Markets, Institutions and Experimentsby Vernon Smith
May 24, 2001 Economics is about exchange. In modern economies this means that people trade tangible goods, services and rights, given and received for money, whose value is itself derived from the rights conveyed by the bearer. Money, however, is a recent social contrivance in the long dimly lighted history of trade among early peoples. Such trade predates the state and even agriculture, which is only some 10,000 years old. The archaeological evidence for trade survives in the durables – weapons, tools and ornaments – left behind in caves and campgrounds, such trade inferred largely from the fact that the geographical distribution of such artifacts is disjoined over great distances from the distribution of the raw materials from which they were manufactured.
Adam Smith saw that trade provided the foundation for specialization and a vast expansion in human productivity. Hence, the division of labor (among specialties) is limited by the extent of the market. It is the presence of market opportunities that permits one person to grow corn, another hogs, the baker to bake and the butcher to cut meat, as each specializes in that for which he is suited by temperament, experience or natural skills, then satisfies his general needs through markets. Smith understood that knowledge was dispersed in the market system, and that the individual, knowing his local situation, could better judge than the “statesmen or the lawgiver” how to employ his capital to its greatest value. But it remained for F. Hayek to articulate more fully the idea that the market order served to coordinate the utilization of this dispersed information through the price system, and to see that it constituted an extended order of cooperation among thousands, indeed millions, of uncomprehending individuals. Hayek saw economy as an example of a self-ordering system driven by cultural evolution, and in this had important parallels with other complex self-ordering systems in biology.
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