… is from page 22 of the late, great Harold Demsetz’s penetrating 1982 tract, Economic, Legal, and Political Dimensions of Competition:
Competition in a private property system is expected to guide resources to those uses that maximize the value of production secured from them. This value is measured by what consumers are willing to pay, making due allowance for the implicit value of leisure and other goods consumed outside the formal market arena. The profit criterion stops uses of resources that would result in more cost than benefit as these are measured by the money votes of consumers.
DBx: With impressively few words, Demsetz here conveys two crucial insights that are usually ignored by opponents of the free-market order.
The first insight is that, in the free-market order, competition and the resulting pattern of prices and wages do not ignore ‘economic’ goods and services (such as leisure) that are not directly exchanged on markets. More importantly, nor do competition and market prices and wages ignore ‘non-market’ values such as emotional attachments to local communities or the benefits of having one parent remain home full-time with young children. The market – specifically here, the combination of competition, freedom of contract, and market prices and wages – allows people to make their own individual trade-offs among these non-market goods and services. But in doing so it, the market, internalizes on each decision-maker the bulk of the costs and benefits of his or her decisions. Such internalization is the best means of ensuring that everyone is treated equally, with no one getting to free ride on others or being compelled to pay for others’ consumption.
For example, when competitive markets ‘destroy’ particular jobs (by conveying through prices knowledge that consumer desires have changed or can be served at lower cost), they do not thereby deny to individuals the ability to live in their most-loved communities. Far from it. But competitive market do insist that each person who chooses to consume such a non-market good pay personally for this consumption – say, in the form of accepting lower wages rather than move elsewhere for jobs paying higher wages. The market does not compel Smith and Williams to pay for Jones’s consumption of non-market amenities any more than the market compels Smith and Williams to pay for Jones’s consumption of goods and services directly exchanged in markets.
When people such as Oren Cass and other advocates of that vague phantasm called “common good capitalism” assert that markets do not allow individuals to express values for non-market goods and services, these people simply don’t know what they’re talking about. Their understanding of the market order is defective. What such complaints about the market order boil down to is that the particular non-market values that rank high in the preference orderings of “common good capitalists” do not rank as highly in the preference orderings of individuals who must pay for those preferences.
The second insight conveyed by the quotation above is that, in markets, the profit motive works – at least better than any known alternative – to direct resources to where they do the most good for society at large (and, hence, away from wasteful or harmful uses). Until and unless advocates of industrial policy describe a realistic alternative to the profit motive – guided as it is by market prices and wages – they have no business asserting that their schemes will outperform the market at serving “the common good.”
Pictured above is Harold Demsetz (1930-2019).