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November 15, 2022 – Science of Liberty

The mutual benefits of markets

The mutual benefits of markets
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The mutual benefits of markets

by Daniel J. Smith

In 2011, I was flying back and forth between Joplin, Mo. and Tuscaloosa, Ala. following those cities’ devastating tornadoes. I was conducting field research to determine how communities can better prepare and respond to future disasters. I kept hearing community leaders discuss the problems that in-kind donations like clothing, shoes, and other supplies created. They referred to these donations as “the disaster after the disaster.”

Leaders appreciated the assistance, but needed money instead. 

Generous donors not only had no idea what sizes and quantities of products the community needed, the in-kind donations were inconvenient. Cities filled warehouse after warehouse with donations, requiring them to take volunteers away from debris removal and rebuilding to sort and inventory goods. Tuscaloosa, which was struck first, sent most of the donated goods to Joplin and then, reportedly, Joplin sent them along to another city hit with a disaster. 

Instead, community leaders wanted businesses to donate and deliver goods — and they had complete confidence in the private sector to do so. 

They had good reason for this faith. Time after time in the wake of disaster, it is businesses that are the first to respond, not only with direct charitable aid, but also by getting their own company back up and running quickly. The return of business is vital to the recovery process because they provide the jobs and regular flow of goods and services that attract residents back and give them a return of normalcy. 

Some major corporations, such as Walmart, even have warehouses around the nation stocked with goods typically demanded during a disaster. And they have the logistical wherewithal to get those goods to disaster-stricken areas quickly and conveniently. In fact, ahead of predictable disasters like hurricanes, Walmart has weather monitoring and response teams prepared to rapidly ship supplies stationed outside the storm’s path to affected communities in need. Joplin’s Home Depot, which was destroyed by their tornado, was up and running out of a tent within one month while their new store was being built. 

There is nothing unique about this. 

Businesses are the backbones of the communities they inhabit. Joplin residents cried when talking about the sense of relief and joy they experienced seeing Chick-fil-A open after quickly rebuilding in the “scar” of leveled ground the tornado had left. The absence of ordinary interactions with barbers, dry cleaners, and restaurant workers made residents appreciate the community-building importance of these mundane business transactions. 

Residents told me the return of these relationships was therapeutic. 

Even outside of a disaster context, private property and the freedom to exchange generate the price system that aids and encourages economic actors to develop plans, adjust their plans in response to the needs of others, and channel scarce resources to best serve individuals. The price system is why businesses are often better at predicting the needs of consumers, especially in a disaster, than people donating out of the kindness of their hearts.

The foundation of a free market is voluntary exchange, meaning both parties must see benefit in a transaction. Consumers have the right to engage in a transaction, negotiate, or walk away if they do not see a benefit. With each dollar they spend, consumers are in the driver’s seat and determine what will be produced and by whom. 

To turn a profit, an entrepreneur must anticipate the needs of others and offer to fulfill those needs on better terms than other providers. 

The pursuit of profit encourages risk-taking, hard work, innovation, and the conservation of scarce resources. The avoidance of loss cautions prudence and provides consumer-driven discipline. The market provides the structure of incentives and the flow of information for businesses to dynamically compete against each other to cooperate with consumers. Thus, the market encourages the widespread experimentation necessary to develop new technologies that improve our lives. 

Markets also simultaneously unleash the competitive entry and investment that rapidly make expensive innovations, such as cellphones and computers, affordable.  

The innovation brought about by the market has drastically improved our material prosperity, especially for people who have the least. It is hard to imagine, but nearly every good or service we avail ourselves of today was once a luxury exclusively enjoyed by the wealthy. Ice, glass, forks, mirrors, indoor plumbing, a non-monotonous diet, and bathing in private used to be privileges only enjoyed by the rich. So too were the refrigerator, television, and microwave. 

In the United States, at least, most people now can enjoy bathing in private … while chatting on their smartphone. 

What’s more, the pace of technological adoption, from the initial introduction when only the rich had access to the good, to when even the poorest segments of society have access has drastically increased over time. 

Businesses made this happen. To thrive, businesses cannot cater only to the wealthy. They must create products for ordinary people. Some corporations, such as Walmart and Dollar General, have entire business models built on the premise of providing reliable but affordable products, not to mention job opportunities, to the underprivileged. 

And, increasingly, many top companies, such as Google and Facebook, offer their services for free. The marketplace provides individuals with consumptive freedom by catering to a diverse array of preferences and needs.

Often underappreciated, the market also enables the pursuit of an authentic, self-authored life. The division of labor allows people to choose how to earn a living based upon their own passions and skills. The fact that we ask first graders what they want to be when they grow up, and truly mean it, is a modern luxury not enjoyed by our ancestors. 

The marketplace even encourages the adoption of community-building norms such as tolerance and honesty. As the late Walter Williams observed, “One of the wonderful things about free markets is that the path to greater wealth comes not from looting, plundering and enslaving one’s fellow man, as it has throughout most of human history, but by serving and pleasing him.” 

A competitive business seeking to earn profits must earn the trust of customers and the loyalty of employees. Empirical studies, as well as field and lab experiments, consistently find that exposure to markets fosters peace, trusting relationships, and concern for others. In his book, The WEIRDest People in the World, Joseph Henrich demonstrates that people with more exposure to markets tend to be less greedy and more cooperative. 

Markets are mutual benefit. They provide the knowledge and incentives for people to constantly adjust their behavior to best serve a world of strangers. The market encourages and enables these individuals to effectively serve distant lands and people while also peacefully distributing resources efficiently. 

Daniel J. Smith is the director of the Political Economy Research Institute and professor of economics in the Jones College of Business at Middle Tennessee State University. He is North American co-editor of The Review of Austrian Economics and president-elect of the Society for the Development of Austrian Economics.

This viewpoint is part of an ongoing series that discusses the principles that unlock human potential. Find links to the entire series here.