3.1.4 Uses and limitations of markets

Markets have become central to many of our lives because they are powerful provisioning institutions and often effective at providing goods and services. The key benefits of markets include speed, adaptability, and the monetary incentives they offer. Markets and the businesses within them can be:

• modular and scalable: markets can support both large and small businesses, allowing them to specialise and adapt to meet human needs. Under certain conditions, businesses can quickly scale up to address demands, like the rapid production of face masks during the Covid-19 pandemic (Figure 2);

• personalised: businesses in markets have an incentive to meet diverse needs and wants. While many products are mass-produced by larger firms, the many small and local businesses can often provide personalised goods and services tailored to different people (Figure 3);

• innovative: competition among businesses can lead to innovations that improve the quality and efficiency of products and services, benefiting consumers and the economy;

• responsive: businesses in markets can be quick to adapt to changes in human needs, wants, and technology. Prices in markets can help them stay responsive by providing signals and incentives, a form of balancing feedback, guiding consumers and producers to adjust their buying or production of goods and services (Section S.x coming soon! and Section 3.1.2).

• markets provide products only to those who can pay: Economists claim markets are efficient because they allocate products to those willing to pay the price. However, to get the product people also need to be able to pay. When markets are used to distribute essential goods, like food, water and housing some people may be left out, worsening economic inequality. Markets might not be suitable for meeting fundamental human needs unless strong government regulation or financial support is in place. In addition, profit maximising businesses may focus more on serving the wants of high-income groups, neglecting the needs of poorer people because it is easier and more profitable.

• markets do not provide important public goods: public goods are non-excludable, meaning everyone can use them without paying, and non-rivalrous, meaning one person's use doesn't reduce availability for others. Street lighting is an example of a public good. Private businesses won't install street lighting because these conditions make it impossible to charge people  for its use. Since a business can't profit from it, a market won't form. Therefore, public goods are typically provided by the state;

• market values can crowd out other social values: When something becomes a commodity—bought and sold in a market—it changes how we perceive it. It may become valued for its use or profit, rather than valued for other important intrinsic, social or ecological reasons. For example, if young people were paid for each book they read, their love of reading might shift from enjoyment to earning money. This shift and other moral limits of markets are discussed in more detail in Section 3.2.5.

For these and other reasons discussed in Subtopic 3.2, societies must be cautious about when and where they use markets to meet human needs. In recent decades, markets have increasingly dominated our economies, but they may not be suitable in every situation.

Concept: Systems

Skills: Thinking skills (critical thinking, transfer)

Time: varies, depending on option

Type: Individual, pairs, and/or group

Option 1: Discussion - To what extent do markets support or undermine democracy?

Time: 40 (or more) minutes, depending on how much time students are given to develop ideas for the discussion

Milton Friedman was a famous economist from the neoliberal school of economic thought. In simple terms, neoliberal economists believe that markets are usually the best way of allocating products and resources in societies, and they favour very little state involvement in economic activities.

Friedman wrote extensively about the relationship between markets and freedom and claimed that ‘free market’ economies were a necessary, but not sufficient condition for democracy. A key part of his claim was that market “exchanges…bring about coordination without coercion”. You may have seen this argument made in the iPencil video at the start of Section 3.1.2. However, critics argue that markets undermine democracies.

Using a discussion process and format that you are familiar with, use what you have learned so far in this subtopic, including the uses and limitations of markets, to develop points for a discussion of the question:

• To what extent do markets support or undermine democracy?

If you need to clarify the key characteristics of democracy as a part of your work, ask your teacher for help.

• Wealth: what it is & how it differs from Income and Why rich people get richer - In these two short videos Gary Stevenson explains the difference between income and wealth, and the resulting dynamics of accumulation. Difficulty level: easy

• The high polluting rich aren’t happier and they are costing everyone else a good life - an article by Dr Lewis Akenji, member of the Earth4All Transformational Economics Commission about how the economic activities of very high income people, including flying, housing, and investments, do not contribute much if anything to their own happiness, while at the same time are driving humanity past planetary boundaries. Difficulty level: medium

• The Guardian view on water privatisation: end an experiment that has failed - an editorial from The Guardian arguing that the privatisation of previously state-owned water infrastructure and services in England has failed to meet human needs while profiting business owners greatly. In the article, the term rent-seeking, refers to profit-maximising businesses extracting as much value from other stakeholders as possible. Difficulty level: medium

• Capitalism and Freedom - a famous essay by neoliberal economist Milton Friedman claiming that ‘free’ markets are a necessary condition for democracy. A highly controversial essay. Difficulty level: high

Biewen, J. and McGirt, E. (Hosts). (2024). Capitalism. Scene on Radio, Season 7. Kenan Institute for Ethics, Duke University. https://sceneonradio.org/capitalism/.

Chang, H. (2010). 23 Things They Don’t Tell You About Capitalism. London: London: Allen Lane.

Friedman, M. (1958). “Capitalism and Freedom”. Essays on Individuality. Philadelphia: University of Pennsylvania. https://miltonfriedman.hoover.org/internal/media/dispatcher/214956/full

Hickel, J. (2020). Less is More. London: William Heinemann.

Raworth, K. (2017). Doughnut economics: seven ways to think like a 21st century economist. London: Penguin Random House

Streeck, W. (2012). How to Study Contemporary Capitalism?. European Journal of Sociology, 53, pp 1­28 doi:10.1017/S000397561200001X

van Bavel, B. (2016). The Invisible Hand. Oxford: Oxford University Press.

Link to Quizlet interactive flashcards and terminology games for Section 3.1.4 Uses and limitations of markets

market: a system where people buy and sell goods and services for a price.

communal: shared by all members of a community

barter: exchanging products for other products without using money

provisioning institution: a group of people and their relationships as they try to meet human needs and wants

monetary: to do with money

scale: the size of something

demand: the quantity of a product that consumers are willing and able to purchase at various prices

incentive: something that motivates or encourages someone to do something

efficiency: the ratio of resource inputs compared to outputs

consumer: someone who buys and uses resources and products ot meet needs

economy: all the human-made systems that transfer and transform energy and matter to meet human needs and wants

price: an amount that must be paid to access a good or service; can be money or some other medium of exchange

balancing feedback: a situation where feedback produces change in the opposite direction

unregulated: not controlled by laws or rules

ecosystem: the interaction of groups of organisms with each other and their physical environment

natural resource: materials created in nature that are used by humans

overextraction: taking too much of something away from somewhere else, especially using effort or force

renewable resource: natural resources that can be regenerated in a human timescale

nonrenewable resource: natural resources that cannot be regenerated in a human timescale

fossil fuel: a non renewable energy source including coal, oil, and natural gas, formed over millions of years in the Earth's crust from decomposed plants and animals

household: a system where people living together care for each other and do domestic work, often termed the 'core economy'

care: the act of providing what is necessary for the health, welfare, upkeep, and protection of someone or something

wage: payment for work

allocate: to distribute something

economic inequality: unequal distribution of income and opportunity between different groups in society

regulation: a rule that guides individual or group behaviour and enforced by an authority

profit maximisation: the strategy where a business tries to achieve the highest profit possible

income: money received from work or investments

public good: goods that are non-excludable, meaning everyone can use them without paying, and non-rivalrous, meaning one person's use doesn't reduce availability for others; markets do not provide these goods

non-excludable: a good that everyone can use without paying, like street lighting

non-rivalrous: a good where one person's use doesn't reduce availability for others

state: a system that provides essential public services, and also governs and regulates other economic institutions

profit: total revenue minus total cost

revenue: the money earned from selling a product

investment: money spent for the enhancement of human or physical capabilities

market power: the ability of a firm to influence the price of their product in a market, as well as other market conditions

reinforcing feedback: a situation where change in a system causes further changes that amplify the original change which can lead to tipping points in a system

political capture: when the government prioritises the interests of economically powerful groups over the general interests of the public

social cohesion: the extent to which people in society feel connected to one another and share common values

commodity: something that can be bought and sold, often, though not always referring to raw materials

intrinsic: belonging to the essential nature of a thing

neoliberal: favouring policies that promote capitalism, less regulation, and reduction in government spending

rent-seeking: actions where an individual works to increase their own wealth without creating any benefits or wealth to the society

extractive: taking something from other humans or from nature without trying to replace it or avoid harm

value: ideas about what is important or good

stakeholder: a person who has an interest in or is impacted by some activity