Markets And Morality

A draft of a monthly column I write for a Chinese financial and economic magazine.

Economics is dubbed the dismal science because it studies scarcity. A question that predates human society is how should scarcity be distributed. Nature rewards the strong, the quick, and the cunning. Societies mitigate this natural system in care for the young, weak, sick, and less fortunate. 

Two chief distribution mechanisms have emerged human society: command and demand. Command refers to authorities, whether sacred or profane, determining who gets what when. Demand refers to the role of markets aggregating information and distributing scarcity through a price mechanism.   

It is possible that what has been dubbed the “shared economy” may offer a third distribution mechanism. However, it is too early to say with much confidence. There does seem to be something there, but the range of goods and services it can distribute may be marginal. It may also turn out to be highly dependent on the command and demand mechanisms. 

While the different mechanisms can be distinguished for analytic purposes, in practice, it appears that the three exist in various combinations.  It is an oversimplification to say that there are demand and command societies anymore. It is a question of emphasis rather than kind. The state sector has grown in most high income countries over the last couple of generations. 

One measure of this is the government’s expenditures as a percentage of GDP. In some countries in Europe, for example, the government expenditures are more than 50% of GDP. Even in some of the so-called “small government” countries like the US and the UK, the government commands (expenditures) more than a third of GDP. 

The scarcity of particular goods and services may be distributed one way while other scarcities are distributed another way. While the demand mechanism distributes auto ownership, the command system distributes the privilege of driving.