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.
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.