A key idea when analyzing markets is Pareto efficiency. This is also called Pareto optimality. Despite the name it is a simple idea. We see Pareto efficiency in markets whenever you can’t make anyone better off without making someone else worse off. There is thus a number of optimal points. Each point involves a different distributions of goods (and thus happiness) amongst the people in the market.
Pareto Efficiency In Markets: The Moral Case For Free Markets
Julianne Nelson explains how the idea of Pareto efficiency is used as the moral case for markets. Essentially it is a weak condition. If something isn’t efficient it can’t be ideal. Without Pareto efficiency it is possible to make at least one person happier (while making no-one less happy). Therefore, this isn’t something we’d ever want. Markets, when they function well, drive us to efficiency. Trades are made until there are no happiness improving trades that remain possible. This means: “All competitive equilibria are Pareto optimal” (Nelson, 1994, page 663).
The most obvious moral problem is that what we all start with differs. One person perfectly efficiently using all the world’s resources for their own benefit is Pareto optimal. Yet this would hardly be desirable from a moral perspective.
Assumptions And Market Efficiency
Nelson goes through the assumptions underpinning the logic of market efficiency. The challenge is that these don’t really apply anywhere in the real world. For example, many markets have externalities. This is where costs are borne (benefits received) beyond the person making the choice. I buy gas but this causes air pollution which hurts everyone. Public goods also exist, i.e. shared goods that can’t easily be restricted. Furthermore, no economy ever has perfectly costless trading.
“We see that reality may diverge substantially from the assumptions that form the basis of the moral case for a market system.” (Nelson, 1994, page 665). Thus, Nelson suggests that, because markets are never completely perfect, ethics comes into play. The market mechanism is not enough.
A Duty of Civility
To Nelson there is a duty of civility. “[T]his duty would include an obligation not to abuse market power and generally not to manipulate the system” (Nelson, 1994, page 665).
I think it is always worth considering the assumptions underpinning our ideas. What makes a market work well, and when, are crucial questions.
For more on asssumptions underlying markets see here.
Read: Julianne Nelson (1994) Business Ethics in a Competitive Market, Journal of Business Ethics, 13, 9, pages 663-666.
