchanged.
The same thing holds true of all other possessions; for barter, in general, had its original beginning in nature, some men having a surplus, others too little of what was necessary for them: hence it is evident, that the selling provisions for money is not according to the natural use of things; for they were obliged to use barter for those things which they wanted; but it is plain that barter could have no place in the first, that is to say, in family society; but must have begun when the number of those who composed the community was enlarged: for the first of these had all things in common; but when they came to be separated they were obliged to exchange with each other many different things which both parties wanted.
Which custom of barter is still preserved among many barbarous nations, who procure one necessary with another, but never sell anything; as giving and receiving wine for corn and the like. This sort of barter is not contradictory to nature, nor is it any species of money-getting; but is necessary in procuring that subsistence which is so consonant thereunto.
But this barter introduced the use of money, as might be expected; for a convenient place from whence to import what you wanted, or to export what you had a surplus of, being often at a great distance, money necessarily made its way into commerce; for it is not everything which is naturally most useful that is easiest of carriage; for which reason they invented something to exchange with each other which they should mutually give and take, that being really valuable itself, should have the additional advantage of being of easy conveyance, for the purposes of life, as iron and silver, or anything else of the same nature: and this at first passed in value simply according to its weight or size; but in process of time it had a certain stamp, to save the trouble of weighing, which stamp expressed its value.
Money then being established as the necessary medium of exchange, another species of money-getting soon took place, namely, by buying and selling, at probably first in a simple manner, afterwards with more skill and experience, where and how the greatest profits might be made. For which reason the art of money-getting seems to be chiefly conversant about trade, and the business of it to be able to tell where the greatest profits can be made, being the means of procuring abundance of wealth and possessions: and thus wealth is very often supposed to consist in the quantity of money which any one possesses, as this is the medium by which all trade is conducted and a fortune made, others again regard it as of no value, as being of none by nature, but arbitrarily made so by compact; so that if those who use it should alter their sentiments, it would be worth nothing, as being of no service for any necessary purpose. Besides, he who abounds in money often wants necessary food; and it is impossible to say that any person is in good circumstances when with all his possessions he may perish with hunger.
Like Midas in the fable, who from his insatiable wish had everything he touched turned into gold. For which reason others endeavour to procure other riches and other property, and rightly, for there are other riches and property in nature; and these are the proper objects of economy: while trade only procures money, not by all means, but by the exchange of it, and for that purpose it is this which it is chiefly employed about, for money is the first principle and the end of trade; nor are there any bounds to be set to what is thereby acquired.
Thus also there are no limits to the art of medicine, with respect to the health which it attempts to procure; the same also is true of all other arts; no line can be drawn to terminate their bounds, the several professors of them being desirous to extend them as far as possible. But still the means to be employed for that purpose are limited; and these are the limits beyond which the art cannot proceed. Thus in the art of acquiring riches there are no limits, for the object of that is money and possessions; but economy has a boundary, though this has not: for acquiring riches is not the business of that, for which reason it should seem that some boundary should be set to riches, though we see the contrary to this is what is practiced; for all those who get riches add to their money without end; the cause of which is the near connection of these two arts with each other, which sometimes occasions the one to change employments with the other, as getting of money is their common object: for economy requires the possession of wealth, but not on its own account but with another view, to purchase things necessary therewith; but the other procures it merely to increase it: so that some persons are confirmed in their belief, that this is the proper object of economy, and think that for this purpose money should be saved and hoarded up without end; the reason for which disposition is, that they are intent upon living, but not upon living well; and this desire being boundless in its extent, the means which they aim at for that purpose are boundless also; and those who propose to live well, often confine that to the enjoyment of the pleasures of sense; so that as this also seems to depend upon what a man has, all their care is to get money, and hence arises the other cause for this art; for as this enjoyment is excessive in its degree, they endeavor to procure means proportionate to supply it; and if they cannot do this merely by the art of dealing in money, they will endeavor to do it by other ways, and apply all their powers to a purpose they were not by nature intended for. Thus, for instance, courage was intended to inspire fortitude, not to get money by; neither is this the end of the soldier’s or the physician’s art, but victory and health. But such persons make everything subservient to money-getting, as if this was the only end; and to the end everything ought to refer.
We have now considered that art of money-getting which is not necessary, and have seen in what manner we became in want of it; and also that which is necessary, which is different from it; for that economy which is natural, and whose object is to provide food, is not like this unlimited in its extent, but has its bounds.
Hayek, Friedrich A. The Road to Serfdom. Chicago: University of Chicago Press, 2007.