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Markets, and its alternatives

J Brauer | © Stone Garden Economics

Naturally enough, economists praise the workings of free, private, competitive markets. Although not without failings, markets help allocate society’s resources to their highest-valued uses. Buyers determine the maximum they are willing to offer for a desired good or service, and sellers determine the minimum they are willing to take. When they come to an agreement, a market is made. The laws of supply and demand are “divine,” as one Saudi oil sheik once marveled.

The “free” in free market means that the transaction is concluded voluntarily, even if under a regulatory umbrella that constrains all parties alike. It means that neither side in the bargain is compelled by an outside force. Competitive means that buyers and sellers each have the option to walk away and buy from, or sell to, another party. Private means not involving a public agency as a party to a deal, even if, again, it may set umbrella rules.

There are other ways to allocate society’s resources—labor, capital, and raw materials and the goods and services produced with them. To see this, consider some alternatives. For example, resources can be allocated by command. On their say-so, Mom and Dad decide how family resources are used, the boss determines who does what in a company, and under threat of penalty government collects taxes and then spends them as it sees fit. But what if kids could earn pocket money in a family economy? What if firms established internal markets (as many do), and what if some government services were hired out to let the market do them? Some efficiencies might be gained.

Resources can also be allocated by majority rule. Perhaps it pleases Mom and Dad to let the kids have a say where to take the next vacation. Participatory decision-making in firms can sway million-dollar marketing decisions, and parliamentary governments work, at least in part, through majority vote. Another option is to use an economy of force—the strongest kid takes the coveted toy—or any other form of contest, such as a game show, where the quickest, or the wittiest, or the prettiest gains the prize.

Kindergarden teachers are fond of advocating an economy of equal sharing if little John and Jane are fighting over a toy: First John can play and then Jane, or the other around. Either way we have an economy of niceness. What if we asked the tykes to bid for the toy with their pocket money? What if, instead of equal sharing, we mix simply sharing with a market idea, such as car-sharing services to break taxi monopolies?

Around the Thanksgiving holiday in the United States, the economy of first-come, first-served is starkly illustrated. If you wait for hours outside the store the night before, you have first dibs at the proffered goodies once the doors swing open. If you are looking to hire skilled foreign talent, you need a work visa for them. The U.S. government makes few of those available, and a year’s worth of visas tends to be gone within hours. First-come, first-served. Any shoal of fish in the ocean is quickly gone because it, too, is harvested on a first-come, first-served basis. This would not happen with paid-for licenses to fish which, if set high enough and enforced, would help preserve fish stocks.

A lottery is an economy of luck. It, too, allocates resources. Sometimes, as in the lottery of the military draft, the winners are losers, and off they go to war. What if we had an all-volunteer force, wherein market forces determine who hires him/herself out to to dispense (or take) the bullets?

Finally, there is the economy of personal characteristics. I have charm and smarts, I am tall, I am handsome, I am male (or female), I am this or that, and because of any of these characteristics, it is I who deserves to receive a job, a position, a scholarship, a handout, or just a (second) chance.

It should be self-evident that, as compared to the market, none of these alternatives is without its own potential failings. If markets can fail, so can families, firms, and governments. In the end, one shouldn’t be overly dogmatic about either the market or its alternatives.

J Brauer is Professor of Economics, James M. Hull College of Business, Georgia Regents University, Augusta, Georgia, USA. He is also a Visiting Professor of Economics at the EBA Program, Department of Economics, Chulalongkorn University, Bangkok, Thailand.

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