Abstract
The market in terms of the interplay between utility-maximizing consumers and profit-maximizing producers plays a central role in modern economics. Since the time of Adam Smith economists have been concerned with the development of the internal logic of their models of markets, sometimes with the consequence that too little attention has been paid to the broader, sometimes implicit, social context in which market transactions take place. For an enlightened understanding of economic theory, it is, however, essential to keep in mind that economists do not always find it necessary to present a full account of human motivation in the analysis of each and every piece of analysis. The article will discuss the often implicit behavioural assumptions and the value judgments more explicitly.
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Notes
- 1.
In addition, there are the markets for intermediate goods where firms produce factors of production, like machinery and raw materials, for use in production by other firms.
- 2.
For simplicity I refer to individual agents as consumers, although, as indicated above, the explanation of individual behaviour covers both the demand for consumer goods and the supply of factors of production like labour.
- 3.
In an extension of the theory, one can analyze the consumer’s expenditure over time. Then, although equality between expenditure and income must hold over the consumer’s lifetime, in any one period such as a week or a year, expenditure could be either greater than or less than income, depending on the adjustment of cash balances and borrowing and lending transactions.
- 4.
For a more detailed discussion of the interpretation of the quotation and references to later discussions of it see Sandmo (2011).
- 5.
There are a number of passages in The Wealth of Nations where Smith expresses his sympathy for the poor in society, so one may guess that he would have been sympathetic to the utilitarian approach.
- 6.
It is possible to argue, however, that the criterion of Pareto optimality is not ethically neutral either, since the view that individuals are the best judges of their own interests is itself based on a certain conception of social welfare.
- 7.
For further discussion of Smith’s thoughts on the nature of competition see Sandmo (2016).
- 8.
This class of cases is sometimes referred to as the tragedy of the commons, a term introduced in a famous article by Garret Hardin (Hardin 1968).
- 9.
A qualification is in order: The increase in the wage rate means that the worker has higher earnings at his initial level of labour supply. He might react to this by wanting to buy more leisure, i.e. to reduce his labour supply. This income effect pulls in the opposite direction from the incentive or substitution effect.
- 10.
In his popular book on the history of everyday life, Bill Bryson writes that Chadwick was an “intense and cheerless figure” and that almost nobody liked him (Bryson 2010, 510). But as this story shows, some had good reason to like him very much, at least if they judged him by the results of his efforts.
- 11.
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Sandmo, A. (2023). The Market in Economics: Behavioural Assumptions and Value Judgments. In: Kærgård, N. (eds) Market, Ethics and Religion. Ethical Economy, vol 62. Springer, Cham. https://doi.org/10.1007/978-3-031-08462-1_2
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