Imagine you are at a garage sale. You are looking through the cast-off clothes, furniture and other junk of some other person. You find a coffee table that is perfect for your living room. You pay $40 for it, which is the asking price.
You are ecstatic. A new coffee table like this would have cost $250. You just saved $210!
It turns out the seller is also ecstatic. She didn’t need that table anymore because she never really liked it anyway. She just got $40 for something she probably would have thrown away!
It turns out that trades like this make us happy for good biological reasons. We are social creatures, and we like interacting with other people and trading things. We love it when we complete a trade that is win-win. We love it when we develop trust with our fellow human beings.
There is a new field of study that looks into this called neuroeconomics. This field is discussed in this video here and this article here. Please look at this two links before commenting on this post.
OK, you looked at those two links? Now, let’s discuss this issue.
A lot of what people suppose to be true about human interactions and trade is simply not true. People are happiest when they sell something that other people value. They are not happiest when they rip somebody off. When we sell something that other people value, they have the possibility of a repeat customer. But there are also chemical responses that take place. The key here is oxytocin.
A fast-acting chemical messenger made in the hypothalamus, oxytocin is what stimulates uterine contractions as a mother delivers her baby. It is also released when people pet their dogs, nurse their children or have sex (some call it “the cuddle hormone”). Research chemist Vincent du Vigneaud won a Nobel Prize in 1955 for isolating and synthesizing it. Today, a synthetic form of oxytocin called pitocin is often used to induce labor in hospitals.
Oxytocin makes us more sympathetic and sociable. And it turns out that when we have more oxytocin, we are much more likely to trust other people and, when it comes to trade, want to do win-win financial arrangements with them.
Prof. Zak says: “trade is deep in our DNA.” We want to trade, and we want the trade to go well and we want the person we trade with to be happy and trust us. Studying primitive societies, he says that the more they trade the more fair the societies become. People on their own begin to shun those who are not fair traders. The societies self-regulate. The winners are usually those who are the fairest traders and offer the best deals to their customers. The losers generally go out of business.
If we put away out ideological blinders, we can see that this is usually the case in the most unregulated markets. Wal-Mart exploded by offering customers what they wanted: cheap prices, good selection, clean stores. Wal-Mart is filled with return customers who keep on coming back because that is where they get the best deals. Wal-Mart customers usually don’t leave the store grumbling: they are happy with their shopping experience and feel their money was well-spent on stuff they need.
Interestingly, about two years ago Wal-Mart decided to change its strategy by raising prices and decreasing selection. Sales plummeted. Don’t mess with a winning formula.
One of the main messages that Prof. Zak has is that markets are moral. In a market-based system, nearly everybody treats others fairly (oxytocin insists on it and you lose customers if you don’t). It literally increases human happiness if people are in a system where they can trade freely.
Prof. Zak points out two important caveats. The first is that obviously there are people who don’t trade fairly. Interestingly, when you feel like you have been ripped off, your testosterone levels soar. You feel an incredible desire to “get” the person who acted unfairly in the business deal. In the wild, you would go beat the brains out of this person. But in a market-based system with the rule of law, you would take the fraudster to court. You would get satisfaction through the judicial system.
The second caveat is that it turns out that about 5 percent of people don’t release oxytocin when they trade. These people are literally psychopaths. They are the Bernie Madoffs of the business world, the people who get no joy out of a fair deal. They only get joy by taking peoples’ money.
The good news is that only one out of 20 people display the Bernie Madoff gene. The vast majority of people are literally happier when they complete a fair deal.
So next time somebody claims that markets are immoral, tell them about oxytocin and refer them to Prof. Zak. They may learn something.