## 1. Conceptual delineations



The term "market" with its cognates in other European
languages (marche, Markt, mercado, etc.) stems from the Latin
root "merx". It means "wares" or
"merchandise". To understand better what markets are, it
is important to distinguish the concept of markets from other, related
concepts.



The concept of "exchange" is at the core of the concept of
markets. In markets, exchanges of goods and services take place for
reasons of self-interest, in contrast to, for example, the exchange of
gifts with the aim of building relationships (on gift exchange see
e.g., Maus 1923-24). Most markets use money as a medium of
exchange. Often, individuals act as "price takers", i.e.,
they take prices as given and choose how much to buy or sell. But
there are also markets where exchanges take place in the form of
barter or in different forms of auctions. The concept of
"markets", however, is wider than the concept of exchange
because it includes the structural macro-effects that result from a
large number of exchanges, for example changes in the overall price
level.



"Competition" is a feature of markets, but is also used in
different senses, e.g., with regard to institutional competition or
evolutionary competition. In markets, competition results from the
fact that agents seek to find the best deal, thus creating competition
among the participants on the other side of the market, supply or
demand respectively. Markets are called "competitive" when
they have certain structural features that include a large number of
buyers and sellers, comparable goods, and the absence of informational
asymmetries. In what follows, the focus is on competitive markets,
leaving aside the specific problems (in particular unequal market
power) of non-competitive markets such as monopolies or cartels. It
should be noted, however, that even in seemingly competitive markets
there are often "pockets" of unequal market power, e.g.,
when a company is the only employer in a certain region or when a bank
possesses more information than its customers. To the degree to which
such deviations from the model of a competitive market are unavoidable
- for example because network effects in the digital realm lead
to highly concentrated markets - they need to be taken into
account in normative evaluations of these markets.



The term "economy" describes the productive and
distributive activities of a region or country, which includes
markets, but also the legal framework within which they take place, as
well as the organizations within markets, such as households and
corporations (on the latter see recently Ciepley 2013 and Anderson
2017). The latter's internal structure is typically hierarchical
and bureaucratic and thus quite different from the structure of
 markets.[1]
 In many countries, the "economy" also includes a state
sector as well as mixed forms, such as private-public partnerships. It
can also include other forms of redistribution such as charities or
"black markets". Polanyi has provided a classic
categorization of allocation mechanisms: he distinguishes between
reciprocity (based on symmetrical relations), redistribution (based on
centricity: a central authority collects the goods and hands them out
to individuals), autarky (production for one's own use) and
markets (1944, ch. 4). This shows that markets are only one form in
which goods and services can be allocated in a society. Insofar as
other structures - e.g., hierarchical structures within
corporations - continue to play a role in economic systems, it
is misleading to conceptualize them as pure "market
economies."



The concept of "capitalism" includes a reference to
markets, but as a socio-economic system, it is broader; its defining
feature is the private ownership of capital (see e.g., Scott 2011).
This typically leads to pressures to find profitable investment
opportunities and to asymmetries between owners and non-owners of
capital. Markets are a core element of capitalism, but in principle
they can also exist in societies in which the ownership of capital is
organized differently (see e.g., Carens 1981 for a proposal that
builds on "moral incentives"; for the debate about
"market socialism" in general see e.g., Bardhan/Roemer
1993). Many proposals for reforming current forms of capitalism, for
example the Rawlsian idea of a "property owning democracy"
(see e.g., O'Neill/Williamson 2012), do not reject markets, but
rather argue for a more equal distribution of productive assets.



A vague, but nonetheless helpful distinction is drawn by Polanyi
between "market economies" and "market
societies". The latter are societies where "instead of the
economy being embedded in social relations, social relations are
embedded in the economy" (Polanyi 1944, 57, see also Cunningham
2005). Many arguments about the value of markets have to do with their
impact on the character of a society as a whole and with the questions
of where, when, and how one should limit the influence of markets. In
Polanyi's terms, this is the question of whether a "market
economy" can and should remain a "market economy",
or whether it does or should lead to a "market
society".


## 2. Three lines of tradition: friends, foes, and critical friends



In Western thought systematic inquiry into the character and the value
of markets started in the early modern period. Earlier analyses were
typically restricted to questions about the economic relations of the
household, the "oikos" (which is the root of the term
"economics"). Important exceptions are Aristotle's
discussion of the character of money (*Politics* I, 8-10)
and the discussions in which this topic was taken up. They raise
fundamental questions about legitimate and illegitimate forms of
exchange. From at least the 18th century onwards, one finds intense
debates about the nature of markets and their value for individuals
and societies (on the history of economic thought see for example the
classic, but somewhat outdated, Schumpeter (1954) or for a more
technical account Blaug (1996)).



The line of thinkers who by and large endorse markets reaches from
Mandeville's *Fable of the Bees* (1924 [1714/1721]) to
the Scottish Enlightenment, with Adam Smith's 1776 *Inquiry
into the Nature and Causes of the Wealth of Nations* often seen as
the birth certificate of economics as a separate science. In the 19th
century, insights from Smith and other earlier thinkers were taken up
by "classic" economists such as Thomas Malthus [1798] or
David Ricardo [1817]. In the 20th century the pro-market tradition
includes the "Austrian" school with thinkers such as
Ludwig von Mises (e.g., 1949), Joseph Schumpeter (e.g., 1942), and
F.A. von Hayek (e.g., 1944; 1973-9); James Buchanan and the
"Virginia School" with its focus on public choice theory
(e.g., Buchanan 1975); and the (largely libertarian) "Chicago
School" with Milton Friedman as its most prominent
representative (e.g., 1962; on the Chicago School as a whole see e.g.,
Emmett (2010); for a critical delineation of libertarian from liberal
thought see Freeman 2001). The arguments by friends of markets have
changed over time, but there are some threads that unite this
tradition: the emphasis on individualism and on markets as helping to
emancipate individuals from traditional ties, a "negative"
understanding of freedom, a focus on the innovating and modernizing
effects of markets, and on their positive impact on the welfare of
society.



There is also a long tradition of thinkers critical of markets. This
was, in a sense, the "default" position in the Christian
culture of the European middle ages, where trade and markets were seen
as driven by, and favorable to, the sins of gluttony and greed, and as
inimical to the established
 order.[2]
 In the last three centuries, the most important critics of markets
include Jean-Jacques Rousseau (notably in the *Second Discourse on
the Origins of Inequality* [1764] (1997)), and Karl Marx and
Friedrich Engels (e.g., *Communist Manifesto*,
*Capital*) and the Marxist tradition, which has unfolded into a
wide spectrum of positions, from left-wing social democrats to radical
communists (see Kolakowski 1978). Common themes in this tradition
are the inegalitarian, disruptive results of unregulated markets,
their instability, their alienating effects (e.g., separating
individuals from the fruits of their labor, see also
 section 3.2
 below), and their degrading effects on the poor. What also unites
these thinkers is the hope that there are alternatives to markets for
organizing the economic life of large-scale societies. In the 19th
century and the first three quarters of the 20th century what was
standardly quoted as an alternative to a market economy was a
centrally planned economy. After the fall of communism in Eastern
Europe and Russia other, usually more modest, models have been
discussed and sometimes experimented with (for examples see e.g.,
Wright 2011, ch. 7). Much of the force of criticisms of markets
depends on the availability of alternative models that score better on
a number of normative dimensions. Research on and experiments with
alternative models are therefore of great interest for philosophers
who wish to evaluate markets from a normative perspective.



There is a third line of thinkers who stand between the friends and
the foes of markets and argue for a qualified endorsement: they see
advantages in markets, but also problems. Therefore, they either argue
that the overall balance is positive, or that the problems can be
mitigated by other institutions. Often, this position is motivated by
the argument that we do not know of a better way of organizing the
economic life of large societies, and that it is therefore better,
overall, to "tame" markets than to abolish them. This
position has been held by thinkers as diverse as G.W.F. Hegel (1942
[1821]), J.S. Mill (1848), J.M. Keynes (1936) or John Rawls (1971) and
by many social-democratic parties in Europe (see Berman 2006). What
unites them is a belief in the "primacy of politics."
Markets are welcomed as an instrument for achieving certain aims
*within* the framework of the state, but their purpose, extent,
and limits should be determined by politics. Whether and how this
primacy of politics is possible is another important question in the
philosophical debate about markets (cf. also 4.3 below).



Today, remnants of these historical traditions can be found in the
ways in which different academic disciplines look at markets. Although
there are exceptions, economists typically see markets in a positive
light. They have long analyzed them using abstract methods that model
individuals as sovereign, rational choosers. This approach, which
leaves a number of problems of real-life markets unexplained, has also
been used for incentive-based analyses of other social spheres (see
notably Gary Becker, e.g., 1976). These have raised questions about
the possibilities and limits of the rational choice approach,
especially since behavioral economists have started to explore how
real human behavior departs from the behavior assumed in the models
(see e.g., Kahneman/Tversky 1979; Laibson 1997; Fehr/Schmidt 1999; for
an overview of behavioral economics see e.g.,
Camerer/Loewenstein/Rabin 2003; for a critique of rational choice
theory from a philosophical perspective see e.g., Sen 1977).
Sociologists, anthropologists, and historians use different, usually
less abstract methods for exploring different markets. Their emphasis
has often been on the relation of markets to other spheres of life,
because they see individuals as socially embedded, and their decisions
as shaped by their social environment. Many researchers from these
disciplines are rather critical of capitalist markets. Their methods
allow them to see problems to which economists may be methodologically
blind. But economists might reply that the methods used by historians,
sociologists and anthropologists are in turn less suitable for
grasping the positive *indirect* effects of markets, for
example the benefits for customers when a company is restructured.
Although they can be intertwined, it is therefore important to
distinguish between disciplinary approaches, research methods, and
substantive arguments about the value of markets.


## 3. Arguments about markets



Judgments about markets are often "all things
considered"-judgments in which both defenders and critics can
concede certain points to one another, but hold that other arguments
outweigh them. For the sake of clarity, the most common arguments
about markets are here presented along the lines of justifications and
criticisms. Some of these arguments apply to markets in general, some
apply to market societies, and others apply to specific markets (cf.
also 3.3 below). Many arguments, however, can be used on several of
these levels, and it depends on an author's goals how he or she
uses them (for a book-length account of arguments for and against
markets see also Buchanan 1985).


### 3.1 Justifications of markets



Sen (1985) distinguishes two basic strategies for justifying markets:
from antecedent rights or liberties on the one hand, or from
consequences on the other hand. Arguments about antecedent rights and
liberties often go hand in hand, as the rights in question are said to
protect the liberties in question. In its paradigmatic form, this
argument is based on a right to private property. It gives individuals
the right to do whatever they like with their property. This includes
the right to enter into exchange relationships with others.
Prohibiting such exchanges, or interfering with them in any other way,
infringes on these rights and thus, it is said, on a basic form of
freedom. The attractiveness of such justifications of markets lies in
their a priori character and their intuitive plausibility. But they
only work if one can defend the a priori rights or liberties on which
they are based. Arguments of this kind are therefore often joined with
arguments about the naturalness of property rights as existing prior
to the state. It is more plausible to hold that property rights must
not be compromised if one holds that they are a priori, than when they
are understood as dependent on consent by society and enforcement
through the state. The naturalness of property rights has often been
defended by connecting them to self-ownership and by basing them on
the mixing of one's labor with material things and thereby
appropriating them, along Lockean lines (Locke 1960 [1689]; see also
Nozick 1974; for the left-libertarian defense of private property
(which combines it with very different positions with regard to
equality and the role of the state) see e.g., Vallentyne/Steiner
2000). But this view of property rights has been disputed. Many
thinkers point out the crucial role of the state in providing and
protecting property rights and the right to free contract (see e.g.,
Murphy/Nagel 2002). Also, many historians of ideas have pointed out
that the idea that liberty consists in the unhindered use of
one's property (what MacGilvray (2011) calls "market
freedom") is not the only way in which freedom can be
understood, and has historically been understood (see for example
Pettit 2006 for a discussion of markets from the perspective of
freedom as non-domination, for a more emphatic endorsement of markets
from a neo-republican perspective see Taylor 2013). In fact, the
strength of such a priori defenses of markets crucially depends on
what "counts" as infringement of freedom: does one only
"count" coercive rules by the state, or does one also
count the obstacles to pursuing one's interests that one
experiences in a market society, which are often the result of
numerous decisions by anonymous individuals (cf. e.g., Cohen 1979;
Olsaretti 2004, ch. 4-6; MacGilvray 2011, ch. 5). A strict
system of private property rights can lead to situations of extreme
inequality in which some members of a society are left to starve, so
that it becomes questionable in what sense they can be called free.
This presents defenders of markets on a priori grounds with a choice:
they either have to bite this bullet and accept extreme inequality and
poverty as justified. Or they have to step back from their pure a
priori position and admit that consequences can play a role in the
consideration of markets. Then, one can admit that markets may have to
be supplemented by other institutions, and their justification cannot
be unconditional any more (Sen 1985). Nevertheless, rights and
liberties can continue to play an important role in pro-market
arguments, even while being embedded in a wider framework in which,
for example, a certain amount of taxation is also defended (for a
recent account, called "free market fairness", which
emphasizes the importance of economic liberties as basic rights but
also allows for some restriction for the sake of social justice, see
Tomasi 2012).



Many justifications of markets, however, are based not on a priori
rights or liberties, but rather on the *consequences* of
markets. Several dimensions of these consequences can be
distinguished. A first, historically important, argument holds that
markets make individuals more virtuous and sociable: they build on
calm, rational interests rather than violent passions. Markets
therefore make manners more peaceful and civilized (see Hirschman
1977, who refers to Montesquieu and other 18th century
 thinkers).[3]
 Arguments about the character-building effect of markets are
sometimes also raised today (cf. e.g., McCloskey 2006, for a critical
discussion see Fumagalli 2020). Hirschman has conjectured that the
civilizing and moralizing forces of markets might just be sufficient
to outbalance their self-undermining forces (1982); Bowles, in
contrast, has suggested that *non-market* elements of liberal
societies might counteract potentially dangerous effects of
markets.



A second argument concerns the consequences of markets in the sense of
the distribution they bring about. It is sometimes held that markets,
or more specifically labor markets, give people what they deserve
because they reward individuals' contributions to the social
whole. This makes desert rather than traditional hierarchies the
determinant of social positions (e.g., Miller 2001, ch. VIII-IX;
Honneth in Fraser/Honneth 2003, 137ff., Mankiw 2010; for
justifications of profits along similar lines see e.g., Arnold 1987;
Narveson 1995). Such arguments draw on the (luck egalitarian)
intuition that differences in individuals' incomes are justified
as long as they are not undeserved, but reflect free choices (see
e.g., Arneson 2008), for example the decision to work 50 rather than
40 hours per week, or to take on a less pleasant job, which gives one
a 'premium for being a steeplejack or an embalmer or working on
the night shift' (Okun 1975, 72). It has been a matter of
debate, however, whether markets in fact reward choices in this way,
or whether one's socio-economic background, one's
participation in teams of workers (where individual contributions may
be impossible to separate), or simply luck play too great a role in
determining one's income. If so, then the "cult of
personal responsibility" would be misguided (Barry 2005, part
IV; cf. also Olsaretti 2004, ch.1-3 for a discussion of the
arguments for markets from desert, which she ultimately rejects).
Interestingly, even some defenders of free markets, such as von Hayek
and Knight, have argued that the sense in which they can be called
just only concerns the framework of rules within which they take
place, not the resulting distributing of income. They argue that what
markets reward, namely the satisfaction of wants, has nothing to do
with moral values (1978, ch. IX; cf. also Knight 1923). One might
argue that these rules can be more or less conducive to justice in the
sense of desert, and that, *ceteris paribus*, they should be
made more conducive to it rather than less (e.g., Lamont 1997; Herzog
2013, ch. V; see also Herzog 2017, chap. V). In that form, however,
the argument concerns not the *justification* of markets, but
rather the question of how their framework should be designed, such
that they bring about results that reward
 desert.[4]



The most important argument for markets that builds on consequences,
however, concerns their ability to deliver efficient outcomes and to
create high levels of welfare. They spur economic growth, while not
relying on a central planning mechanism, but on the self-interest of
individuals. This is what the famous Smithian metaphor of the
"invisible hand" (WN IV.II.9) is usually taken to stand
for. Under certain assumptions, such as stable preferences, the
absence of external effects on third parties, equal and open access to
information, and the absence of one-sided bargaining power, market
outcomes are Pareto efficient. This has been shown in the first
theorem of welfare economics (for the formal proof see e.g.,
Mas-Colell/Whinston/Green 1995, ch. 16). Pareto efficiency means that
no individual's position in terms of satisfaction of her
preferences can be improved without reducing another
individual's position, i.e. there is no waste caused by unused
possibilities of bargaining. The strict mathematical conditions of the
first theorem of welfare economics never hold in practice. But the
general equilibrium model embodies two arguments about markets that
explain why they can spur economic growth, and these can also be
applied to real markets. The first can be called the
"coordination argument" (cf. Roemer 2012): the price
system can transmit complex information about people's
preferences in decentralized ways, which allows for the allocation of
goods and services to where they are most wanted. The emerging
spontaneous order satisfies social needs in better ways than could be
achieved by central planning (see notably von Hayek 1945). Market
prices serve as an instrument for determining the opportunity costs of
certain uses of resources, which also allows for comparisons of the
different sets of resources individuals hold (see Dworkin 2000, ch. 1
and 2). 



The second argument is that markets fuel individuals' energies
because they give them incentives to find socially useful ways in
which to use their talents. As Adam Smith's famous (if often
abused) quote goes: "It is not from the benevolence of the
butcher, the brewer, or the baker, that we expect our dinner, but from
their regard to their own interest" (WN I.II.2). Smith's
aim is not to give an account of human nature as fundamentally
egoistic. Rather, he points out that markets tap a source of
motivation that goes beyond the benevolence that people show within a
small circle of family members and friends. Their self-interest
connects individuals to a much wider range of exchange partners, which
allows for a greater division of labor and hence more efficient
production. Defenders of markets also hold that they support
innovation because they give individuals the possibility of using new
techniques and new combinations of factors of production, and they
provide capital for entrepreneurs and inventors. This leads to a
dynamic process of "creative destruction" that helps raise
the standard of living (Schumpeter 1942, who popularized this Marxist
term).



The arguments from efficiency and growth do not, as such, say anything
about the *distribution* of income and wealth that is achieved
in a market economy. A situation can be Pareto efficient while at the
same time being extremely unequal (cf. e.g., Sen 1973). Sometimes one
finds additional pro-market arguments to the effect that the wealth
created by markets automatically "trickles down" to the
poorer layers of society. This can happen, for example, when the rich
buy goods or services the production of which creates employment for
the poor (as argued by Smith in 1976b [1759] IV.I.10], or when
innovations first made for luxury goods are later adopted in the mass
market. It is not clear, however, under what conditions this happens.
As a matter of fact, market economies exist in egalitarian and less
egalitarian societies. Surrounding institutions play a major role in
determining the degree of inequality that results from them. One can
argue, however, that well-designed markets can contribute to making
the pie of a national economy larger than it would otherwise be, and
that the additional wealth can be redistributed through taxation or
other measures. Then markets, in combination with other institutions,
can potentially be justified vis-a-vis non-market-institutions
by their distributive effects, for example along the lines of
Rawls' "difference principle". According to this
principle inequalities can be justified if they are "to the
greatest benefit of the least advantaged members of society"
(1999, 5-6). If one chooses this justification for markets, the
design of institutions and the degree to which income and wealth
should be redistributed depend not only on one's normative
position, but also on one one's assumption about which regime in
fact makes the poorest members of society best-off. Such an
instrumental defense of markets can be found in many theories of what
Freeman (e.g., 2011) calls the "high liberal" (in contrast
to the "classical liberal") tradition.


### 3.2 Criticisms of markets



Numerous arguments have been brought forward against markets, either
in order to reject them altogether or in order call for their
limitation. One of the main criticisms of relying on markets to
organize economic life points to their unequal outcomes, and the
poverty - understood in absolute or relative terms - they
can create. In the 19th century, this concerned in
particular those members of society who did not own the means of
production and therefore had to sell their labor to earn an income.
During the industrial revolution a large percentage of the laboring
classes turned into a proletariat that, in Marx' and
Engels' famous words, had "nothing to lose but its
chains" [*Communist Manifesto,* 1848]. The ability of
markets to be a "tide that lifts all boats" (a phrase
attributed to J.F. Kennedy) has thus been questioned at least since
the 19th century. Critics have called for a more equal
distribution of resources in society. Often, this criticism was
combined with the call for a complete overthrow of the capitalist
system, which was seen as self-undermining because of the ever-greater
divisions it created; this debate has been revived by the publication
of Piketty (2014) and the ensuing controversies about diverging
tendencies in capitalist societies.



To this criticism defenders of markets can reply by questioning the
value of equality of outcomes. What is more difficult for them to
reject - because their own arguments often emphasize rights and
liberties - is the charge that the inequalities created by
unregulated markets can go so far as to seriously limit the
possibility of making use of one's rights and liberties (see
also Rawls 1971, sect. 32). In a society in which most goods and
services are distributed through markets, those who do not have the
means for purchasing them can be said to be free only in a very
restricted sense. Even relative (in contrast to absolute) poverty can
lead to various forms of social exclusion. A lot here depends on how
one understands the notions of freedom and coercion, but in some
situations it is plausible that a lack of resources subjects
individuals to coercion, not least because it is the enforcement of
*other* persons' property rights that hinders their
access to resources (Cohen 1995, Otsuka 2003, Waldron 1993, Widerquist
2013). As Satz (2010, esp. ch. 4) argues, the vulnerability of agents
whose choice is limited by their dire situation, as well as the
"weak agency" of individuals who are poorly informed and
depend on other people's decision, can therefore be reasons for
limiting free markets. In the 19th century, the asymmetry
in bargaining power between workers and capitalist was at the heart of
the debate, and it still plays an important role in many countries. In
addition, individuals with low human capital, with psychological
afflictions, or with a problematic legal status (e.g., illegal
migrants) are especially vulnerable in markets. The idea of markets as
mechanisms of social coordination is based on a picture of all
individuals as sovereign, fully informed, and fully rational choosers.
Wherever this is not the case, markets can lead to the exploitation of
vulnerable individuals by others. These arguments do not necessarily
imply a complete rejection of markets, but they raise questions about
the wider institutional framework in which they are embedded. Possible
remedies to these problems can either aim at regulating markets or at
complementing them by institutions that put individuals on a more
equal footing when they enter into exchange relationships (cf. 4.2
 below).[5]



The idea that markets have anything to do with "desert"
has also been criticized, especially from the perspective of Marxian
theories of exploitation. They hold that, to the contrary, laborers
are systematically deprived of their rightful contribution, as their
wages are lower than the value they create through their labour (e.g.,
Marx, *Capital*, vol. I, ch. 7-8; for a discussion see
e.g., Buchanan 1985, 87-95). As has also been pointed out, the
idea of desert can easily serve as an ideological smokescreen for
those who are successful in markets (cf. e.g., Hayek 1978, 74f.).
Markets have been criticized for cementing inequality and social
division, thus undermining equality of opportunity (cf., e.g., Barry
2005, parts II-IV). This leads to the question whether other
institutions, for example a system of public education, can help to
mitigate these problems, so that a combined system could be
justified.



The ability of markets to deliver efficient outcomes when the goods in
question are private goods has seldom been questioned by their
critics. But even friends of markets admit that they do not lead to
efficient outcomes in cases of "market failure", specifically when
there are external effects or public goods. External effects are
effects on third parties that are not captured in property rights, for
example air pollution or CO2 emissions. Public goods are goods that
are non-excludable (it is not possible to effectively exclude
individuals from their use) and non-rivalrous (the possibility of use
by one individual does not reduce the possibility of others using it)
(see Mas-Colell/Whinston/Green 1995, ch. 11). An example for a public
good is public security: if it is provided, individuals cannot be
excluded from it, and the fact that more individuals enjoy it does not
reduce its value for others. Therefore, no individual has sufficient
economic incentives to provide it; it has to be provided by the state.
Critics of markets often hold that situations that include external
effects or public goods are much more widespread than defenders of
markets admit, including not only environmental but also social
problems. With regard to externalities, economists often point to
Coase's famous theorem that holds that when there are no
transaction costs, problems of externalities can be overcome through
bargaining, independent of the initial distribution of property rights
(1960). In reality, however, transactions are often extremely
difficult and costly, especially when multiple agents with differing
interests are involved. This makes the applicability of this theorem
- and hence the defense of market solutions in such cases
- problematic. Another problematic case is that of
"positional goods" (Hirsch 1976), i.e. goods the value of
which depends on their relative position in comparison to what other
have. A case in point are expensive houses that people desire for the
sake of their status rather than their intrinsic qualities: they want
to have a house that has a certain size relative to the houses of
others. Positional goods are scarce by definition: only 10% of houses
can be in the top 10% of the market. Competition for them is thus a
zero-sum game: it is a "rat race" in which everyone keeps
the same relative position if everyone moves up by the same amount.
This is why some theorists argue that the externalities caused by this
kind of competition justifies regulatory measures (see e.g., Frank
2005; for a discussion of positional goods from an egalitarian
perspective see also Brighhouse & Swift 2006, for an account in
terms of recognition theory see Claassen 2008).



A broader question that can be raised in this context is the question
of "efficiency of what?" (cf. also Satz 2010, 33f.). As
critics of markets point out, markets may be efficient in satisfying
people's wants, but sometimes this may happen because they
actually shift people's preferences towards things that can
easily (which often means: profitably) be provided in markets. These
are not necessarily the preferences people would choose it they
reflected about which preferences they would like to have (cf. e.g.,
George 2001, who uses the metaphor of "preference
pollution"). Economic models of markets usually take
individuals' preferences as given, which hides a whole range of
questions that have been raised about markets in this respect: how do
markets change individuals, their relation to one another, and their
relation to certain goods and values? Among Marxist theorists, the
term "alienation" is used to describe the phenomenon of
individuals being, or feeling, separated from things that should
belong together. For example, if workers have to sell their labor to
the owners of the means of production, they are said to be alienated
from their work and its products, as well as from other human beings
and the being of the human species, (Marx [1844], I; for a recent
account of the notion of alienation see Jaeggi 2014).



With regard to human relations, market societies have been accused of
undermining community and solidarity, as markets are based on purely
instrumental, fast-changing relations, so that "all that is
solid melts into air" (Marx/Engels, *Communist
Manifesto*; for a contemporary account see e.g., Lane
 1991).[6]
 The "creative destruction" and competition that take
place in markets may spur innovation, as their defenders hold, but
they also destroy established social ties and traditions (cf. Polanyi
1944) and might undermine solidarity (Hussain 2021). This thought
seems to play a role in the communitarian critique of the liberal view
of human nature (e.g., MacIntyre 1984, cf. Bell 2012 for an overview).
In addition, the fact that markets build on self-interest has been
said to make individuals more egoistic and materialistic. Such
arguments are the counterpart to the claim that markets make
individuals *more* social and moral, as held by their
defenders. An important aspect of this debate, which has also been
explored empirically, is the tendency of monetary incentives to
"crowd out" the intrinsic motivation to act out of
altruism or for the sake of the public good (cf. e.g., Titmus'
famous study on paid and unpaid blood donations (1971); Frey (e.g.,
2007); see also Gneezy/Rustichini's study on how a fine for
late-coming parents at a day-care center increased their numbers
because it was seen as a price (2000)).



The strength of such arguments depends on whether individuals can and
do restrict their "market attitude" to the economic
sphere, or whether this attitude comes to dominate society as a whole.
For example, can it be kept at a distance from private relationships,
or do individuals develop a market attitude with regard to intimate
relationships as well, as sociologist Eva Illouz argues (e.g., 2012)?
Pressure on the private sphere not only comes from people's
conscious or unconscious transmission of certain ways of thinking, but
also from the increasing number (or at least the perceived increase)
of monetary transactions that concern this sphere, for example in the
form of paid child care or surrogate motherhood. This has led critics
of markets to call for limitations of their sphere of influence in
order not to "commodify" goods whose meaning is closely
tied to values such as intimate relations, individual flourishing, or
child-parent relationships (cf. e.g., Radin 1996; Anderson 1993;
Sandel 2012; for a critical discussion see Satz 2010, 80ff.). As
Anderson emphasizes, the larger question behind this issue is how a
society can accommodate a plurality of goods that are valued in
different ways (1993, esp. ch. 1 and 3). A similar strand of arguments
concerns the question of whether markets push people towards the
consumption of material rather than immaterial goods (see e.g., the
popular account by Fromm 1976). If this is the case, they not only
"pollute" their preferences, but also contribute to the
overconsumption of natural resources and a variety of ecological
problems (e.g., Wright 2011, 70; Hardin 1968).



Related arguments concern the question of whether citizens can stand
in an equal respectful relationship to one another if certain goods,
e.g., votes or body parts, are traded in markets (Sandel 2012, 10ff.
cf. also Satz 2010, ch. 3; on the ethics of vote buying, see the
relevant section of the entry on
 voting,
 on body parts see Phillips
 2013,[7]
 on legal representation see Wilmot-Smith 2019, Agmon 2021). For
example, it has been argued that some institutions, e.g., schools, are
such that disagreements should be settled by "voice"
rather than "exit" (in Hirschman's 1970 distinction;
for the example of schools see e.g., Anderson 1993, 162f.). Also, many
political theorists argue that the political sphere of a democracy
should be seen as different from markets in that what is at stake are
not individual interests, but the public good (cf. e.g., Radin 1996,
ch. 14, who draws on John Dewey's understanding of democracy).
What such theories have in common is that they see society as composed
of different social spheres - and, as Walzer puts it,
"[t]he morality of the bazaar belongs in the bazaar",
whereas exchanges in other social spheres should be blocked (1983,
109). In many such cases, a combination of arguments applies,
concerning not only the character of goods, but also the vulnerability
of some market participants. As Brennan and Jaworski (2015, 2016) have
recently argued, arguments about commodification that are based
*exclusively* on the symbolic dimension of trading certain
goods are not convincing because these symbolic dimensions are
culturally contingent. But many cases of commodification are not
purely symbolically harmful, they combine symbolic and other harms. On
the other hand, as Satz (2010, e.g., 9) reminds us, the best answer to
problematic markets is not always to ban them as this might lead to
black markets or other evasion mechanisms. The question of
alternatives, e.g., regulated markets or markets complemented by other
institutions, often depends on the institutional framework within
which markets take places. This will be considered in section 4
below.


### 3.3 "The market" versus different markets



As will have become clear, some arguments for and against markets
directly respond to one another, whereas others have to be weighed
against one another without being directly compatible. Many thinkers
acknowledge the force of at least some arguments from both sides. They
take the line described in section 2 as "qualified
endorsement" and argue for the market as *one* element
within an institutional framework that can mitigate some of its more
problematic effects. It should be kept in mind, however, that
different markets can look very different with regard to the arguments
listed above. This raises the question of whether it is possible at
all to say something general about the value of "markets",
rather than about specific markets in specific situations. A common
problem in the discussion about markets is the level of abstraction,
as many abstract models make idealizing assumptions that do not hold
in real life (see also Phillips
 2008).[8]
 While there is nothing wrong as such with using abstract models, it
is important to consider their limited validity in real life
instantiations. When comparing markets to other institutional
solutions, the comparison has to take place at the same level of
abstraction. Otherwise one compares apples to oranges, e.g., when a
very imperfect market with great asymmetries of power is contrasted
with an idealized public bureaucracy, or when a market in which all
individuals are fully rational is contrasted with corrupt public
institutions. It makes more sense to compare a reasonably
well-functioning market with a reasonably well-functioning
bureaucracy. 



Another problem in debates about markets is the following: If critical
arguments against markets are raised, defenders of markets sometimes
hold that the ills should not be blamed on markets, but rather on the
surrounding institutions, because the conditions that would need to
hold for markets to do their beneficial work are not fulfilled. For
example, when markets are criticized for leading to an overconsumption
of natural resources, defenders of markets often point out that there
are no full property rights for many environmental goods. If
environmental goods had a price, it would be expensive to use them,
and their owners would have incentives to treat them in responsible
ways (see e.g., Tomasi's reply to the "tragedy of the
commons" (2012, 259ff.)). One might retort, however, that in
many cases having such property rights would not solve the problem,
because the transaction costs of finding bargaining solutions would be
too high. Such examples show that the value of concrete markets can
often not be discussed in purely abstract terms - what they are
and what effects they have crucially depends on the institutions that
surround them. These will be discussed next.


## 4. Relations between markets and other institutions


### 4.1 Preconditions for markets



Most theorists agree that for markets to come into existence, certain
institutions need to be in place. Central among these are property
rights and the legal institutions needed for enforcing
 contracts.[9]
 The question of enforceable property rights plays as an important
role for evaluating markets in countries with weak governance
structures. There, the ability to enforce one's rights can be
distributed very unequally, so that free markets can exacerbate these
previous injustices. The question of which property rights can be
enforced is one of the main determinants (apart from outright bans) of
which markets can exist in a society. For example, in most countries
one cannot sell oneself into slavery, as courts of law would not
enforce such a contract. An area where this question about property
rights and hence marketability is fiercely contested are intellectual
property rights, where some people argue that our traditional notions
of property rights are not suitable for goods that can be reproduced
at extremely low costs, such as digital contents (e.g., Shiffrin 2007;
Boutang 2011, ch. 4).



While the existence of property rights - and hence of a minimal
state that enforces them - has been recognized as a precondition
for markets even by most libertarian thinkers, other preconditions are
often not made explicit in economic approaches to markets, and are
more controversial. As has been emphasized in particular by the
members of the German "Freiburg School" of
"ordoliberalism", for markets to remain competitive there
need to be anti-trust laws that prevent cartels and monopolies (see
e.g., Eucken 1939; on how this view was replaced by more
thorough-going laissez-faire views in the US see Crouch 2011, ch. 3).
Sociologists have long pointed out the crucial importance of trust for
the existence of market exchanges, as contracts in markets often
include implicit elements that cannot be spelled out in terms of
property rights and hence not be legally enforced (see e.g., the
classic account by Durkheim 1997 [1893] or more recently Beckert
2002). Certain forms of social ethos, e.g., a commitment to keep
promises, can facilitate market transactions (Rose 2011). Research in
economic sociology also puts emphasis on the dependence of markets on
other social relations. For example, Granovetter shows how market
relations are often embedded in personal relationships, such as the
relationships between the experts for certain technologies in
different companies (1985). Fligstein emphasizes how the rules set by
states, including, for example, rules about governance structures and
other regulatory institutions, influence the behavior of companies in
markets and make markets "a social construction that reflect the
unique political-cultural construction of their firms and
nations" (1996, 670; on the "legal construction" of
financial markets see Pistor 2013). Some sociologists, notably Callon,
also argue that markets depend on the performative power of economic
theories about what markets are: these help individuals to frame
situations *as* market exchanges (e.g., 1998). For example,
MacKenzie argues that market participants in certain financial markets
use theoretical models to determine their own behavior (e.g., 2009).
Such examples make particularly clear that the markets we know are not
something independently "given", but depend on other norms
and institutions in society, and sometimes even on certain forms of
information technology. Even the ability of markets to deal with
decentralized knowledge (Hayek 1945) often works in conjunction with
"epistemic infrastructures" for markets provided by other private
or public institutions (Herzog 2020). 


### 4.2 Institutions that supplement or correct market outcomes



Many political philosophers take (some of) the criticisms raised
against markets (cf. 3.2 above) seriously. They therefore argue that
markets can only be justified if they coexist with other institutions
that supplement or correct their outcomes. These institutions can be
subdivided into different categories. Economists typically use the
concept of "market failure" to describe cases where one or
more conditions for efficient market outcomes are not met, e.g., when
there are externalities or public goods (see e.g., Bator 1958; Cowen
1988). To improve outcomes in such cases can require the regulation of
markets (e.g., by prohibiting negative externalities such as the
emission of harmful pollutants) or the provision of public goods by
state institutions. Rules and regulations might also be needed -
and can be justified from the point of view of Pareto efficiency
- in cases of what Basu (2007) has called the "large
number problem": some form of behavior, although harmless in
itself, may have a negative impact if committed by a large number of
people. The same can be true when there is more than one equilibrium
in a market and it is desirable to move to one of them rather than
another, e.g., from an equilibrium with child labor to one without
(Basu / Van 1998). One might also argue that the macro-economic
stabilization of markets, for example through the central bank or
through measures that raise demand in recessions (cf. Keynes 1936),
belongs into the category of provision of public goods. The
effectiveness of such measures, however, is deeply contested among
economists.



A second broad category of institutions that supplement or correct
market outcomes can be summarized under the term "welfare
state". It attempts to provide responses to criticisms of
markets concerning poverty, unequal outcomes, and a lack of equality
of opportunity. The most basic tasks of the welfare state are to
secure the socioeconomic rights (cf. e.g., Marshall 1992) of citizens
who cannot earn an income in the labor market, and to provide some
degree of equality of opportunity. Many political philosophers have
emphasized the importance of redistribution for these purposes (see
also Fleurbaey 2012); the emphasis on redistribution has almost
overshadowed questions about the *direct* distributive
consequences of different markets and how these might be influenced by
regulation (but see Dietsch 2010). Welfare state institutions can take
on different forms, and can be organized in different ways, from a
minimum of care for the destitute to a large array of social services,
such as public education and a public health service. Recently, some
thinkers have even argued for the introduction of an unconditional
basic income for individuals, to make sure individuals are not at the
mercy of those who control the access to resources (e.g., Van Parijs
1995, Widerquist 2013). Decisions about such institutions are often
taken to be trade-offs between the efficiency of markets and the
desideratum of some degree of equality of income and wealth. As Okun
writes: "Any insistence on carving the pie into equal slices
would shrink the size of the pie" (1975, 48). It is not clear,
however, whether this picture adequately describes economic reality.
It is often based on the assumptions that higher taxes stifle
people's motivation to work hard. But whether this is true
depends, among other things, on the question of whether individuals
are mainly motivated by the desire to earn money or whether they might
also have an intrinsic motivation to provide certain goods and
services (cf. Roemer 2012). Some measures, such as a public education
system that gives every child a chance to develop his or her talents,
might lead simultaneously to more equality and to a larger economic
pie, because the increase in human capital more than outbalances all
possible losses in efficiency through the taxation that pays for the
education system (cf. also Okun 1975, 81ff.; on the efficiency of
various non-market institutions see also Heath 2006). As a matter of
fact, in some countries such as the Scandinavian countries a strong
welfare state coexists with a flourishing market economy, undermining
claims of mutual incompatibility. In addition to its role in
redistribution, the welfare state can also have a wider, cultural
meaning: as Cunningham (2005) argues, it can help to overcome the fear
created by the existential risks to which individuals are exposed in
pure market societies, and which might be an important factor behind
the allegedly more egoistic and more materialistic culture in such
societies. For example, in a well-functioning welfare state
individuals do not have to maximize their income for the sake of
saving for periods of unemployment, but can participate in a social
system that insures them against unemployment. A welfare state could
also encourage risk-taking by lessening the costs of failure, which
might spur innovation.
 [10]


### 4.3 Problems with the dichotomy of "the market" versus "the state"



The relationship between the market and the state has traditionally
been understood as a three-layered scheme, roughly as outlined in
sections 4.1 and 4.2: 1) the state secures property rights and other
preconditions of markets; 2) markets take place within this framework
and deliver efficient outcomes; 3) the state corrects market failures
and deal with other problems through complementary institutions such
as the welfare state. This model is presupposed in many debates about
markets. But there are reasons to think that it is insufficient, both
descriptively and normatively, for capturing today's
realities.



There is, first of all, the problem of markets having become global,
whereas the political framework is still largely based on nation
states. This can lead to enforcement deficits, but also puts pressure
on states to forego stricter regulations or higher taxation because
capital, especially financial capital, will leave the country and
escape to so-called "tax havens" (Dietsch 2015). In recent
years, there has been increased interest in *international*
markets: What distinguishes them from domestic markets; for example,
do the immense inequalities of power and the different institutional
frameworks in different countries mean that they need to be
conceptualized differently? How could they be regulated and
supplemented by other institutions in order to achieve more global
justice? How could the community of states, or at least groups of
states, cooperate to achieve this? These questions are embedded in the
wider debate about global justice (cf. e.g., Pogge 2002; Caney 2005;
Brock 2009, see also Blake 2008). This debate turns, for example, on
institutions such as the World Trade Organization that could enforce
certain standards on labor conditions (see. e.g., Barry/Reddy 2008),
or on how the trade in natural resources could be embedded in
institutions that prevent the "resource curse" that haunts
countries with rich natural resources but weak governance structures
(see e.g., Wenar 2015). Such proposals ask how the institutions that
structure international markets could be changed in ways that make the
gains from trade mutual and give everyone a fair share (see also James
2005; Risse 2007; Kurjanska/Risse 2008; Christensen 2017).



Secondly, problems of market failures and market instabilities seem to
be much more pervasive than has often been assumed, especially in
complex, interrelated markets such as financial markets (cf. e.g.,
Minsky 1986, esp. ch. 9; on financial markets in general see also
Herzog 2017). This means that it is far more difficult for states to
regulate them. It has to do with the role of psychological effects
such as herding (cf. e.g., Akerlof and Shilling 2003) and maybe also
with massive imbalances of power within such markets, which are often
caused by asymmetries of information or barriers to market entry. The
consequences of regulatory changes are hard to predict when there are
nonlinear causal chains and the reaction of "the markets"
is difficult to anticipate, so that it is unclear how to evaluate
their impact on society. This raises the question of whether states
have to use a more flexible approach to regulating markets, or whether
there might be ways of reducing the fragility of the global economic
system.



A third ground on which the dichotomy between "the market"
and "the state" has been criticized is that it obfuscates
the influence of powerful economic agents, e.g., large-scale
corporations, on political decision-making. As some authors have
argued, some capitalist countries, notably the United States, are
coming close to a situation in which it is not the state that
regulates markets. Rather powerful agents among both the corporate and
the political elites set the rules of the game to their own advantage,
at the costs of society at large (e.g., Crouch 2011).



All these points are particularly urgent because the problems of
limited natural resources and climate change raise issues about the
ability of the market-cum-political-framework as we know it to steer
towards a more sustainable path. Because many of the activities that
harm the natural environment take place as market activities,
regulating them will often require a regulation of markets. Given how
difficult it is to establish such a regulatory framework on a global
scale, however, voluntary action by individual market participants
also seems to be called for, e.g., by buying sustainably grown
products and cars with a low carbon emission. Such voluntary actions
should, ideally, create incentives for companies to find innovative
solutions to reduce resource consumption and energy consumption (cf.
also 5.2 below). Although they are certainly part of the problem,
markets might then also be part of the solution to the challenges
raised by poverty, resource depletion, and climate change.


### 4.4 The interrelatedness of institutions



The interrelatedness of markets and other institutions is also
confirmed by sociological research on the "varieties of
capitalism" and similar approaches. They argue that rather than
there being one "best" set of institutions, there are
certain sets of institutions in the economic and the political realm
that fit together better than others: they form "institutional
complementarities". As Hall and Soskice show, one can
distinguish "liberal" from "coordinated"
market economies in which mutually related mechanisms reign with
regard to areas such as industrial relations between employers and
employees (or unions), institutions for vocational training and
education, corporate governance, or inter-firm relations. In liberal
market economies, as they predominate in Anglo-Saxon countries, market
mechanisms are much more pervasive; for example, employment contracts
are typically shorter. In coordinated market economies, as one finds
them for example in continental Europe, other forms of coordination,
e.g., collective bargaining, play a greater role (Hall and Soskice
2001). Such interrelations, which can be neglected in highly abstract
theorizing, should be taken into account when political philosophers
address concrete questions about markets in "non-ideal"
theory (as is done, for example, in Keat 2008). Philosophers have
often focused on rules and regulations while taking individuals'
preferences as given, implicitly adopting an "economic"
perspective on markets. But a "sociological" perspective,
in which the generation of preferences and the wider social context
are also taken into account, allows one to see other ways in which the
outcomes of markets can be changed. Changes in different institutions,
in individuals' preferences, and in the "ethos" that
rules in certain markets should, ideally, go hand in hand and be
consistent with one another. It is unlikely that the current problems
in which markets are involved, such as global justice and climate
change, can be solved by relying only on one of these instruments. The
desirability and feasibility of different market and non-market
arrangements for addressing these issues, together with questions
about the international dimension of markets and how they can be
geared towards normative goals such as human flourishing and greater
equality, are among the most important contemporary research areas
about markets.


## 5. Related themes



When philosophers think about markets and their place and role in
society, they need to be aware of the fact that *theories
about* markets can sometimes carry their own implicit value
judgments. This is why they need to be sensitive to methodological
questions of the scientific discipline that focuses on markets, i.e.
economics. When it comes to normative conclusions, political
philosophers should also take into account the arguments brought
forward by business ethicists, who discuss the moral duties of market
participants. As Heath et al. (2010) have recently argued, debates in
business ethics and in political philosophy would benefit from being
more closely integrated, and this holds in particular for debates
about markets. In this final section, these two related themes are
briefly discussed. 


### 5.1 Methodological questions in economics



It is important to distinguish methodological issues in economics (see
Hausman 2008) from normative questions. However, they are often
intertwined in intricate
 ways.[11]
 One example concerns assumptions about human rationality: standard
economic models assume perfect rationality, which excludes problems
such as weakness of the will, so that normative criticisms of markets
that build on the ability of more rational market participants to
exploit the weaknesses of less rational market participants cannot be
raised within this framework. More generally, plausible arguments
challenge the possibility of value-free economic theorizing (see e.g.,
Mongin 2006). This means that philosophers who want to discuss
normative issues about markets need to take care to make explicit the
normative assumptions that might enter their view of these markets
because they are built into the economists' models. While the
mainstream of economic theorizing in the last decades has used a
rational choice methodology, new approaches, for example, behavioral
economics or institutional economics, have worked with different
assumptions, raising new methodological challenges. For example,
explorations of the importance of norms of fairness in economic
contexts (e.g., Kahneman/Knetsch/Thaler 1986; Fehr/Schmidt 1999) raise
questions about the relation between the fairness norms favored by
political philosophers and the norms observable in people's
behavior. Another interesting area are "nudges" that are
supposed to lead people to more rational or more socially desirable
behavior by changing institutional defaults (e.g., Thaler/Sunstein
2008), which leads to philosophical questions about paternalism.


### 5.2 Business ethics and Corporate Social Responsibility



Business ethics and discussions of corporate social responsibility are
concerned with the behavior of individuals and especially corporations
in markets (see Marcoux 2008). The scope of such approaches depends to
some degree on the legal and cultural framework in which corporations
operate. Arguably, the increased interest in these topics in the last
decades also has to do with the unwillingness or inability of states
to regulate the behavior of firms more strongly (cf. also Smucker
2006). One might therefore think that such measures are only
insufficient solutions for problems that states fail to solve. As
such, however, they play a particularly important role for
international markets, because the regulatory problems at a global
level are unlikely to be overcome soon. Initiatives such as the *UN
Global Compact* aim at introducing basic moral standards into
global markets.



Historically, conceptions of "doing business" have long
been accompanied by ideas about certain moral norms, often captured in
terms of the "honor" of the merchant (cf. e.g., Smith 1978
[1762/66], 538f.). Even Friedman, in his famous article in which he
claims that "The Social Responsibility of Business is to
Increase its Profits", holds that business people should do this
"while conforming to the basic rules of society, both those
embodied in law *and those embodied in ethical custom*"
(1970, emphasis added). As Heath argues, in pursuing profits firms
have a responsibility not to exploit market failures such as
information asymmetries, which serves both ethics and efficiency
(2014; for a critical discussion see e.g., Moriarty 2020). An
important question that connects the topics of business ethics and
corporate social responsibility to the normative evaluation of markets
is whether markets reward or punish ethical behavior, i.e. whether
business ethics is a cost or a strategic advantage for companies (cf.
e.g., Porter/Kramer 2006 for how the latter might be achieved). This
depends on their institutional embedding, but also on the
consumers' "ethics of consumption", which is an
important new field of research on markets (see e.g., Crocker/Linden
1998; Schwarz 2010). The basic idea is that if consumers express not
only their self-interested, but also their *moral* choices in
markets, markets can become instruments for making societies more just
and economies more sustainable. At the same time, consumer-driven
strategies such as ethically motivated boycotts may need to fulfil
certain criteria in order not to undermine democratic legitimacy
(Hussain 2012, Berkey 2021 and the literature quoted there). In many
societies, these are ongoing processes, and it remains to be seen how
effective they can be in steering the global economy onto a more just
and more sustainable path.