The Evolution of Markets

Last March, the journal Science published a fascinating study by researchers from around the globe entitled, “Markets, Religion, Community Size, and the Evolution of Fairness and Punishment,” which sets out to research the ways in which large-scale human societies are able to foster trade and cooperation. Obviously, we haven’t always lived in large, interconnected groups of people like we do now. Once upon a time humans lived in small, closely related groups that were held together by the innate bonds of kinship. But getting from small groups of related people to large interconnected societies has always puzzled sociobiological researchers.

Sadly, the full journal article is only available to subscribers so I haven’t been able to read the full thing. This article, from USAToday, seems to be a pretty good summary. The abstract of the study says this

Large-scale societies in which strangers regularly engage in mutually beneficial transactions are puzzling. The evolutionary mechanisms associated with kinship and reciprocity, which underpin much of primate sociality, do not readily extend to large unrelated groups. Theory suggests that the evolution of such societies may have required norms and institutions that sustain fairness in ephemeral exchanges. If that is true, then engagement in larger-scale institutions, such as markets and world religions, should be associated with greater fairness, and larger communities should punish unfairness more. Using three behavioral experiments administered across 15 diverse populations, we show that market integration (measured as the percentage of purchased calories) positively covaries with fairness while community size positively covaries with punishment. Participation in a world religion is associated with fairness, although not across all measures. These results suggest that modern prosociality is not solely the product of an innate psychology, but also reflects norms and institutions that have emerged over the course of human history.

Russ Roberts, the host of the great economic podcast EconTalk and professor of economics at George Mason University, never tires of defining economics as the study of incentives, and I think this is exactly what this study is talking about. What they are really examining is the incentives that led small groups of people to interact and cooperate with other small groups of people, rather than just fighting them in all out tribal warfare. As Hans-Hermann Hoppe explains in his paper “On the Origin of Private Property and the Family“, the hunter-gatherer societies were essentially parasitic. They took from the land but never produced anything. Once these resources were depleted these societies had to either wait for the replenishment of vegetation and animal herds or migrate. Migration worked for a time, but, the supply of land being fixed as it is, there came a point in which human societies simply could not escape each other and it came down to either warring over land or hunkering down and cooperating.

The question, then, is how to cooperate and trade with groups of people you would normally consider enemies. Ludwig Von Mises, in Human Action, describes the tendency for humans to cooperate,

If and as far as labor under the division of labor is more productive than isolated labor, and if and as far as man is able to realize this fact, human action itself tends toward cooperation and association; man becomes a social being not in sacrificing his own concerns for the sake of a mythical Moloch, society, but in aiming at an improvement in his own welfare.

What Mises is saying here is that as the opportunity cost of not trading rises relative to remaining in small, splintered groups people will begin to trade. They begin to trade by establishing norms and rules (that could be explicit or implicit) in order to facilitate trade.  As the paper notes, groups of people that do engage in trade show greater amounts of fairness towards strangers than those that do not. This can be explained by the concept of “social capital” which compares human relationships analogously to  financial transactions. The sociologist James Coleman describes social capital in terms of credit slips. When person A does something for person B it establishes a mutual relationship and the concept of credit slips describe the “debt” person B then holds for person A. Social capital is the trust and obligations that people hold toward one another.

People went from war to peaceful exchange via “growing” their social capital by engaging in trade. Although many today are apt to see trade and competition as “cutthroat” and somehow inherently hostile, trade is actually an action which establishes people as allies rather than enemies because each party knows the trade is mutually advantageous (A and B engage in trade because they desire what the other party has and if they didn’t the trade would not happen). Fairness is a natural outcome of the creation of social capital.

When economists say markets can overcome this problem or that problem it may make more sense to bring it down to the individual level. People solve problems when there are good reasons, and strong incentives, for doing so. Often times critics of the market conceive of the market as some abstract, homogeneous institution rather than the nexus that ties human action together. When we think in terms of individuals it becomes easier to understand why markets can solve problems- because people do. This study demonstrates just one of the numerous ways in which this is true.

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