A Legalistic Conception of the Market: Beyond Efficiency

Abstract

This paper argues that the standard picture of the market is flawed not merely in practice but also, and especially, in principle. The basic difficulty with the standard picture is that trading (with contracts) gives rise to a form of recognition that is preference-independent and, therefore, that market participants cannot wish away its negative and positive effects on non-trading parties. The paper argues on the basis of this that such effects undermine the possibility of identifying the market with Pareto efficiency—to wit, the first fundamental theorem of welfare economics, showing that perfect competition yields Pareto efficient allocation of resources, cannot hold for market exchange that takes the contract form of interaction.