How is a market a social institution?

Personally, I see relationships as the fundamental unit of economics, and have always been a little shocked that they don’t seem to seem to come up explicitly in economic theory.

Say I have some bacon (mmm…. bacon.) In order for anyone else to get access to my bacon, the two of us have to form a relationship. There are tons of ways that this could happen: a family member could have free access to my bacon, a friend could ask to borrow my bacon, I could invest my bacon in a corporation and use it for some project, I could sell my bacon or someone could use a gun as leverage to take my bacon. Though they generally aren’t talked about in economics (that I’ve seen) there are rules to how these sorts of relationships are formed. In order for a relationship (friend, business partner, buyer/seller) to form, there has to be a model for that relationship which is known by both parties. The two of them then have to negotiate the application of that model to the situation they’re in (if you’re figuring out how to be married this is hard, if you’re figuring out how to be a buyer and seller it is sometimes easy), then build trust, then finally start exchanging your bacon.

I like this model because it expands economics outside of the marketplace, and points out the ridiculousness of a free market system. A free market is really just saying that to keep things simple everyone should form the exact same kind of relationship. (A particular nuance of buyer/seller developed by some rich fuddy duddys.) This makes about as much sense as telling everyone to exchange goods exclusively through heterosexual nuclear families. Relationships are, by their very nature, diverse. They step in and out of marketplaces with ease, and insisting that they don’t requires extraordinary sacrifices in our relationships with our communities and our planet. 

This kind of relational economics also suggests a strategy for creating sustainable social change. Remember, in order to form a relationship there first has to be a model for that relationship known by both parties. That means that by constructing new, useful relationship models and making them widely known you can radically alter the way that economic activity takes place. 

(This model gets even crazier when you say that you don’t actually HAVE the bacon, you just have a relationship with the bacon, and that relationship is also subject to new models and change.)

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6 Comments

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6 responses to “How is a market a social institution?

  1. A free market is really just saying that to keep things simple everyone should form the exact same kind of relationship.

    I always thought a free market is saying that everyone should be…well…free to form this kind of relationship:

    [two people who decided to exchange something freely simply because they want to, without harming anyone else]

    Call it the ‘free exchangers’ relationship.

    Thus, a non-free market would be a market in which some of these relationships are disallowed (for whatever reason – religion, country, etc).

    By the way, this relationship that a true free market would allow includes many of the relationships you seem to think are non-free market. If you have relationships with your community or your planet or whatever, surely that will affect the sorts of free-exchanger relationships you are willing to enter into. That’s your choice, and nothing about a free market excludes you making that choice.

  2. davidgljay

    Thanks for commenting, I’m eager to have my ideas challenged. A free market is one in which “two people exchange something without harming anyone else” ? That implies that in a free market externalities are not allowed. It seems more accurate to say that in a free market:

    “two people may decide to exchange something freely simply because they want to”

    and drop that last bit. We’re also a ways past exchanges happening exclusively between two people, so I’d amend again to say that in a free market:

    “a person may decide to exchange something with another entity freely simply because they want to.”

    If that’s the case, how does any relationship initiated with anyone violate the rules of the free market? Say I’ve built up a bunch of political power and I freely exchange that political power to enact strict regulations on trade. Why would that exchange run any more contrary to the free market than any other trade with an externality?

  3. I would think that in a true free market, externalities are indeed not allowed (or, equivalently, compensated via tax, etc.). But this only applies to true, demonstrable externalities. A lot of people nowadays claim things to be ‘externalities’ simply because they don’t like them or for otherwise capricious reasons, or something is assumed to be an externality after a sloppy, hand-waving argument. Then there is the problem of calculation (of the cost of the purported externality), which very few people are qualified to do but this doesn’t stop people from e.g. proposing a tax.

    So like I said, free markets shouldn’t allow true externalities (since a true externality, where shown, violates others’ rights), but not everything claimed to be one is so, and the burden of proof ought to be high rather than minimal for people wishing to use that path to block certain kinds of ‘free exchangers’ relationships.

    You can change ‘person’ to ‘entity’ if you want, it doesn’t really change what I was saying and since I was just trying to boil the definition down to basics I was basically using the terms interchangeably. (An ‘entity’ being nothing other than a ‘group of persons’.)

    How can relationships ‘violate the free market’? Exactly and only when they have the effect of preventing other ‘free exchanger’ relationships that would otherwise exist. In your example, by using political power to block certain sorts of ‘free exchanger’ relationships (involving trade), you are obviously violating free market principles. The part of the free exchanger relationship you are violating is the ‘without harming anyone else’ part. Thus, your relationship with those in political power is not a ‘free exchanger’ relationship and not part of the free market, but something else.

    best

  4. davidgljay

    So externalities are only taken into consideration when they are “demonstrable” with a “high burden of proof.” It sounds like that would lead to a system where people who can afford to hire lawyers to make their case would have the power to impose rules on the system and people who can’t afford to hire lawyers won’t. I’m not saying that I have a solution to the problem, just that a classically defined free market also free of externalities isn’t really possible. People will always use types of relationships other than free monetary exchange to influence what’s going on. As long as they do, some opportunities for market exchange will go unrealized. I don’t think that that’s such a bad thing.

  5. Andrew jensen

    All of this talk seems to put the exchange of goods or service at the forefront here. Maybe it’s just a wording thing, maybe it’s just a vibe I’m getting, but this makes it sound like the exchange is a good in and of itself. Now, one might suppose that this is obvious, as why would two people interact in a way that wasn’t mutually benificial?

    Except that in the real world, this happens all the time. A mugger coerces you into entering a relationship with him, one where he can kill you. Essentially you then pay him to exit the relationship, which is mutually benificial only because you were unwillingly put in the relationship to begin with. A Monopolist can coerce high prices and provide poor goods or services because the customer has no where else to go. And externalities fit in this model too. Essentially, a third party is being coerced into accepting some of the cost of the transaction.

    Oftentimes we get so caught up in what rights we thingk we should have, that we forget maybe to think about rights we shouldn’t have. Any time you state a right, you can restate it as a denial of a different right. “I have the right to be gay” restates as “you don’t have the right to prevent me from being gay, nor the right to ignore my other rights because I am gay.” “I have the right to clean air and water” restates as “you don’t have the right to pollute the air or water.” This is maybe a better way to secure some things, because they target the activity that causes the problem directly, and they leave no room for margins. In the first instance, a gay basher might say “he has the right to be gay, and I have the right to bash him for it.” which obviously violates the intent of the right to be gay, if not the wording. A polluter might dismiss a “right to clean water” argument by saying “my pollution doesn’t make the water that dirty,” or “while this specific body of water is dirty, there are many others that are clean, go drink from there.” In both examples the denial of a right to do something is stronger than the affirmation of a right to something.

    So maybe the idea of a free market could be better stated in the negative, something like “no person may coerce another into exchanging goods or services.”

  6. davidgljay:

    It sounds like that would lead to a system where people who can afford to hire lawyers to make their case would have the power to impose rules on the system

    “to impose rules on the system”? Um, no. Rules such as ‘no fraud’, etc. are already on the books and can and will be added by Congress etc. as needed. Aside from those, in a true free market one would think there would be a high burden, yes, for people who wanted to prohibit certain sorts of voluntary exchanges, assuming that’s what you’re talking about.

    People will always use types of relationships other than free monetary exchange to influence what’s going on. As long as they do, some opportunities for market exchange will go unrealized. I don’t think that that’s such a bad thing.

    I’m not sure I said it was, and you seem to be talking about two different things (1. imposing rules that in effect prohibit some types of exchange, 2. having relationships that do not involve exchange per se).

    Andrew Jensen:

    Maybe it’s just a wording thing, maybe it’s just a vibe I’m getting, but this makes it sound like the exchange is a good in and of itself.

    Wait, let’s clarify; I’m not sure I said anything either way about whether exchange is good or bad per se. I was just trying to describe what a free market would be like. This is separate from a defense of free exchange. For all you know, I hate free markets and think that free exchange is terrible.

    Of course, that happens not to be the case, and in the interest of disclosure, yes I do believe that free exchange is a positive-sum game. But I do think it’s important to clarify when my intent was descriptive vs when my intent is to praise.

    A mugger coerces you into entering a relationship with him, one where he can kill you.

    I’m not sure what this example has to do with a free exchange….

    A Monopolist can coerce high prices and provide poor goods or services because the customer has no where else to go.

    Monopolies often involve/rely on government action in one way or another, which had the effect of raising barriers to entry for others (=inhibiting some types of free exchange). It’s also far from obvious or universally-agreed that this or that monopoly is net-bad for the consumer (this needs to be established on case by case basis).

    And externalities fit in this model too. Essentially, a third party is being coerced into accepting some of the cost of the transaction.

    Indeed. Which is why e.g. a tax could be appropriate in such cases, like I said.

    So maybe the idea of a free market could be better stated in the negative, something like “no person may coerce another into exchanging goods or services.”

    Hey, I like it 🙂 best,

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