Lecture 7

Market Exchange Versus Social Exchange

The theories of economics are all built around the market where everything is for sale. However, in normal societies, the most valuable things are the ones which are not for sale. A MARKET SOCIETY is a place where everything is for sale. A MARKET ECONOMY is one where most things are for sale and market economies TRY to put more and more things for sale. An important DISCOVERY is that there is a confllict between these two mechanisms -- some things work better in markets and others in societies. This is a deep and complex topic.

For an INTRODUCTION to the idea of CONFLICT between MARKET and SOCIETY, read my newspaper article: {link]

Very Related: What isn't for sale? by Micheal Sandel [link]

Please WATCH the following video on You-Tube about MOTIVATIONS in Labor Market: [link]

There are TWO Main explanations for efficiency wages:

ONE comes from Stiglitz et. al. and says that people will SHIRK -- they will try to avoid doing the job. Firms must monitor, punish shirking, reward hard work, this is the best way to motivate people to work efficiently.

TWO comes from psychology/sociology: GIFT EXCHANGE, trust people and give them rewards. DO NOT MONITOR. Then they will work efficiently. The goal of this lecture is to examine to two theories, differentiate between them and look at the evidence in favor of them and against them.

The main reading for this lecture is The Market Economy and Its Limits -- This article is a brief summary [5000 words] of Karl Polanyi: The Great Transformation. It describes the conflict between market mechanisms and social mechanisms. The implications on how we understand the world will also be discussed. Economic theory is the market understanding of the world. It is in conflict with the social mechanisms, and these are reflected in behavior in games and in the labor market.

The above article is the short, abbreviated form. A longer and more detailed exposition is given in: The Rise and Fall of the Market Economy, which is attached below.