Friday, March 4, 2011

From markets to market economy

Market gate, old city of Baku. Until a few centuries ago, markets were highly localized in time and space. Most economic activity took place outside them, either within each household or in long-term reciprocal relations within the community.

The political Right typically believes that a market economy will self-generate as long as government gets out of the way and as long as property rights are legally protected.

But why, then, are market economies relatively recent? When Adam Smith wrote The Wealth of Nations (1776), he was describing an economic system that had scarcely existed a few centuries earlier in England and that was still unknown in most of the world. It wasn’t as if people had been ignorant of the market principle and its potential for creating wealth. In fact, markets had been common since the dawn of history and probably long before. But they had been highly localized in time and space, with most economic activity taking place outside them, either within each household or in long-term reciprocal relations within the community. Something kept all of these isolated marketplaces from expanding into a market economy.

That something was “trust.” Market economies have developed in societies where lying, cheating, and stealing are highly stigmatized, even when dealing with strangers and even when the chances of getting caught are minimal. In such societies, some people may deviate from this behavioral norm, but they are just that—deviants. They are the exceptions, not the rule. In the early 70s, my hometown used to have newspaper boxes that operated on the honor system. You took a paper and placed enough money in the coin slot. Nothing kept you from taking a paper without paying, but nobody ever did.

Yet this is not how most of the world works. When I raise this point with other people, they usually agree. Like me, they have traveled and seen how other societies really operate. But then they will argue that such societies are deviant. Something—lack of opportunity, poor education, or improper role models—is preventing them from being normal.

Yet the truth is the opposite. It is the high-trust societies that are abnormal, both historically and geographically. They are the ones that have abandoned the fundamental rule of trusting kith and kin above everyone else (because everyone else is out to screw you). That norm no longer applies to them. They have deviated from it; therefore, they are deviant.

Gregory Clark (2009) has described the trajectory that has led some societies to deviate from the low-trust norm:

The Darwinian struggle that shaped human nature did not end with the Neolithic Revolution but continued right up until the Industrial Revolution. But the arrival of settled agriculture and stable property rights set natural selection on a very different course. It created an accelerated period of evolution, rewarding with reproductive success a new repertoire of human behaviors – patience, self-control, passivity, and hard work – which consequently spread widely.

Was this behavioral shift due to changes in genes or in memes (learned ideas)? The question is difficult to answer (and not simply because many find it offensive). Natural selection operates on phenotypes, and only indirectly on genotypes. There was probably a mix of changes to learned behaviors and innate predispositions. There may also have been changes to gene/culture interaction, i.e., some predispositions may have now required less “exercise” to become fully expressed.

Whatever its exact nature, the overall change seems to have been a shift toward the sort of behavioral regime that exists in certain small communities, such as Hutterite colonies and Israeli kibbutzes, except on a much larger scale:

Still, a common good is always a fragile commodity, vulnerable to the parasitism of self-interest and nepotism. How were these perils averted? A large part of the answer is simply small size. Communities are small enough for everyone’s behaviour to be continuously monitored and controlled through informal, and if need be, formal sanctions. At the same time, the group is small enough for the contribution of every adult to be crucial to the collective welfare, and, therefore, for everyone to have a large stake in controlling shirkers and free-riders. In short, the costs of rewarding good behaviour and stigmatizing parasitism are much lower than the costs of ignoring other people’s behaviour. Both types of communities are notorious for lack of privacy: everyone’s behaviour is everybody’s concern. (van den Berghe & Peter, 1988)

But how was it possible to expand this high-trust environment to one that would encompass millions of people? How did societies like England pull it off?

(to be cont’d)


Clark, G. (2009).The Domestication of Man: The Social Implications of Darwin, ArtefaCToS, 2, 64-80

Van den Berghe, P.L. and K. Peter. (1988). Hutterites and kibbutzniks: A tale of nepotistic communism, Man (N.S.) 23, 522-539.


Tod said...

Holland was maybe the first modern economy but being too commercially orientated it lacked the military power to defend itself from England. England existed as a rogue state in the early days.

"Keynes points out in one of his books that the treasure which Sir Francis Drake stole from Spanish men-of-war, invested in the East India Company which was the welspring of the British treasury"

Steve Sailor on 'The pinch'
"To Willetts, the key to Anglo-Saxon exceptionalism is the nuclear family structure. “When it comes to families, England was the first nuclear power,” Willetts quips.

[...] Willetts explains the “deep features” that have distinguished England, and its overseas offshoots, from the rest of the world.

England has been “not just different from Papua New Guinea or Pakistan; it is also quite different from France and Italy and most of Continental Europe,” except for Holland and Denmark.

And this difference dates to at least 1250—and perhaps back to (or beyond) the Dark Age days of King Canute."

Harmonious Jim said...

Agreed that trust is crucial. Looking forward to your theory of why it arose, or rather spread beyond kin in some places.

Eugene said...

I'm not sure if Peter would be interested in this or not, but there's an article in today's NYTimes which is tangentially related to this.

Apparently, there's a new book out that explains the evolution of social institutions and structures in different parts of the world. The field is called "sociobiology," and it's the idea that societies evolve differently according to various biological imperatives. Maybe something that can be addressed in future posts.

Peter Frost said...


I would argue that the English nuclear family is more an effect than a cause. As England became a high-trust society, people no longer had to depend as much on their kin relations. The extended family (and increasingly the nuclear family) has withered away because people feel that these institutions are no longer necessary.

Harmonious Jim,

Thanks! I'll explain more in the next post.

Generic Viagra,



Yes, I've heard about Fukuyama's forthcoming book. From what I've read, he seems to have come to many of the same conclusions that I have come to.

Harmonious Jim said...

On YouTube there's a couple of hour-long talks by Fukuyama on the subject of his book on political development. He makes no mention whatever of humans evolving in the past 10000 yrs. (But what he says is nonetheless interesting.)

Tod said...

"England became a high-trust society, people no longer had to depend as much on their kin relations".

Hmmm, in many parts of the world kin are in fact far more related that they are in England. Cousins in the east are often very much more related than in England, being the result of umpteen generations of consanguineous marriage.(I'm not sure how polygyny affects this).

Trusting your cousin in England is a very different thing to trusting your cousin in Saudi Arabia. Furthermore in the East your cousin might also be your brother in law.

It was the the Church which forbade consanguineous marriage, (2nd cousin marriage was banned in the 6th century,by the 11th century there was a ban on 6th cousins marrying).This also promoted non- arranged marriages.

Chris Crawford said...

I have been exploring some of the concepts you describe here, but from the angle of the development of rationalism. A few of my own observations:

Markets and city-states evolved in unison. We have plenty of evidence from Mesopotamia that commercial contracts were common and they were enforced by magistrates. Moreover, the problem of trust outside the city limits was quickly addressed by the establishment of local agents in distant cities. We have plenty of correspondence from that period in which the boss merchant provides instructions to his local agent. That local agent, in turn developed trusting relationships with other local merchants. This "spoke and hub" system worked quite well and was in fact the primary basis for capitalist systems right up until, say, the Industrial Revolution. It is still in force today, but the massive expansion of trade as a percentage of GDP during the Industrial Revolution required expansion of the system to include less trusted sellers, which in turn required more detailed legal structures. This was especially the case with capital accumulation required to finance ever-larger enterprises -- joint stock companies and the like.

So I see the history of capitalism as a matter of narrow spoke and hub systems broadening, adding ever more spokes and hubs, and coalescing.

Their contribution to the evolution of human thought arises from the degree to which they controlled social mobility. For me, the prime example is the development of classical Greek society, which was at its core a mercantile society. The Phoenicians did a lot of trading, but they weren't mercantile because power was still limited to royalty. In Greece, power ultimately flowed from money, and so mercantilism dominated the Greek economy. I have been digging up indicators of the degree of literacy in pre-classical Greece, and there are no good numbers, but there's enough to indicate that literacy in Greece was much higher than in any other society at the time.

This, IMO, is what led to the cognitive explosion that we sometimes call "The Glory that was Greece".

My thesis is still incomplete but you can find a sketchy explanation of it here