Journal of Economic Literature 2013, 51(2), 478–495
http://dx.doi.org/10.1257/jel.51.2.478
What’s the Good of the Market?
An Essay on Michael Sandel’s
What Money Can’t Buy
†
Timothy Besley*
This essay will discuss the criticisms of the economic approach to markets offered
by Michael Sandel’s What Money Can’t Buy. After reviewing the main arguments,
the essay looks at these from three main angles. First, it relates them to different
traditions of thinking about markets and their achievements that have been developed
by economists. Second, it discusses the idea that markets can change values as argued
by Sandel in light of recent related literature in economics. Third, it discusses some of
the literature on alternatives to using the market to allocate resources and the pros and
cons of these. (JEL A11, A13, D40, D63, P10)
1. Introduction
a period in which economics has achieved
unprecedented power and prestige.
Sandel’s mission in WMCB is to question
whether the use of markets to allocate some
goods is just. It is essentially a book about
right and wrong. The book is brimming
with interesting examples that make you
think. This is the moral philosopher’s stock
in trade—using examples as the method of
questioning what we believe. In particu­
lar, concrete examples of difficult cases are
used to challenge our ethical intuitions.
And WMCB is a master of this method. I
read this book cover-to-cover in less than
48 hours. And I have written more marginal
notes than for any book I have read in a long
time. This essay is a response to the book.
But it goes beyond a normal review to consider some of the wider themes that WMCB
develops. The essay will question some of
the arguments that are made as well as
M
ichael Sandel’s What Money Can’t Buy
(WMCB hereafter) is a great book and
I recommend every economist to read it even
though we are not really his target audience.
The book is pitched at a much wider audience of concerned citizens. But it taps into a
rich seam of discontent about the discipline
of economics. While there is little sign that
mainstream economics is on the back foot,
there are many initiatives, even some within,
whose expressed aim is to overturn orthodoxy as it has emerged in the past fifty years,
* London School of Economics and CIFAR. I am grateful to Maitreesh Ghatak for many helpful discussions on
the ­topics covered here as well as comments on an earlier
draft. I have also received helpful feedback and encouragement from Janet Currie, Anders Jensen, and Ken Shepsle.
† Go to http://dx.doi.org/10.1257/jel.51.2.478 to visit the
article page and view author disclosure statement(s).
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Besley: What’s the Good of the Market?
drawing broader implications for debates
about how societies are organized and what
economics, as a discipline, has to say about
this.
Throughout WMCB, the economics
profession comes in for a fair bit of stick.
Economists are accused of having views
about markets that lead to repugnant
conclusions. However, there is the usual
problem when using general terms like
“economists.” It does not make much sense
to take WMCB’s arguments as a portrayal
of what philosophers think in general. And
one should therefore have similar misgiving about taking examples, quoting selectively, and then characterizing this is as
the views of economists in general. That
said, I did recognize all the positions that
WMCB attributes to members of the economics ­profession, i.e., they are reflective
of what some (perhaps even many) economists believe. So I don’t think that WMCB’s
portrayal of a stylized mainstream view in
economics is massively wide of the mark.
But there are many economists who have
thought hard about these issues and take
contrary positions, only some of whom are
mentioned in the book.
This essay will discuss the criticisms of
markets offered by WMCB. After reviewing
the main arguments in section 2, I will look
at WMCB from three specific angles. First,
in section 3, I will review the benchmark for
WMCB by discussing different traditions of
thinking about markets and their achievements that have been espoused in the economics literature. Second, the essay will
look at the idea that markets can change values, drawing on the literature on how values
and norms are shaped. Third, I will discuss
alternatives to using the market to allocate
resources. This helps to get to the “so what”
question following from WMCB. Supposing
that a reader of WMCB accepts (as seems
reasonable) that some use of markets to
allocate resources leads to outcomes that
479
are morally questionable, what does that
imply for the way societies are organized?
Some concluding reflections are offered in
section 6.
While there is much that is good in
WMCB, it does not provide any guidance on
what would be an alternative to the use of
markets in cases where it is uncomfortable
with their consequences. And it fails to give
credit to the large research agenda in economics that deals with many of the issues
that he raises. In particular, economists who
have worked on market design pay serious
attention to many of its concerns (see Roth
2007).
2. The Main Arguments
The main arguments in WMCB are
intended to provoke a suspicion that allowing
transactions between consenting adults in a
market place is not universally desirable. It
focuses predominantly on market exchange,
where one side of the transaction is financial,
i.e., a price. The book uses a range of provocative examples to challenge the intuitions of
the reader about whether allowing a market
to operate in a particular context is problematic. The subtext is that market reasoning has
become so powerful in recent years that the
reach of the market has been pushed too far.
The examples developed in WMCB motivate
the general arguments and breathe life into
the narrative.
Because it proceeds via examples, WMCB
is open to the criticism that it fails to offer
anything like a conceptual scheme for analyzing when markets have undesirable properties. A strength of economics as a subject
has been that it tries to generalize away
from specific cases to provide a core body of
knowledge that provides guidance across a
range of circumstances. The search for general principles is, for example, the approach
followed in Kanbur (2004) that investigates
what makes markets obnoxious in some
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Journal of Economic Literature, Vol. LI (June 2013)
­cases.1 Roth (2007) also looks systematically
at factors that make some market transactions repugnant.
A number of examples in WMCB refer
to cases where allocating goods using prices
faces the prospect of the good getting into
the wrong hands. One example is the sale
of tickets for rock concerts. Here, Bruce
Springsteen is mentioned approvingly for
holding down ticket prices to below marketclearing levels in 2009 in order to widen
access. Estimates cited by WMCB suggest
that this cost Springsteen around $4 million in lost revenues. Another example that
WMCB uses to cast doubt on the desirability
of a market allocation is auctioning off the
right to a U.S. green card to refugees. And
the commercialization of professional sports
with the growth in corporate sponsorship
is used to suggest the possibility that sports
events are no longer the preserve of true
fans. Anyone who has been to the tennis at
Wimbledon in recent years would recognize
this argument—many of the most expensive
and best-positioned seats on Centre Court
are bought for corporate entertainment purposes and remain empty while their potential
occupants prefer to linger over champagne
and canapes rather than watching tennis.2
One alternative to markets in such cases
is rationing by standing in line while holding down prices. Many people associate such
strategies with the Soviet Union and post–
World War II rationing in Western Europe.
But WMCB takes issue with this arguing that
there are many examples that “cast doubt on
the economist’s claim that markets are always
better than queues at getting goods to those
who value them most highly. In some cases,
1 He suggests three general classes of situations that he
labels as extremity of outcome, agency, and inequality.
2 Although, of course, one could point out that the problem is that those who are being entertained are not forced
to face the market price and hence they treat the ticket as
if it were free and attend even if they have a very limited
interest in tennis.
the willingness to stand in line . . . may be a
better indicator of who really wants to attend
than the willingness to pay” (32). However,
this is not a new argument—see, for example, Weitzman (1977). Unlike WMCB,
Weitzman gives a rather precise account of
the factors that shape the trade-off between
markets and queues. And WMCB reaches
a similar conclusion to Weitzman; it does
not advocate a wholesale rejection of markets, acknowledging that “Whether, in any
given case, markets or queues do . . . better is an empirical question, not a matter to
be resolved by abstract economic reasoning”
(32). While it is difficult to disagree with this
view, the challenging practical question is
how to apply this reasoning in specific circumstances. Many cases are not clear-cut.
For example, public health systems often use
waiting times as a means of rationing health
care that encourages some people (typically
the better off) to pursue market alternatives
where access to treatment is immediate.
Such rationing-by-waiting economizes on
public health care costs and can implicitly
target resources toward the less well off. But,
the cost is that some people can die on waiting lists or suffer extreme discomfort.
WMCB discusses the example of a company called LineStanding.com, which
presents itself as the market leader for
paying people to stand in line on Capitol
Hill on behalf of lobbyists. This, of course,
should favor lobbyists with greater financial
resources. But in assessing the merits of such
activity, the argument in WMCB takes a different turn. Here the issue is what it means
to turn access to Congress into a commodity
through such means. WMCB argues that it
“degrades Congress by treating it as a source
of private gain rather than an instrument of
the ­public good” (35). This is a rather different and important point reflecting how
attitudes and norms are shaped by the way
that goods are allocated. Here, the notion
is that creating a market in Congressional
Besley: What’s the Good of the Market?
line-standing can heighten the perception
that Congress can be bought by the highest
bidder. Presumably, this could erode trust in
government and have an impact on the kinds
of people who wish to hold public office.
Another area where WMCB has trouble
with what it perceives to be standard economic reasoning is gift giving, where it
asserts that “Economists don’t like gifts . . .
they have a hard time making sense of gift
giving as a rational social practice. From the
standpoint of market reasoning, it is always
better to give cash rather than a gift.” As
WMCB points out, this view is premised
on the logic that the recipient knows their
preferences better than the gift giver. And
he cites the well-known paper by Waldfogel
(1993) that finds that many people do not
value the gifts that they receive at Christmas
at their market value. Thus had they been
given cash instead, they would be better-off.
Anthropologists have long been critical
of economists’ understanding of gifts. They
have argued that gift giving has social significance beyond the instrumental value of the
goods that are exchanged; see, for example,
Mauss (1970) for a classic account. The idea
that economists’ view of gift giving has implications for the way that we organize the allocation of some goods is a central argument
in Titmuss (1971), whose work is discussed
in WMCB. Titmuss criticizes the use of
markets in soliciting blood and his analysis
provoked critical replies from high-profile
economists, such as Arrow (1972). Titmuss
argues against turning human blood into a
commodity; people responded positively,
he suggests, to regarding blood donation as
an act of civic duty. This, he argues, would
be socially beneficial, by creating an organized opportunity for individuals to engage
in socially valuable acts. And, this in turn,
would have more general social benefits by
creating better citizens.
WMCB also discusses examples where
market incentives seem to have backfired.
481
These are characterized as cases where
“introducing money into a nonmarket setting
can change people’s attitudes and crowd out
moral and civic commitments” (119). A good
illustrative example is the study by Gneezy
and Rustichini (2000), which shows how parents in an Israeli day care center responded
to the introduction of fines for picking up
children late by showing up late more often.
Instead of the fine deterring such behavior,
the authors argue that it became perceived
more like a price in a market transaction.
Hence, parents no longer felt guilty for causing the staff of the day care center to be late
home once they were paying. Such ideas
have been discussed extensively by economists in the past and a series of examples can
be found in Frey (1997), although Gneezy
and Ristichini’s evidence is one of the most
persuasive empirical examples. There is
­
now a growing body of experimental evidence that supports the idea that pro-social
behavior may be greater when no price or
incentive is offered.3 How far these arguments have made inroads into mainstream
economic thinking is moot. But they can no
longer be considered as particularly exotic.
WMCB discusses examples of goods that
money cannot buy no matter what. It notes,
for example, that paying someone to be
your friend is not the same as friendship.
And there is a difference between buying
an Oscar statue or a Super Bowl ring in an
auction and actually winning one. Being
elected a member of a distinguished academy by your peers has value because it cannot be bought and the value of the good is
the expression of esteem.
These are all cases where the value of the
good itself depends on acquiring it in a nonmarket context. The economics profession is
full of rewards, such as being elected a Fellow
of the Econometric Society or a member
3 See,
for example, Heyman and Ariely (2004).
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of the appropriate section of the American
Academy of Arts and Sciences. And given the
chatter in common rooms and lunch tables
over the merits or otherwise of Nobel Prize
winners in economics, it would be hard to
argue that we don’t (as a profession) take
these rationed nonmarket goods seriously.
There seems little doubt that status matters in economic situations as discussed at
length by economists such as Frank (1985)
and Brennan and Pettit (2000). In line with
this, recent empirical evidence by Brown et
al. (2008) suggests that an individual’s rank
in the wage distribution affects job satisfaction even when monetary wage differentials
are controlled for. And employers understand full well the role of status in eliciting
effort. Status rewards, such as employee of
the month, are routinely offered in firms.
Besley and Ghatak (2008) argues that such
rewards make perfect sense in a standard
principal–agent relationship as an alternative
to using standard monetary rewards.
Another set of examples relate to cases
where the market is trading in questionable
goods. One example that WMCB discusses is
paying to hunt a rhino. Such schemes have
actually been applauded as conservation
mechanisms since they give local communities a strong incentive to police illegal gaming if the proceeds from shooting rhino are
shared. But for WMCB, the argument goes
beyond the possibility of instrumental justification. It argues that there is something
intrinsically objectionable to allowing the
rich who are willing to pay for it to legitimate
rhino killing through such market mechanisms. The basic judgment is that there are
things that should not be available for purchase no matter how much someone is willing to pay for them.
Another example along these lines is the
Web site called stiffs.com, which allows people to bet on the deaths of celebrities. A reasonable assumption is that this exists because
some people find such gambling amusing or
enjoyable. But it is not difficult to see why
others take the view that such activity is in
poor taste. It is possible that the person who
has placed the bet will crave the death of the
celebrity in question, for no other motive
than personal financial gain. WMCB frames
the issue as follows: “the moral tawdriness
of the game lies mainly, I think in the attitude toward death it expresses and promotes.
This attitude is an unwholesome mix of frivolity and obsession—toying with death even
while fixating upon it” (142). But, as WMCB
acknowledges, betting on deaths predates the
Internet era by a long way. And it is not linked
either to conventional market settings—
French tontines existed for centuries in which
individuals belonged to a pool whose value
increased as its members died. This created
a pool of gainers out of a tontine member’s
early demise. And WMCB rightly notes that
views about life insurance and whether this is
gambling or insurance have reflected a longstanding debate reflecting a society’s values
even though, by now, life insurance is widely
accepted as a legitimate economic activity.
WMCB also discusses the commercialization of sport at length. Many sports teams
now routinely sell naming rights and seem to
push the limits of advertising to more or less
anything associated with sports such as sponsoring shirts and naming of stadiums. This
brings in revenue and arguably enhances the
experience. It may even raise the quality of
the sport with better incentives for players
who reap higher rewards. But the concern is
that it undermines the values for which the
activity stands. The concern is that monetary
incentives drive out traditional sporting values. WMCB uses terms like debasement,
coarsening, pollution and the loss of the
sacred (187) to describe the consequences of
commercialization in this and other contexts.
Universities face similar issues as they
seek to raise money to support their activities. In part, this is driven by market forces,
in particular by competition for faculty and
Besley: What’s the Good of the Market?
students. Buildings and chairs are now routinely named for individuals and corporations. Sometimes this can backfire if the
reputation of the donor is subsequently sullied. However, since the aims of universities
are focused on producing a key public good
(research), it is less clear that naming rights
that enhance this function are problematic.
But there are some who appear to believe
that it cheapens the product.
Somewhat surprisingly, there is a limited focus in WMCB on markets in health
care. While most countries have a mixed
economy in health, there are many debates
about how far market forces belong in allocating health care. The United States has a
strong market norm in core health care provision that sets it apart from the rest of the
developed world where nonmarket allocation through public finance for core health
services is the norm. WMCB’s examples
in health care focus on the extreme case
of queue jumping by the super rich, particularly the possibility of paying for 24–7
access to a physician. But other countries
take steps to reduce the domain of markets in health care to a much greater extent
than this due to the perceived social corrosiveness of allowing too much inequality
in access to health care. And many would
regard the inequalities in access to health
care in the U.S. system to be unacceptably
large without worrying about the extreme
examples discussed in WMCB.
Summing up on the examples, the main
objections to using the market in WMCB fall
into two categories.
First, there is an objection to market
outcomes based on fairness. This is partly
the standard observation that inequality in
market choice is a reflection of underlying
inequalities in purchasing power. No economist will find that argument surprising nor
is the observation that inequality in initial
conditions will manifest itself in the way that
market choices play out. But the fact that
483
some people drive Ferraris has nothing to do
per se with having a market for cars—it is
due to the underlying inequalities in income
and wealth.
But the argument developed in WMCB
is more than this standard egalitarian objection to inequality in outcomes driven by
inequality in endowments. A key question
about voluntary exchange, whether in markets or elsewhere, is in what sense these
choices are really free. Standard economic
models tend to reduce this to whether or
not exchange is voluntary and results in
an outcome for both parties to a transaction that lies above a reservation outcome.
But when a poor person sells their kidney
to buy food, some intuitions would question in what sense there is real freedom in
that transaction and the standard economic
account does not appear to capture wider
judgments that characterize the context in
which choices have been made. This view
is exemplified by the remark that “(m)arket
choices are not free choices if some are
desperately poor or lack the ability to bargain on fair terms” (112). This is an interesting idea that does not figure centrally in
standard economic discussions of markets.
However, there is work that looks at this
issue that I will discuss below.
Second, there is the corruption/degradation objection to the use of markets. This
is the view that trading in markets can lead
to valuable attitudes and norms being damaged or dissolved. So WMCB argues that
“markets are not mere mechanisms; they
embody certain values. And sometimes,
market values crowd out nonmarket norms
worth caring about” (113). This argument
also goes beyond standard textbook discussions of markets. To investigate this further
requires thinking about how attitudes and
preferences are formed and how markets can
change these endogenously. This is also an
area where there is an active research agenda
in economics that I will discuss below.
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3. Economic Perspectives on the
Achievement of Markets
At the core of WMCB are a series of specific arguments about the value of using
markets with a particular focus on how this
shapes motivation and norms. This is distinct
from the approach to the analysis of markets
as it has evolved in textbook accounts where
the role of markets is, above all, to achieve
allocative efficiency. And the ultimate invisible hand theorem concerns the possibility
that a range of economic agents as consumers
and producers can act in a decentralized way
to achieve an efficient allocation of resources.
This project is an old one and is exemplified in Adam Smith’s famous quote in Book
1 of the Wealth of Nations: “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 self-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.” This project reached its apotheosis
in economics in the work of general equilibrium theorists such as Arrow and Debreu
who sought to formalize these arguments as a
means of understanding their reach and limitations. They derived conditions under which
decentralized production and exchange in
competitive markets would yield a Pareto
efficient allocation of resources. One of the
main conditions required is the absence of
externalities, i.e., direct effects on producers
and consumers that are not reflected in market prices. In fact, the problem of allocative
efficiency is not having too much use of markets, but too little. The byline for market failure is as a problem of incomplete and missing
markets. The concept of Lindahl equilibrium
extended the Arrow–Debreu model of a
competitive market system to include public goods and externalities, where personalized prices mediated exchange and achieved
allocative efficiency.
In the process of investigating conditions
for allocative efficiency in the presence of
public goods and externalities, it became
clear that using markets in such contexts had
severe limitations. And so emerged a role for
government in taxing, regulating and providing public goods to supplement what the
market provided or correcting its problems.
While this view was challenged in Coase
(1960), this became close to a consensus in
mainstream economics and underpinned
models in public economics textbooks such
as Atkinson and Stiglitz (1980).
The incorporation of imperfect information—moral hazard and adverse selection—into economic models of markets
was used to cast further doubts on whether
markets would achieve allocative efficiency.
Greenwald and Stiglitz (1986) argued that
this would almost always cause externalities that would destroy any presumption of
efficiency. Allied to such investigations were
developments in mechanism design theory
suggesting that cleverly designed centralized solutions could implement better outcomes than could be achieved by markets.
These approaches offered the promise that
permissive conditions existed under which
nonmarket allocation could be designed by
insightful planners to implement outcomes
in a fairly permissive way that could often do
as well as or better than the market. Indeed,
Hammond (1987) argued that markets were
often a form of constraint on optimality
because of the way that they created arbitrage opportunities to undo the effects of
optimal mechanisms.
Further doubt has been cast on marketbased solutions by behavioral economists
who, using arguments and evidence from
psychology, question the textbook model of
informed, far-sighted, and rational individuals. These deficiencies in decision making
create internalities that increase further the
range of arguments for government intervention in markets—see the discussion in
Besley: What’s the Good of the Market?
Bernheim and Rangel (2007). These create
further arguments for government intervention including, for example, compulsory
saving for retirement (see, for example,
Diamond 1977).
Taking stock of this textbook view and subsequent developments, it is quite surprising
how much economists are characterized as
being a pro-market profession. These standard arguments actually yield very little presumption in favor of a free market economy.
And this is without factoring in other concerns such as natural monopolies and distributional issues.
Many of the objections in WMCB are
pitched as a critique of economists’ “markets
as a source of allocative efficiency” view. But
the argument in WMCB is that we miss things
that are important when we look exclusively
through that lens. There is, however, a way of
viewing the concerns raised in WMCB in the
standard economic framework. The arguments could be characterized as a particular
kind of externality that arises if market transactions affect motivation, preferences, and
norms in a way that is not properly priced
in the market transaction. To incorporate
this would, of course, mean extending the
model to make motivation, preferences, and
norms endogenous. However, it could then
be incorporated within the standard conceptual frame as an extension of the domain of
externality arguments.
Economists have long understood that a
market economy does not guarantee equitable outcomes. However, the main focus has
been on how this is due to inequality in the
underlying distribution of natural resources,
capital, and skills. Some kinds of market
­imperfections, e­ specially those due to borrowing constraints, can lead to inequalities
that widen over time as in the occupational
choice model of Banerjee and Newman
(1993). There would also be concerns when
income inequalities stem from access to
rents and/or the excise of monopoly power.
485
However, differences in skill and entrepreneurial talent, in particular, may lead to
inequality even when there are no market
imperfections.
How inequality is conceptualized varies
somewhat among economists.4 If one looks
at societal judgments, it seems plausible to
argue that some kinds of inequality are more
salient than others. This idea was developed
in an important paper by Tobin (1970) who
looked at forms of specific egalitarianism
that apply to spheres like health, education,
or access to justice. One might choose to
limit the domain of inequality without being
persuaded about the need for egalitarianism
in all areas of life. This could apply, for example, to providing legal counsel ahead of a trial
where some would regard it as unacceptable
that the wealthiest can buy the best lawyers
even if they would not object to the wealthiest living in the biggest houses.
Some of the arguments in WMCB, which
focus on the possibility of markets favoring
the wealthy and/or putting a good in the
wrong hands, echo these standard arguments. But the real question in such cases is
what alternative way of allocating resources
is to be preferred. There is no reason to
think that allocating goods using nonmarket mechanisms is more egalitarian. For
example, the pervasive use of patronage and
social networks to allocate jobs is a salutary
reminder of what can happen when markets
are compromised. And there is a long-standing debate about how far the middle classes
have been able to extract the largest benefits
from public spending programs, something
that Stigler (1970) christened Director’s Law
of Public Income Distribution. The point
is that believing there are more egalitarian alternatives to markets depends on the
4 The classic economic approach is welfarist, thinking of
inequality in terms of utilities. However, Amartya Sen has
argued for a wider conception that looks at capabilities as
the currency of justice—see, for example, Sen (2009).
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Journal of Economic Literature, Vol. LI (June 2013)
specific institutional solutions pursued and
the incentives that they embody.
WMCB is concerned about whether markets are always conducive to free choice.
There is a strand of thinking in economics
that promotes the market economy on the
basis of the freedom that it brings, although
generally this is not the core argument
developed in textbook accounts of how markets work, even though it could be viewed as
implicit since markets are modeled as a form
of noncoercive exchange. There are classic
works in economics, such as Hayek (1944)
or Friedman (1962), which have developed
this view at length. They constitute efforts
to justify the capitalist system and were
written in an era when the major alternative was state socialism, which, at the time,
had made many inroads around the world.
Both of these accounts of the virtues of the
market system represent important schools
of thought—respectively the Austrian perspective and the Chicago perspective. These
have had many other influential thinkers,
including Frank Knight and Ludwig von
Mises.5
WMCB takes issue with whether market
transactions constitute free exchange. But
this is largely on the basis of underlying
endowments being unequal as in the contemporary Marxist critique of markets of, for
example, Roemer (1988). However, there
are two arguments that go beyond concerns
about endowment inequality to question
whether market transactions properly constitute free choice in some situations.
The basis of the free choice argument is
that a party to a transaction consents to an
exchange if and only if she is better-off than
she would be by not trading where the latter
is usually characterized as a fixed and known
outside option. But what if that alternative
is not fixed? Acemoglu and Wolitzky (2011)
5 For
some discussion, see Boettke (1998).
consider this possibility in a model of a bilateral exchange where one tool available to a
principal in a principal–agent relationship
is coercion, modeled as the ability to lower
an agent’s outside option. They specifically
have in mind tools for labor coercion. They
show that such instruments would be used as
part of an employer’s optimal labor contract.
Thus, while the agent is still trading above
her outside option and so is apparently free
to choose, that option is influenced by the
employer’s coercive behavior. One would be
suspicious of characterizing such situations
as free choice.
Basu (1986) develops an argument where
freedom is compromised by third parties.
A good example of this is Akerlof’s (1984)
model of the role of caste in labor markets.
Members of a community might choose to
punish those who violate the prevailing social
norm imposed by caste rules that restrict
occupational choice and trade. Thus, even
though a market may exist, social punishments may prevent access to it and leave
individuals with inferior trading opportunities. So observing individuals trading in a
particular way does not imply that this choice
is free of social constraints.
These analyses constitute important caveats to the standard idea that market exchange
constitutes free choice. However, it is worth
reminding ourselves that effective markets
operate within a framework of legal rules.
Some of these rules are designed to limit
such things as labor coercion and caste discrimination. The issue is how effective such
measures are in specific contexts—whether
individuals are free when they trade in markets will depend on the context.
4. Markets and Values
A central argument in WMCB is that use
of the market in particular situations shapes
preferences and norms of market participants
and those who observe such transactions.
Besley: What’s the Good of the Market?
Most economic analyses take preferences
as fixed and given. Moreover, there is a tendency to characterize preferences narrowly
with a particular focus on the implications
of self-interest. But of course, there are
many examples where economists have gone
beyond these stylized approaches. Most
models in economics also make no explicit
reference to the role of social norms. Yet,
this is also an area where there has been a
significant amount of work. For noneconomists it is sometimes hard to understand why
we deliberately strip away complications in
our models when they are not needed. But
there is a general preference for models that
seek minimal departures from a very stylized view of preferences and rationality. It
is only possible to assess on a case-by-case
basis whether this simplicity yields misleading insights.
Economic models routinely depart from
assuming self-interest when modeling preferences to understand how markets and
institutions work. There has been a good
deal of success in accounting for observed
behavior in the laboratory this way. For
example, Fehr and Fischbacher (2002)
review some of the core ideas in the study
of social preferences for fairness and reciprocity. One finding, which is germane to
WMCB, is the strong evidence that people
care about procedure as well as outcomes.
This idea is central to work by psychologists
who look at judgments about justice—see,
for example, Thibaut and Walker (1975).
Such studies have a bearing on whether
there is likely to be social acceptance of
market systems in practice.
There are many examples where
economists have analyzed endogenous
preferences—see, for example, Bowles
­
(1998). On the basis of an extensive review of
the literature that combines evidence from
economics, ethnographic, and historical
studies, it concludes that “the argument that
economic institutions influence motivations
487
and values is plausible, and the amount of
evidence consistent with the hypothesis is
impressive” (76). One important example
concerns feminist values, reductions in family size, and the transformation of sexual
practices associated with expansion of labor
force participation by women as discussed,
for example, in Goldin (2006). She uses the
framework of Akerlof and Kranton (2010) to
emphasize how changes in women’s behavior can be thought of as a changing sense
of identity. There appears to be a complex
dynamic process involving acquiring education, labor market behavior, and preference
change. But such changes are not exclusively
about individual preferences. A key notion is
that societal norms have also changed, which
in turn has transformed what is regarded as
socially acceptable behavior for women.
While an obvious way to think of norms
in this context is as changing preferences,
there is sometimes suspicion in proceeding
too directly in this way. This view is articulated, for example, in Postlewaite (2011) who
notes that “It is trivial, however, to support
observed behavior without abandoning optimization—simply posit that one prefers to
follow a particular social norm” (34).
He makes an important distinction
between reduced-form preferences—those
that embody rational behavior, given the
social equilibrium that is being observed,
and deep underlying preferences. Thus,
we could posit a deep preference for social
approval that will manifest itself in different reduced-form preferences over specific
actions depending on the context. So once
sufficiently many women participate in the
labor force or use markets in child care, such
behavior could become socially accepted.
Endogenous norms may thus generate positive feedback loops (due to complementarities), which, while they could initially hold
back change, could also imply that tipping
points are reached after which change can
accelerate.
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Journal of Economic Literature, Vol. LI (June 2013)
A number of models now look at such
processes. The work of Bisin and Verdier
(2000, 2001) has been particularly influential and studies intergenerational transmission of preferences. Another example
is recent work by Tabellini (2008), which
looks at how parents indoctrinate their children and how this is influenced by the kinds
of social interactions that they will experience. Fernandez, Fogli, and Olivetti (2004)
study how cultural preferences evolve intergenerationally to influence women’s labor
force participation.
These approaches do suggest a role for
market systems to influence norms along the
lines discussed in WMCB. Creating a level
playing field in labor markets, for example
by banning discrimination against women,
can create a process of self-reinforcing
dynamic change in which markets play a
role in breaking down social taboos. Market
access created earnings opportunities for
women that were not available in home production. This fueled emancipation in other
ways propelling a process of greater societal
change. Fernandez (2013) develops a model
of cultural learning to understand this and
calibrates the model to U.S. data to look at
development over 120 years.
But WMCB is most concerned about the
way in which the market can undermine
pro-social values. There is an old debate
about the role of networks in providing support in traditional societies that parallels this
concern. There was a fashion among leftist historians such as Thompson (1963) to
characterize preindustrial life as networks of
mutual support that were destroyed by the
advent of capitalism. This is also a central
theme in Polanyi (1957) who studies how
markets extended their reach in the process
of development. And more recently, Scott
(1977) uses the term “moral economy” to
describe the framework of informal support.
A common theme here is that market systems displace close social ties. Economists
who have engaged in these debates have
demonstrated how this process can be
accounted for by understanding how incentives change with greater mobility. For
example, Coate and Ravallion (1993) look
at how repeated bilateral interactions can
foster mutual support arising as an informal contract in a repeated game. Improving
outside options makes it more difficult for
such mutual support to persist and could
also make monitoring more difficult. More
generally, informal arrangements can be sustained with group-based rather individual
punishments. So reciprocity becomes a selfsustaining social norm as in Kandori (1992).
Greif (2006) develops these ideas to look at
the emergence of trading networks in a variety of contexts where formal law has yet to
emerge.
But one could also model informal transfers among those who live in close proximity to one another as a norm embodied in
a deep preference for social approval. In a
moral economy, social approval is granted to
those who make transfers in times of need.
This norm makes sense when there are few
market options and approval is sought in a
well-defined social group. But development
undermines these two preconditions.
On either of these views, markets triumph
in part because of their benefits over the
moral economy. For example, there is no
need to be tied to a network to be supported.
And traditional networks are often governed
by power structures that make individuals
beholden to those who wield such power.
Markets can serve those who are willing to
pay rather than those with social and political
connections.
But there seems to be a general proposition that supports the logic of WMCB. In
any well-specified model of social norms,
whether operating through deep preferences
for social approval or as an equilibrium of a
repeated game, there is an element of noncooperative design that creates the scope for
Besley: What’s the Good of the Market?
inefficiencies. It is perfectly possible that the
market could displace the moral economy
before market alternatives have improved to
a point where they are better. Societies may
have few means of coordinating change.6
However, whether this is true can only be
answered case by case.
As a final example, it is worth reflecting
on the role that changing norms may have
played in the recent financial crisis. This
is the theme, for example, in Akerlof and
Shiller (2009). Suppose that financial sector workers internalize norms of socially
­acceptable behavior. Then whether financial sector workers behave responsibly in
their investment decisions could change
endogenously without changes in market
fundamentals if new norms take root. If
such norms create higher profits at the price
of making a financial collapse more likely,
then competing for workers could exacerbate that risk-based externality. Although
this argument is quite loose, it does hint at
how paying attention to norms could have
real consequences in exacerbating market
externalities.
But the recent crisis also puts the so-what
question into sharp relief. We know little
about how formal regulation interacts with
norms although Benabou and Tirole (2011)
makes an interesting start on this. We also
need to consider the norms and behavior of
those who designed and operated the systems of regulation that were widely blamed
for the failure to anticipate the financial crisis. So focusing on the faultiness of market
driven incentives seems one-sided. Either
way, there is a need to consider alternatives
to markets and the values that they embody.
6 This is similar to the argument in Arnott and Stiglitz
(1991) who study the externality between informal institutions and the market based on informational imperfections.
489
5. Alternatives to the Market
What are the alternatives to using the market? Debates since the financial crisis, such
as the Occupy Wall Street movement, offer
no coherent alternative blueprint for running
society. In an earlier era, it was socialism. But
grand debates about economic systems are
now defunct following the collapse of most of
the twentieth century’s socialist economies,
which had turned out to be both repressive
and inefficient.
The arguments against markets in WMCB
might be used to support greater state intervention to regulate markets. However, that
is not the line that is taken in WMCB and
therefore leaves open the question of what
the alternative should be. If there are problems with using markets to allocate goods,
then ultimately we have to say what we
should do about it. Recent developments
in political economy provide a window on
this issue. One of the key challenges lies in
understanding when government intervention can make things better. The dominant
view is that the primary fix is via designing
effective institutions that constrain behavior
and encourage government to act in the public interest. Acemoglu and Robinson (2012)
refer to these as inclusive institutions while
Besley and Persson (2011) call them cohesive institutions.
The standard approach in political economy gives little role for norms and values in
shaping how government works. It begins
from the premise that government is populated by rational self-interested bureaucrats and politicians. This was the starting
point in the classic account of government
in Buchanan and Tullock (1962) and has
remained so across a swath of subsequent
literature. Buchanan (1989) is strongly
opposed to the idea that there is anything
like civic virtue that plays a role in government. He says “Individuals must be modeled
as seeking to further their own narrow-self
490
Journal of Economic Literature, Vol. LI (June 2013)
interest, narrowly defined, in terms of measured net wealth position, as predicted or
expected” (20). And he follows a well-trodden path. Some two centuries earlier, Hume
(1742) offered the following maxim for institution design: “In contriving any system of
government and fixing several checks and
controls of the constitution, every man ought
to be supposed a knave and to have no other
end, in all his actions, than private interest.
By this interest, we must govern him, and
by means of it, notwithstanding his insatiable avarice and ambition, cooperate to the
public good.” This approach underpins the
case for constraints on government and, by
doubting government effectiveness, creates
a presumption against market intervention.
That said, it is still compatible with a wideranging role for government and Besley and
Persson (2011) argue that the growth of
government in the twentieth century was in
large measure made feasible by the development of institutions that encouraged spending tax revenues in a universalistic way.
Many accounts of government also see it
as embodying civic engagement with a role
of a public service ethos in promoting good
government. Besley (2006) argues that there
is potential for political selection of publicly
spirited leaders to play a role in promoting
government in the public interest. More
generally, civic virtue can also boost citizens’
policy concerns and willingness to participate
in politics as voters, candidates and activists. There is support for this perspective in
accounts of how human capital investments
can foster civic societies that monitor government performance and encourage social
activism. This has been argued, for example,
in Glaeser, Ponzetto, and Shleifer (2007)
and forms part of a long-standing tradition
articulated in Lipset (1959). This view also
sees a strong role for education in promoting citizenship (either directly or indirectly)
as found, for example, in Milligan, Moretti,
and Oreopoulos (2004). These arguments
are parallel to the discussion above of how
norms can evolve over time, in this case
norms that support civic engagement and
make government work better.
Many of the arguments in WMCB argue
that the downside of markets comes from
the fact that they pursue exclusively commercial ends. But there are many forms
of private organization that try to reduce
commercial incentives in the way that they
operate and to encourage some kind of nonprofit mission orientation. The literature on
nonprofits, following Hansmann (1980), has
emphasized the importance of the nondistribution constraint in attenuating the profit
motive. Glaeser and Shleifer (2001) argue
that it makes it more costly for managers in
nonprofits to engage in personal rent seeking, and hence provides a natural means of
safeguarding quality.
But there is also the notion that nonprofits attract mission-oriented workers (Besley
and Ghatak 2005 and Francois 2000). Thus
Weisbrod (1988) observes that “Non-profit
organizations may act differently from private
firms not only because of the constraint on
distributing profit but also, perhaps, because
the motivations and goals of managers and
directors . . . differ. If some non-profits attract
managers whose goals are different from
those managers in the proprietary sector, the
two types of organizations will behave differently” (31). He also observes that “Managers
will . . . sort themselves, each gravitating to
the types of organizations that he or she finds
least restrictive—most compatible with his
or her personal preferences” (32).
Weisbrod also cites persuasive evidence to
support the idea that such sorting is important in practice in the nonprofit sector. Besley
and Ghatak (2005) argue that matching
workers and firms based on mission orientation can be used to economize on incentives.
In line with this idea, empirical studies, such
as Ballou and Weisbrod (2003) and Bertrand,
Hallock, and Arnould (2005), confirm that in
Besley: What’s the Good of the Market?
industries where both for-profits and nonprofits are in operation, such as hospitals,
the former make significantly higher use of
performance-based bonus compensation
relative to base salary for managers.
So one reaction to WMCB is to argue for
a greater role for the nonprofit economy
beyond sectors such as health care and education where they have traditionally played
a significant role. However, nonprofit firms
also have to operate in a marketplace and,
unless there are restrictions on entry, the
nonprofit economy will often face competition from for-profit firms.
In fact this is a feature of other alternatives
to for-profit firms such as mutuals, clubs,
and cooperatives. These organizations are all
characterized by built-in features that restrict
commercial incentives—typically there is no
scope for outside owners to exert influence on
how the organization is run. They are forms
of collective enterprise in which the interests
of their members are paramount.
To illustrate, take the case of professional
sport. A few of the major soccer teams in
Europe continue to operate as clubs where
the fan base can provide a check on some
commercial decisions, particularly the ability
of outside owners to extract surplus. While
these teams do not have not-for-profit status,
this does act like a nondistribution constraint.
However, competition against more commercially oriented clubs drives the market.
And superficially it does not seem to make
much of a difference to the behavior of clubs
in terms of ticket prices or players’ salaries.
However, it is striking that a few years ago
one of the most globally successful clubs—
FC Barcelona—for a while chose the children’s charity UNICEF as its shirt sponsor
ahead of more lucrative commercial offers.
Workers’ cooperatives are also examples of
organizations that try to resist conventional
wage policies, typically in favor of greater
egalitarianism. However, if more productive
workers can quit and explore market-driven
491
outside options, it may be difficult to sustain
this as discussed in Abramitzky (2008), which
looks at wage determination in Kibbutzim.
This is a further reminder of the need to look
at the behavior of organizations in an equilibrium context.
Further blurring of the distinction between
for-profit and not-for-profit activity comes
from attempts to create greater corporate
social responsibility (CSR). It is now common for corporations to have mission statements based on noncommercial values. One
question is how these missions are enforced.
In Bagnoli and Watts (2003), Besley and
Ghatak (2007), and Kotchen (2006), mission
is driven by the presence of socially responsible consumers; this idea lies, for example,
behind much of the fair-trade movement.
In Baron (2001, 2009), the m
­ echanism is
private politics, i.e., social activists who can
threaten to undertake actions that are costly
to the firm if they judge the firm to be behaving in a socially irresponsible way. In either
case, there are reasons to expect firms to
behave in a more socially responsible way
even when they have purely commercial
motives. Such models suggest a role for civil
society in enforcing better market outcomes.
The kind of distasteful behavior that
WMCB describes could, in principle, be
policed in this way. However, the market
will tend still to cater for the values of those
who like to bet on celebrity deaths or hunt
rhinos unless there are ways of enforcing the
closure of markets. Social pressure or government regulation may sometimes be the
answer. There is a degree of arbitrariness
in the extent to which causes have spawned
organized interests or captured the imagination of concerned consumers. Monitoring
can sometimes be difficult and there is no
independent arbitrator for whether a just
cause is pursued. In fact, this critique of
CSR echoes Friedman (1970), who argues
that private corporations should get on
with the business of making profits while
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Journal of Economic Literature, Vol. LI (June 2013)
governments should deal with regulating
public goods and externalities. Of course,
once there are imperfections in both governments and markets, the case is much
less clear-cut. Moreover, in an increasingly
globalized economy, regulating markets may
require global cooperation.
Underpinning these discussions of government and noncommercial activity is the
possibility that civic norms play an important
role in market systems. They can influence
both the conduct of government and whether
noncommercial actions are fostered by workers, consumers, and activists. In line with the
discussion in the previous section, there is
a question of what organizational structures
strengthen or weaken the norms that support
these outcomes. So working in a nonprofit
could create an outlet for socially responsible
behavior, which would e­ ncourage parents to
socialize their children in the same way as
would a public sector with a strong ethic of
public service. A focus on the benefits of selfinterest rather than self-sacrifice could be
destructive of pro-social norms along the lines
that WMCB describes. And economists have
made a start on this. For example, Benabou
and Tirole (2010) explore the economics and
psychology of social responsibility where prosocial behavior is endogenous.
Even if one accepts the argument developed in WMCB, much of the discussion in
this section makes clear that relying on government or organization design as a means
of dealing with the issues that it raises is not
straightforward. Perhaps then the solution
can only lie in creating better people. Trying
to conceptualize this, let alone achieving
it, constitutes a major challenge that surely
goes well beyond economics.
6. Final Remarks
In summary, I can imagine two extreme
reactions by economists to reading WMCB.
There will be those who view it as a travesty—a failure to grasp even the most basic
understanding of what makes the market
work. WMCB also fails to offer any reasoned
or overarching approach for analyzing situations—case study based intuitions cannot
be a way to run an economy. Moreover, it is
simply unscientific to start questioning what
is in good or bad taste. Besides, economics
does not really imply anything—it is just a
set of methods for studying the world that
can be used to reach a variety of conclusions
including a pro-market or a pro-state position. So there can be nothing to criticize in
economics per se as long as the reasoning is
logical and, where possible, draws on evidence. It is not so much that there is a case
to answer, but the idea of there even being
such a case is not coherent in terms of the
way that the discipline of economics has
evolved in the past fifty years.
The other reaction would be to feel a
sense of unease about the way that we
approach markets and teach about their
benefits. To argue that economics is not
about values is disingenuous. Economists
advise governments, teach generations of
students, and get into positions of influence. It would be ludicrous to think that
physicians are not involved in expressions
of value with their decisions over who to
treat and how—and the same is true of
economists. If we detach ourselves from
this and try to believe that what we teach,
advise, and write about has no normative
implications, we have lost our moral compass. This does not mean, however, that
every piece of analysis should develop
this angle. Moreover, the way that societies choose to allocate resources (and what
we teach about them) have the potential to
shape norms, values, and attitudes.
It seems reasonable to believe that there is
(provocative) value in both of these extremes.
When we study attitudes, norms, and institutions we need to do so in a way that engages
Besley: What’s the Good of the Market?
with wider reflections on what matters rather
than banging our heads against brick walls
that we have built for ourselves. There are
diverse opinions within the economics profession and there is a core group who would
likely prefer to defend the traditional paradigm against some of the developments that
have been highlighted here.
The timing of WMCB may seem ironic in
a year in which the Nobel Prize was awarded
to Alvin Roth and Lloyd Shapley for their
important work on market design that
underpins a large expansion of exchange
and matching into domains such as school
choice, labor markets, and kidney exchange.
As Roth (2008) explains, the approach that
he has taken is sensitive to issues of social
constraints on market allocations. For example, he acknowledges that having a role for
prices in kidney exchanges offends societal
values. So the market design that has been
proposed in this setting looks for exchanges
that are feasible without prices. Thus, the
concerns in WMCB are already taken on
board by those who are actively promoting
more socially sensitive forms of exchange.
On the day of finishing this draft, the British
government is announcing the results of its
auction for the new 4G spectrum licenses.
Asking how to design the auction to yield the
maximum public revenue seems to be a classic technical economic question that needs no
consideration of the issues in WMCB. But the
question of how to spend those revenues or
whether to hold an auction at all seem value
laden in a way that cannot be avoided. It
would impoverish our discipline if we stepped
back from these issues. Would we really be
content to let other disciplines fill the void? In
my view, we cannot and should not step away.
But that means facing full on the implications
of our views for the way in which ­societies
organize their affairs. We must continue to
work on issues of cultural and institutional
change, the evolution of pro-social norms
and preference formation and how these are
493
endogenous to institutions, organizational
structures and competition. WMCB reminds
us that we still have some way to go on this.
However, it does not seem to be aware of how
much thinking in economics has already taken
place on these issues. WMCB also offers little
positive guidance about how to understand
these issues better.
At the outset, WMCB identifies two obstacles to rethinking the role and reach of markets. One is the power and prestige of market
thinking. The other is the rancor and emptiness of public discourse. Most economists
will regard the first as well earned and many
would gladly take a bow. But it seems hard
to dispute that the need to participate in and
engage with debates about markets (and governments) is a central obligation of the economics profession. WMCB is to be applauded
for supplying both provocation and insight on
a wide range of important topics. And it suggests a range of challenges to which the discipline of economics can respond.
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