(This essay was published in Hong Kong Economic Journal on 2 December 2015.)


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 increasing aspects of our lives.


Economics is mostly about markets and prices, not money. And in economics, money and markets are not the same. Markets are institutions or platforms where exchanges take place, and money is most commonly understood as 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 perform two roles in coordinating exchange and production activities in the market. First, they perform a rationing role in determining who gets to use the commodities that are exchanged. Second, they perform an allocation role in directing commodities to their most valuable use.


Exchanges occur in markets and are mediated through prices. The price of a commodity is the terms at which one unit of the commodity will be willingly given up in exchange for certain quantities of another commodity. For example, an apple is exchanged at the price of two-sevenths of a watermelon and the price of a watermelon is three-and-a-half apples (the reciprocal of two-sevenths). Here, prices are not expressed in money, but in terms of another commodity.


In a barter economy, money is not used as a medium of exchange. Prices are expressed in money terms only when we have chosen to use money as the means of payment and unit of account. We could even designate one commodity to be money. Historically, gold and silver performed this function. Today money is created by government fiat.


Price and Value


Although customers usually pay the same price for a unit of a commodity, it does not mean every customer values every unit he bought as equal to the price he has paid for them. But as long as all purchases are voluntary, the value of every unit must be at least as much as the price.


Consider a customer who values the commodity above the price he paid for it in the market. Having bought the commodity, he may not be willing to sell it for the same price unless a replacement unit can be easily acquired at the same price (assuming the trouble and inconvenience of making another purchase is negligible).


A situation where a person values a commodity more than its price is quite common since people may attach different values to the same commodity. It might happen that I like a green scarf more than you do even though we both paid $300 for it.


Some commodities may be rare or available in limited editions so it might be difficult to find them again at the same price. Some historical buildings or heritage sites bring back memories and feelings that some people value (and often think others would or should value, too) and they wish to have them preserved and maintained.


It is entirely possible from an economics point of view that the value of a commodity to a person may be higher than the price it commands in the market. If a person has to sell such a commodity at the market price, then one may regard its value as corrupted or degraded. Selling a commodity that is regarded as sacred, holy, exalted, dignified, esteemed, or memorable similarly could be viewed as degrading and corrupting its value because its perceived unusual qualities have not fetched its true price.


A house where Bruce Lee lived can be considered as a joint product. The house as a structure is just another commodity, but tied and inseparable from the house is a memory that commands a separate higher value.

Suppose Bruce’s house generates a total annual psychic value worth $5 million of fond memories to 100,000 visitors, but one can fetch $10 million if it is leased out to a casino. Would it be corrupting and degrading to turn the house into a higher value casino use rather than just preserving Bruce Lee’s memory?


Would that degrade the memories that visitors associate with  Bruce’s house? In that sense, these visitors certainly would suffer a value loss. But would the answer be different if instead of a casino, the house were leased to an orphanage for $5 million, or even $10 million? How should we decide among the competing potential uses of the building?


One approach would be to let the market decide based on the willingness to pay principle. Or we could decide by a political process of open public consultation, democratic voting, or even divination (like rolling a holy dice). According to the market approach, the higher valued use would be selected so a casino (or perhaps an orphanage) would take precedence over preserving Bruce Lee’s memory.


Moralists of different persuasions have often opted against the market solution in favor of some form of political solution. Is it because they are better at appreciating the true value of Bruce Lee’s memory than the market? Or is it because many moralists know that the market will not deliver what they want but, being dogmatic zealots, are simply pushing their luck through political means?


We know many activities in our lives are organized through markets. The production and exchange of fruits, garments, cars, and millions of other commodities are delivered through the market. But there are many obvious exceptions. Mercenaries have from time to time been hired to fight wars, but it is more common to use volunteers and conscription to raise an army (the US has an all-volunteer army).


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 organized 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 organized through markets? And why have a growing number of activities come under market organization?


Markets excel in delivering efficiency. But they are not always the best institution to organize activities when the primary objective is something else – for example, when equality trumps efficiency considerations. In practice, those who oppose market allocation do so because of ignorance or out of fear that competition would threaten their interests.


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.


Furthermore, market arrangements for child adoption have many uncertainties, especially when it comes to producing quality children. Child qualities are difficult to detect when they are young, while older children have learned to hide their negative qualities. Markets in adopted children are simply uncommon, except among close relatives or for poor orphans. Indeed, the evidence seems to suggest that the best predictor of future child quality is the attributes of the parents.


Yet markets have expanded into more sectors of our lives because they have become more efficient at organizing more and more activities, and 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.


Markets are not the preeminent institution in organizing all aspects of our lives, though. For markets to function well, they need the state to protect private property rights and uphold the rule of law. They also need the state to 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 in history have abused their powers on behalf of certain interests and those interests have sometimes captured governments. But these are all abuses of power, not the corrupting influence of markets.


Moralists often mistakenly attribute these abuses to the corrupting influence of markets. But business interests are not the only interests in society to  abuse their market powers to capture political power, and I believe not even the most powerful or effective ones.


There is abundant empirical proof of this. Regulations promoting good and transparent governance are far more elaborate when applied to for-profit corporations than to non-profit organizations. Businesses have from time to time corrupted the regulatory regime that governs them, but non-profit organizations do not even appear to come under any regulatory regime that matters. And they often have moralists covering for them in high places inside and outside academia.


Markets should not organize all sectors of our lives, with the family as an obvious example. If markets have grown, it is only because the public has preferred them to alternative institutions in certain areas and at certain times because they do a better job. Very often a combination of market and other institutions works better in responding to the needs of society.


Take for example Iran, which began paying kidney donors out of necessity. The revolution of 1979 led to the confiscation of the country’s assets abroad, and its treasury was further drained by the eight-year Iran-Iraq war. There was little money for dialysis and no physical or legal infrastructure for getting kidneys from deceased donors. The government began paying to send Iranians who had a match abroad to get transplants. This proved unsustainable, so Iran allowed donors to be paid in the mid-1990s. A state-regulated system developed in which the government paid donors the equivalent of about $3,500 in Iranian currency, labeling the sum a gift for their altruism. By 1999, the waiting list for a kidney was essentially eliminated. The market became the only viable choice for Iran to address its kidney disease problem given its circumstances.


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. Ethics are the rules of the game in a society and 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.




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