Why don’t people like markets?

People do not love markets – there is a lot of evidence for that. Is it relevant that, well, to put it bluntly, people do not seem to understand much about market economics?

That is a common enough message from professional economists. It is put into sharper focus by Bryan Caplan in his book The myth of the rational voter. Caplan (among other important and interesting things) reports on systematic studies of voters’ knowledge of policies and their effects on economic processes. The take-home message is that people just don’t get it, and that their voting preferences are largely irrational.

Now, voter ignorance or irrationality would not be very bad, if it was completely random. If most voters chose policies randomly, the net result would be no strong aggregate preference for any policy. But Caplan shows that people’s irrationality about economic issues is not random at all. There is method in their madness. It consists in a series of “biases”, like the anti-foreign and anti-trade bias (i.e., “when foreign countries prosper we suffer”). If this is true, many “rational voter” models in political science are in serious trouble.

As usual when people describe folk-understandings as “irrational” or “biased”, we cognition and culture and evolution folks get a trifle impatient.



Too often, such descriptions boil down to the observation that human minds do not follow some arbitrarily chosen normative model (see Tversky and Kahneman passim and Gerd Gigerenzer on the alternative perspective). Surely we should not stop at saying that people “don’t attend to base rates” or “have a bias against foreign trade”. The real questions is, why? What psychological processes lead to such biases?



The truth is, no-one knows because no-one bothered to study that. I am surprized, nay flabbergasted that there is no study of folk-economics in the social science literature. No-one (except Caplan and a few others) seems to study what makes people’s economic modules tick. In psychology we have had decades of study of folk-physics, folk-biology, intuitive psychology and the like. Intuitive economics anyone?

Robert Nozick observed that intellectuals dislike markets, probably because intellectuals are used to and thrive in knowledge-rewarding meritocracies, while markets do not really care for your effort, intelligence or just desert, as long as you provide what others want. This may be true. But it is not sufficient, for most people, not just intellectuals, are leery of markets.

Market process are unloved for many reasons.

One of them, obviously, is that market processes are not visible. Going through our everyday tasks, we fail to notice how millions of voluntary transactions resulted in precisely these goods and services being available to us when and where we want them at a price that makes them affordable. That is of course a point that Adam Smith and others made long ago, but could be made more forcefully if we understood the limits and susceptibilities of human imagination. In a powerful essay, 19th century free-trader Frédéric Bastiat noted that the economic process comprises ‘what is seen’ and ‘what is unseen’. For instance, when a government taxes its citizens and offers a subsidy to some producers, what is seen is the money taken and the money received. What is unseen is the amount of production that would occur in the absence of such transfers.HonestGrocer

Another plausible factor is that markets are intrinsically probabilistic and therefore marked with uncertainty. Even though it is likely that whoever makes something that others want will earn income, it is not clear who these others will be, how much they will need what you make or when you will run into them. Like other living organisms, we are loss-averse and try to minimise uncertainty. (Note, however, that market uncertainty creates a niche for market-uncertainty insurance, which itself is all the more efficient as it is driven by demand).

Finally, humans may be motivated to place their trust in processes that are (or at least seem to be) driven by agents rather than impersonal factors. This may be why there is a strong correlation between being scared of markets and being in favour of state interventions in the economy. One of the most widespread political assumptions in modern industrial societies is that “the government should do something about x”, where x can be any social or economic problem. Why do people trust the state? The state (in people's intuitions, not in actual fact) has all the trappings of an agent. It is supposed to have knowledge, memories, intentions, strategies, etc. Now it may be that people are vastly more comfortable trusting an agent to provide help or impose sanctions, than they would trust an impersonal, distributed and largely invisible process. That would be mostly a question of intuitive psychology (highly salient in our reasonings about social processes) versus population thinking (highly unintuitive, difficult to acquire and engage in without sustained effort).

But, as I said above, we do not know, because nobody studies that.

PS – Some people may be tempted to tell me that people fear markets simply because markets are destructive, evil, create unhappiness and inequality, etc. That obviously is not the answer, just like "people believe in spirits because there are spirits" is not a cognitive explanation of supernatural concepts.


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    Hugo Mercier 18 June 2012 (23:59)

    Thanks for a great post!

    A couple of things. First, I guess that one of the reasons people haven’t looked into intuitive economics is that it wouldn’t come with all the attributes of the other intuitive stuff — in particular, it would probably not be evolved (I guess markets, if there were any to speak of, were limited when we evolved). So maybe the problem is not so much that people have a faulty intuitive economics, but that they just don’t have one?

    Second, one may be tempted to object: don’t Americans (well, some of them at least) love markets and hate government? I’m not sure that would be a strong objection. Caplan’s data comes mostly from Americans (if I remember correclty), and yet he finds them unsufficiently pro-free market (he should do a survey in Seine Saint-Denis, that would help him put things in perspective). I’d guess many ‘pro free-market’ people are in fact mostly anti-tax, and may not be wild about lowering tariffs or welcoming massive amounts of immigrants.

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    Bryan Atinsky 28 June 2012 (00:52)

    “Finally, humans may be motivated to place their trust in processes that are (or at least seem to be) driven by agents rather than impersonal factors. This may be why there is a strong correlation between being scared of markets and being in favour of state interventions in the economy.”

    Hmmmm….I don’t have the data to look up, so my observations are anecdotal, but saying that this phenomenon is likely related to “trust in processes that are (or at least seem to be) driven by agents,” seems problematic. From what I can see, those who heavily support the ideology of free markets are Christians who even couch their support for free markets in terms of their trust in a process driven by AN agent…(a.k.a. God). Success in life is a sign that the big agent has your back, failure is a sign that you aren’t deserving of support from that big agent in the sky.

    I would say then, that the agency explanation is a bit of a “Just So Story.”

    Anything to what I am asking you think?

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    Gordon Ingram 28 June 2012 (16:28)

    I agree with Bryan that the idea that people may dislike markets because they are not seen as driven by agents is rather off-beam. The idea that markets are akin to some kind of force of nature is a convenient fiction – of course they are really driven by aggregates of complex agents; otherwise why would humans be the only species to have markets? – and I wonder how many people this fiction really deceives, outside of economics faculties. The main reason people dislike bankers so much is because they are seen – quite accurately – as agents who fix the markets for their own personal gain (see the recent Barclays emails).

    The idea that “markets are destructive, evil, create unhappiness and inequality, etc” may be a little over the top – they are just a tool, after all – but for me it is beyond dispute that they are impersonal and indeed alienating. There is a wealth of anthropological literature (I am thinking in particular of Sahlins and Gudeman, but you could pretty much take your pick from economic anthropology) to support the contention that marketised relationships are fundamentally different, and in some sense less authentic, than communal relationships. In his brilliant book _Debt: The First Five Thousand Years_ David Graeber sees small-scale parallels to markets in rituals of exchange between neighbouring tribes who are prone to war – rituals that are always prone to break down into actual violence. (Think here too of the way that medieval Vikings alternated between raiding and trading.) He then traces the origins of the first formal market systems in the need for early empires to service their armies of mercenaries, and later, professional soldiers.

    Given these negative connotations of markets, in terms of alienation and violence, it is not surprising that people react negatively to the prospect of markets encroaching onto things that they value, such as health or education. But it all depends on the framing. (Indeed I went to a talk by Ken Binmore the other week where he pointed out that almost all behavioral economics is susceptible to framing effects. Gigerenzer would surely be on board with that.) Most people realise that markets are good at generating wealth for particular individuals, and as Hugo notes above, markets are generally framed in these positive terms in American cultural discourse. Frame a question about the marketisation of the health service in terms of individual doctors being rewarded for their particular levels of expertise and effort, and you will get a more positive response than if you frame it in terms of individual patients being denied access to particular types of treatment.

    None of this seems particularly mystifying. For me, a much more interesting and difficult question is why the encroachment of markets into areas such as health and education continues apace, even though most people don’t want it to happen because they realise that it is alienating and irrational. This is where we enter the realms of a collective delusion that is akin to religion. But I don’t know of anyone who has really tackled this question head-on …. references would be welcome!

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    Werner Hertzog 28 June 2012 (19:24)

    Fear of the market seems to be stronger in some societies in comparison to others and, as Hugo noticed, if there is such a thing as an “economic socialism-liberalism spectrum”, the United States seems to be at its very end (see “American Exceptionalism”, by Seymour Lipset). So I’m skeptical of whether we will find innate mental “biases” that explain folk economic theories. If some people fear the market more than others, it could be interesting to look at cultural/social differences in attitudes toward the market.

    So here’s a quick (and maybe old) idea: fear of the market is probably related to folk theories of society, or whether people expect and validate certain internal groups making economic decisions that concern the welfare of the whole. While some people may conceive society as an “organism” whose decisions emanate from executive centers (certain social groups, like the government, the elders, or the intellectuals), others may see society as a chaotic conglomeration of individuals moved by self-interest. Each view creates and validates a specific kind of social order.

    Now in order for people to consider the actions of a social group (the government, the elders, etc) as legitimate, a certain degree of group entitativity — social groups being essentialized and conceived as agents — is required. It may be that in the United States intense competition between political associations (think of Tocqueville) and lack of consensus over who should manage the economy dilutes the entitativity of internal groups, giving way to a more reliance on individual rather than collective action. This would explain American exceptionalism.

    It could be interesting to look at folk theories of price formation, especially in pre-industrial (rural) societies, and see how these theories change as people abandon the plough and become the wage laborers or petit bourgeois. During most of human history people knew no such thing as “market equilibrium” (needless to say), and I suspect that people would be inclined to blame very concrete and visible social groups for fluctuations in prices. This may explain the traditional hatred directed toward groups of merchants. As people become more dependent of transactions mediated by money they may shift to a more abstract view of market mechanisms.

    Markets may indeed be seen as destructive, evil, etc. since economic opening is usually followed by the decay of traditional coercive institutions like organized religion and groups of traditionalists (folklorists). With economic growth people tend to increasingly equate social status to personal wealth, disempowering groups whose main source of status lies in tradition. This can be perceived as loss of cultural identity — which is a good reason to fear markets. Trational coercive institutions lose relevance (maybe temporarily, until they learn to adapt), which increases the rate of social change. People don’t do the same or think the same way as their parents used to; the world seems out of control and uncertain. No wonder why both the far-left and the far-right fear the market: both emerge as responses to rapid social change and uncertainty it generates.

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    Ilkka Pyysiäinen 10 July 2012 (14:54)

    Pascal argues that ‘the market’ is cognitively difficult because it is an impersonal force or mechanism, while we humans are specially geared towards detecting agents and predicting their actions. What seems to be missing here is the fact we do personalize ‘the market’ as a quasi-agent of sorts. Think of Adam Smith’s ‘invisible hand,’ for example. ‘The market’ is said to be ‘nervous’, to ‘want’, to ‘trust’ and so on and so forth. All kinds of institutions are regularly though of in agentive terms: the parlament decides, Uncle Sam wants, the party wishes etc. In this way, we try make the cognitively difficult more easy.

    However, although there may be a fear of the market, there is also much trust in the market and market economy (see, e.g., Grover Norquist’s Leave Us Alone: Getting the government’s hands off our money, our guns, our lives (2008)). Institutions and ‘the
    market’ can be thought of as Superior Beings against which we play a game we cannot win. Such games can also be modelled as in Steven Brams, Superior Beings (2007). Brams’s idea has been used by, for example, Matti Kamppinen in his article “Playing against Superior
    Beings in religion, technology and economy” (in the edited volume Religion, Economy, and Cooperation, 2010).

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    David Hirshleifer 15 July 2012 (00:40)

    “The real questions is, why? What psychological processes lead to such biases?
    The truth is, no-one knows because no-one bothered to study that.”

    I wrote a think piece about an aspect of this: “Psychological Bias as a Driver of Financial Regulation.” But I agree that much more study is needed.

    What are the biases and social processes that favor regulation or suppression of markets? One is that people tend to be overconfident, as documented extensively in psychological studies. An overconfident individual thinks he can easily come up with simple solutions to social problems that are better than market outcomes. This causes voters, regulators, and politicians to plunge ahead with ‘solutions’ that have unforeseen adverse consequences. This everyday ‘fix-it’ attitude neglects the fact that the market is a spontaneous order that aggregates the insights of many participants, and, in addition, selects for good choices that have arisen by chance. The latter effect is of course evolution by means of natural selection. However, as Darwinists have often remarked, the notion of spontaneous order is deeply unintuitive to most people.

    Specifically, overconfidence leads regulators to think that they can actively wield fiscal, monetary, and regulatory policy tools to manage market fluctuations. It also leads policymakers to odd conclusions on occasion, such as the idea that suppressing the beliefs of speculators by making trading more costly will make markets more efficient.

    Attentional effects also contribute to antipathy toward markets. Even if markets increase the wealth of almost everyone in the long run, there will always be salient stories about individuals who are harmed by particular events in the marketplace, leading to calls for intervention to provide remedies, or to protect against such dangers arising in the future. If stories about losses as opposed to gains are especially salient, this reinforces the above effect.

    Xenophobia helps motivate regulation of foreign shareholding and control of domestic companies. The urge to find scapegoats leads to anger at lenders and speculators during downturns. This can set the stage for the rise of conspiracy theories, and for demands for restrictions of unpopular groups.

    Norms for reciprocity, equality, and charity profoundly shape regulation. The equality norm commands attention when a group is doing poorly, and envy is intensified. As a result, people get angry at rich executives who lay off low income workers. Such events are framed in moralistic terms rather than in colorless terms of resource reallocation and economic efficiency. This results in demands to punish executives or to regulate managerial compensation.

    Also, people have trouble understanding the idea that lending and speculation generate economic value. Demanding interest is viewed as taking more than was given, and speculation is viewed as mere gambling (so that gains are again mere taking, without reciprocity). This results in vilification of lenders (‘usurers’) and speculators, and to laws restricting lending practices and speculative activity.

    Religion and ideology affect beliefs about markets. For example, the (invalid) meme that commerce is a zero-sum game reinforces the socialist meme assembly. During bad times, people are attracted to ideologies that allow them to blame others for their suffering and which offer hope that suffering will be alleviated. This promotes revolutionary and utopian movements.

    As a case study of what makes pernicious ideologies highly contagious, in my talk I try to explain why in recent decades a movement claiming that firms suffer from ‘short-termism’ has become very influential, despite rather limited validity. (I won’t try to explain these arguments here).

    The paper is freely downloadable, and here’s a link to the Executive Summary.

    Here’s the abstract:

    “Psychological Bias as a Driver of Financial Regulation,” David Hirshleifer, European Financial Management, 14(5), 856–874, November 2008.

    I propose here the psychological attraction theory of financial regulation – that regulation is the result of psychological biases on the part of political participants – voters, politicians, bureaucrats, and media commentators; and of regulatory ideologies that exploit these biases. Some key elements of the psychological attraction approach are: salience and vividness, omission bias, scapegoating and xenophobia, fairness and reciprocity norms, overconfidence, and mood effects. This approach further emphasises emergent effects that arise from the interactions of individuals with psychological biases. For example, availability cascades and ideological replicators have powerful effects on regulatory outcomes.

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    Martin Stehberger 16 July 2012 (23:02)

    I am reminded here of four lines that I have seen quoted by market sceptics, from a Bertolt Brecht poem named Alfabet:
    Reicher Mann und armer Mann (rich man and poor man),
    Standen da und sahn sich an (stood there and looked at each other).
    Und der Arme sagte bleich (and the poor man palely said):
    Wär ich nicht arm, wärst du nicht reich (if I weren’t poor, you’d not be rich).
    For a study of folk-economics, about the first that should be done in my opinion is establishing how many, and what kind of, people believe the following statement, the “commerce as a zero-sum game meme” as David has called it in the preceding comment:

    If A and B enter a transaction from which A gains then B must lose.

    In his linked talk, David cites relevant work (“The Evolutionary Origin of Freedom”, Rubin 2002) containing survey evidence that such beliefs are common.
    The example in the original post is of the zero-sum kind: “when foreign countries prosper we suffer”. Now why would (some) people not see the existence of win-win transactions? David has given a motivation, in line with the Brecht poem: to blame others for one’s own suffering. Two other points:
    1) To understand how an exchange can create value you have to appreciate that something can be worth more to A than to B in a particular situation, and how this concept of personalised value is different from saying, for example, “this is worth 50 dollars”. It requires reflection on the topic. Without it, using Gordon’s example of medieval Vikings alternating between raiding and trading, one would see both as zero-sum, and probably explain the voluntary nature of the latter by taking as exhaustive the case that one side has simply outwitted the other. Notice that people with this view can still be competent at their own trading.
    2) Absolute versus relative gains/losses. Many market transactions are asymmetric with a weaker side “losing” in relative terms, e.g. landlord gets rich whereas tenant just gets a space to exist in.
    This unfairness factor contributes to people’s dislike of markets directly, too. See “equality norm” and “charity norm” in David’s talk: markets don’t care about either. Also, market incentives lead to the right action for the wrong (in people’s eyes) reasons. People worry that markets promote selfishness and disregard of such norms. (And there are other important points, of course, that have already been highlighted in this discussion.)

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    Olivier Morin 18 July 2012 (10:54)

    Bryan Caplan’s book contains many interesting and debatable claims (too many to debate here), but I agree with him on one point: people (well, American voters) have no problem with markets per se. They have trouble understanding (and trusting) institutions in general. Including the government and its interventions.

    I suspect one could take the same kind of poll data that Caplan uses to argue that American voters have the opinions of a south-american dictator (as he says), and use them to depict the same American voters as raving libertarian freaks. In some areas at least, citizens’ misgivings about state intervention are, well, utterly absurd. Let me illustrate.

    Economy: Citizens (in their majority) seem to misunderstand systematically the nature, the rationale and the effects of state interventions. 58 % of American voters think that government intervention on gas prices makes gas more expensive than would be the case if the market alone determined the price. In poll after poll, a majority of around two thirds believe that economic activity benefits from cuts in government spending (for instance, cuts in government-paid salaries). As Caplan notes, many Americans believe that their tax money is spent primarily on donations to foreign countries. In poll after poll, the majority thinks that spending should be reduced in every government program.

    Institutions: US citizens display a level of wariness towards the state that would be appropriate in a banana republic. The majority of American voters consider that the federal government threatens their rights. Only 22 % of American believe that the American government derives “its just powers from the consent of the governed”. The rest consider that the government is not even legitimate. The majority always agrees that government is too big, whichever way the question is asked. On average, Americans think that political parties and the congress are “very corrupt”, giving them a grade of around 4 (on a 0 to 5 scale). Public officials and teachers only get slightly better grades (incidentally, corporations are seen as less corrupt than politicians). Parties, parliaments and state employees are rated as less corrupt by citizens in India, in Indonesia, in Iraq, in Italy, etc.

    Justice: American citizens do not trust the state to enforce the rule of law. Again, most US citizens view their justice system as quite corrupt, have a low opinion of the supreme court, etc. 65% americans think that popular jurys are more competent and trustworthy than professional judges.

    Security: Citizens oppose tighter regulations on the trade and possession of weapons.

    Education: Citizens do not trust the state to provide basic universal education. They consider that the government should not be allowed to impose the teaching of evolutionary theory in american classrooms.

    Health: Most Americans think that minimal, universal healthcare is best left to the care of the market.

    Caplan’s anti-market bias, it seems to me, pales when compared to this anti-state bias. Such a bias, I hasten to add, is probably not specific to US citizens (though they happen to grow a particularly tasty variety).

    To conclude, we do not need to build a specific psychology of the anti-market bias; rather, we would need to understand why people are mistaken about institutions in general. And for this, I think, it’s enough just to round up the usual suspects: false information, lack of motivation to learn more, confirmation bias, and so on.

    (This mash-up of 2012 polls mostly comes from Rasmussen reports. Ambiguities are likely, check for yourself. Data on corruption polls from Transparency International.)

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    Stefano Adamo 8 March 2013 (15:33)

    Thank you all for the very interesting discussion!

    First, I would like to recommend a paper by Paul Rubin entitled “Folk Economics,” where some of the views that have come out of the discussion are treated in an evolutionary framework.
    In addition, I would like to mention that during my doctorate I have worked on the intellectual aversion for the market economy from a historical angle, studying the implications of the rhetorical phenomenon of the personification of money in the English literature of the early modern period. Comparing the economic views expressed by satyrical dramatists and pamphleteers to those of the economists of the time, aka the “early mercantilists,” I found out that the characterization of money as a supernatural force that takes hold of human behavior (a “visible god,” as Shakespeare called it) reveals a naive understanding on the part of the writers of the social and economic transformation taking place at the time. Most of them overlooked the economic implications of that transformation, and construed it merely as a process of corruption of traditional ethical values. This investigation led me to conclude that a promising line of research on the aversion for the market economy might consist in understanding how lay people make sense of complex economic ideas.
    Let me give you a hint. When economists use such concepts as rationality, profit, cost, trade, competition, and so on, they are using words that embed a whole set of assumptions, a shared knowledge that defines the economic way of thinking. On the other hand, also common people are exposed to this jargon in their daily life: they often use the same words, but they arguably attach to it a different, non-technical meaning. How does that meaning form? Drawing on the culture and cognition research program, I have hypothesized that it forms according to the way people relate their own understanding on the word in question with real-world examples of which they have personal experience. More generally, our opinion on matters on which we have no special competence may emerge from the relation we establish between the delusively familiar ideas involved in them and our own interpretation of the small piece of world we see around us.
    I have more fully developed this hypothesis here. I’ve recently also uploaded a draft here, in which I explore the topic of the aversion to the market using as a case study the Italian movies of the economic boom era. It turns out, that the Italian filmmakers, just as the English dramatists of a few centuries earlier, were quite wary of the capitalistic development of the country.