In discussions of social policy, one often hears comparisons between “the government” and “the market,” as if they were somehow similar options. Thomas Sowell argued that referring to “the market” in this way is a “misleading figure of speech.” I quote here from his book Knowledge and Decisions (1980, quoting here from 1996 edition, pp. 41-42): “Society” is not the only figure of speech that confuses the actual decision-making units and conceals the determining incentives and constraints. “The market” is another such misleading figure of speech. Both the friends and foes of economic decision-making processes refer to “the market” as if it were an institution parallel with, and alternative to, the government as an institution. The government is indeed an institution, but “the market”
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“Society” is not the only figure of speech that confuses the actual decision-making units and conceals the determining incentives and constraints. “The market” is another such misleading figure of speech. Both the friends and foes of economic decision-making processes refer to “the market” as if it were an institution parallel with, and alternative to, the government as an institution. The government is indeed an institution, but “the market” is nothing more than an option for each individual to choose among numerous existing institutions, or to fashion new arrangements suited to his own situation and tastes.
The government establishes an army or a post office as the answer to a given problem. The market is simply the freedom to choose among many existing or still-to-be-created possibilities. The need for housing can be met through “the market” in a thousand different ways chosen by each person–anything from living in a commune to buying a house, renting rooms, moving in with relatives, living in quarters provided by an employers, etc., etc. The need for food can be met by buying groceries, eating at a restaurant, growing a garden, or letting someone else provide meals in exchange for work, property, or sex. “The market” is no particular set of institutions. Its advantages and disadvantages are due precisely to this fact. Any comparison of market processes and government processes for making a particular set of decisions is a comparison between given institutions, prescribed in advance, and an option to select or create institutions ad hoc. There are of course particular institutions existing in a market as of a given time. But there can be no definitive comparison of market institutions–such as the corporation–and a governmental institution, such as a federal bureaucracy. The corporation may be the predominant way of doing certain things during a particular era, but it will never be the only market mechanism even during that given era, and certainly not for all eras. Partnerships, cooperatives, episodic individual transactions, and long-run contractual agreements all exist as alternatives. The advantages of market institutions over government institutions are not so much in their particular characteristics as institutions but in the fact that people can usually make a better choice out of numerous options than by following a single prescribed process.The diversity of personal tastes insures that no given institution will become the answer to a human problem in the market. The need for food, housing or other desiderata can be met in a sweeping range of ways. Some of the methods most preferred by some will be the most abhorred by others. Responsiveness to individual diversity means that market processes necessarily produce “chaotic” results from the point of view of any given scale of values. No matter which particular way you think people should be housed or fed (or their other needs met) the market will not do it just that way, because the market is not a particular set of institutions. People who are convinced that their values are best–not only for themselves but for others–must necessarily be offended by many things that happen in a market economy … The diversity of tastes satisfied by a market may be its greatest economic achievement, but it is also its greatest political vulnerability.