Basic Economics, Chapter 18, Part One

“A modern market economy cannot exist in a vacuum. Market transactions take place within a framework of rules, and require someone with the authority to enforce those rules. Government not only enforces its own rules, but also enforces contracts and other agreements and understandings among numerous parties transacting with one another in the economy.”

This would seem to be a sound statement at the opening of the chapter. But let’s think more about what is being said. “A modern market economy can not exist in a vacuum.” Who ever proposed that it does or should? And is there any fundamental difference between a modern market economy and any other economy at any other time?

Markets exist among people. They can’t exist as an entity in and of themselves, but exist only when people have the opportunity to trade with each other. They do not exist or become black markets when that freedom is interfered with. The mere fact that there are black markets that operate with an extraordinary degree of efficiency–without the government enforcing contracts or settling disputes, and while actively working to hinder their operation–should be a clear sign to all that markets can operate quite nicely without aid or intervention from the government. The only thing that distinguishes the “modern market economy” from the “black market” is the lack of total government opposition to the “modern market economy.”

To get into this a little more, consider Sowell’s comment that a modern market economy, “…require[s] someone with the authority to enforce those rules.” This isn’t altogether true, even on the face of it. There are, for instance, many rules in the market that are not enforced by government at all, or, if they are, were only legally codified after the custom was widespread, such as presenting a receipt to the customer after a purchase. An example of still uncodified rules are pricing rules that dictate that if you sell a product that is inferior to your competitor’s, you must charge a lower price, offer greater convenience, or in some other way compensate your customer to justify the inferior quality. The same rule is applied in reverse for selling at a higher price a product of the same quality as a competitor. These pricing rules are not enforced by the state, but if a firm fails to keep these rules, they will see a decline in their profits and ultimately run the risk of going out of business.

Of course, I wouldn’t say that false advertising or not fulfilling a contract is the same as breaking the rules of English grammar by using a misplaced modifier; but, then again, the vast majority of rules in the market are similar to the rules of English grammar in that they are enforced through a peer system appropriate to the environment. When grammar rules are broken, it hinders the speaker’s ability to communicate effectively and be understood. Insofar as these aims are important to the speaker, he strives to follow the rules of the language; and, insofar as he does not, others think poorly of him. If his violations are bad enough, people even refuse to listen to him.

Similarly, there are rules that apply to the market. Do not steal, for instance. Consider an agreement in which Adam agrees to pay Bob $30 for Bob to cut Adam’s grass. Bob then cuts the grass, but then Adam doesn’t pay Bob. This is essentially no different than if Adam had stolen $30 from Bob. Word would get around about Adam’s failure to pay, and he’d be unable to find someone to work for him in the future.

These types of rules, and the fact that they are broken, do not, in and of themselves, provide justification for a state (though at this point in our study of Sowell, that necessity has not been ruled out), but only demonstrates the necessity for a security and justice industry. Whether that industry should be just another of the 1,000 industries in the marketplace, open to competition and subject to contractual agreements between customers and providers, or whether that industry should be run only as a state monopoly funded through compulsory confiscation of the money of all members of society is a question that will be dealt with later.

2 thoughts on “Basic Economics, Chapter 18, Part One”

  1. I’ve picked up Basic Economics and started reading it. I can’t find any of your blog posts about the book earlier than chapter 12. Can you point me to your earlier commentary?

    1. Anne, I’ll have to check. I know I didn’t do any posts on the first chapters, though I don’t remember what chapter I did start with. the first 10 chapters or so are really solid and if I do have any disagreements with anything he says early in his book they are very minor and either entirely knit-picky or just not worth a blog entry.

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