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ing areas, then, are certain to have quite a different history of want development.

The preceding discussion has indicated how the range of goods and services now available makes it possible that the service component of higher living standards in the low income areas may be quite large. The demand for government services is likely to be great; there is considerable complementarity between the demand for services, on the one hand, and that for goods and leisure on the other. The demand for services will also be tempered by the location of so many of the low income countries in the tropics or subtropics, where clothing and housing requirements generally call for smaller expenditures.

If a country's production resources are geared to domestic demands, the consumption expenditure pattern will affect the whole fabric of economic growth. To the degree that the expansion of consumption departs from the pattern followed in the now wealthy countries, we can expect departures in the pattern of growth of production and trade. The development of the manufacturing sector may be stunted because the labor force is likely to adopt a set of consumption standards somewhat inconsistent with the industrialization process. Once the process of commitment begins, urbanization and imitative consumption generate demands for imported goods, for certain durables, and for a wide array of services. The agricultural sector may shift production slightly away from subsistence crops and toward cash crops in order to increase money income and to be able to buy more goods in the towns. Foreign clothing is introduced and imported cloth may be substituted for local goods. Durable goods are imported initially at least and give rise to related services. The mere availability of other services may draw additional purchasing power away from locally manufactured goods. Meanwhile the demand for government services may result in a tax program that may limit consumption expenditures for other goods and services. The effects of this type of growth can well be: (1) a large increase in the services sector of the economy, since the production of services is oriented toward the market; (2) a decline in manufacturing if homecrafts are included as such, since the high income countries have a comparative advantage in the production of so many manufactured goods; and (3) a commercialization of agriculture. There is evidence that these have been happening in Latin America.

The Economic Commission for Latin America, reporting on the distribution of the population and work force between 1945 and 1955, noted that with respect to employment structure Latin America was

close to Southern Europe, "with the substantial difference that industrial development, instead of preceding the development of services, definitely lags behind." 27 This rapid growth in employment in the services sector is not an accurate index of the relative growth in the demand for services, since output per worker rose much more slowly than in the area as a whole. But the Commission's report concludes that the production of physical goods did not keep pace with the production of services.28

We should entertain the possibility that the low income countries will see the growth of their manufacturing sector stunted while domestic resources are concentrated in primary and tertiary production. The pattern of consumers' demand leads to this conclusion, and the forces shaping world trade operate to bring about this result. Primary production, being based on resources, and services, being oriented to the market, will characterize the economy of the low income country. The manufactured goods are likely to be produced by those countries that have the comparative advantage in such goods, namely, the industrialized countries.

Public policy can operate to forestall the unbalanced growth suggested here. Tariffs and quotas on certain durables can limit the demand for the complementary services, for example. Budgetary restrictions might limit government services, and so on. But the pattern of development of demands should be added to the factors that can inhibit industrial development of the low income countries.

27 "Changes in Employment Structure in Latin America, 1945-1955," Economic Bulletin for Latin America, 2:20 (February 1957).

28 Ibid., P. 41.



Bert F. Hoselitz

In a celebrated passage in the Wealth of Nations, Adam Smith asserts that one of the universal propensities of mankind is to truck and barter. Although this observation is based on empirical materials drawn mostly from the societies of Western Europe, Smith correctly points out that in societies in which there is some division of labor, some arrangement for the mutual interchange of goods and services must be made, and that the market is the most advanced and efficient form of such an exchange mechanism. On the basis of modern ethnographic and cultural anthropological findings, Smith's proposition would be restated so as not to postulate a universal inherent propensity to truck and barter, but rather to distinguish between systems of distribution that differ between cultures. This view has recently been presented with special emphasis by Polanyi, Arensberg, and associates, who not only stress the fact that market exchange is only one form of exchange, but also that even in systems in which market mechanisms exist, different commodities may be subject to different forms of exchange.1


From the generally accepted proposition that the most highly developed and, in some ways, the most efficient means of exchange is a market, there might be derived the further proposition that the general level of a society's economic advancement is associated with the over-all extension of markets and the array of goods and services thus exchanged. Such a proposition seems plausible on the basis of superficial observation of various societies at different levels of economic advancement, and is perhaps strengthened by the fact that even in communist countries, which at first attempted to dispense with markets as instruments of allocation, the market mechanism was adopted progressively as the societies developed more complex forms of production.

If we observe a rather close correlation between the prevalence of market exchange and the level of economic development, a further

1 Karl Polanyi, Conrad M. Arensberg, and Harry W. Pearson, Trade and Market in the Early Empires (Glencoe: Free Press, 1957).

problem is immediately raised as to the mutual causal relation between the two phenomena. Is the development of markets a "cause" or a "result" of economic development? What causal connections may be found in the growth of the institution of markets and the raising of the level of economic performance in general? Adam Smith apparently held that markets are one of the causes of economic advancement, for in the passage cited he seems to suggest that markets develop as a result of the propensity to truck and barter and that they in turn provide an impetus for economic specialization and hence greater productivity of resources. On the other hand, it may be maintained that in the Soviet Union, during the period of the New Economic Policy (NEP), for example, the development of markets was a consequence the greater diversity and efficiency of production, and that the gradual relaxation of policies of physical allocation under the later Five Year Plans and their replacement by allocation through the market occurred in response to similar trends.

The Two Faces of a Market


We are concerned here with the relationship between market mechanisms of exchange and the level of economic advancement and, in particular, with the role of markets in the commitment of an industrialized labor force. To approach this problem more closely, we must distinguish between the market (1) as a mechanism in the process of allocation of resources and (2) as a social institution. The main feature of the former aspect of markets is their efficiency in transferring goods and services from uses that make lower marginal contributions to productive or consumptive objectives, to uses that make higher contributions. It is in this connection that we speak of the objectivity of the market, and it is from this standpoint that we measure the effectiveness of a market mechanism by associating it with degrees of openness and freedom from obstacles to the smooth allocation of resources among competing uses.

Although analysis of the market mechanism in its purely economic aspect is of paramount importance if we are concerned with allocation of resources, in the study of commitment the institutional facets of a market economy are of much greater significance. We are not concerned primarily with the effectiveness of the market in achieving certain distributive or allocative objectives, but with the role that market exchanges play in the minds of persons using the market. The outward physical appearance of a market is immaterial from the standpoint of

its purely economic function, but is very important from that of its institutional role. Who meets whom, under what conditions, in what surroundings, for what kinds of contractual arrangements? These questions appear paramount in the institutional analysis of the market. And even more important, what commodities are customarily traded on the market, and what prohibitions or impediments interfere with the market's mediation of certain exchanges? How universalistic are market criteria, with respect to commodities exchanged and with respect to persons transacting business on a market? Are there goods and services that are not subject to market exchange, and are there certain persons who may not use the market at all, or who may use it only under prescribed conditions and for specific forms of transactions?

Although we concentrate in this paper on the institutional aspects of the market, we do not exclude consideration of the economic criteria of the market mechanism, for even from the institutional standpoint the efficiency of resource allocation and the real or alleged impersonality and objectivity of the market have significance.


Nonintersecting Exchanges

There exist today, and have existed in the past, many societies in which certain commodities can normally be acquired only through purchase on the market, whereas other goods are normally acquired by free distribution, by membership in an extended family or tribe, or by ceremonial gift or exchange. In fact, in some rather primitive societies men still distinguish between goods that are acquired as a matter of course (i.e., without recognition that any special effort is required for their availability), those that may be acquired only through certain forms of ceremonial exchange, and those that have a price and for which other goods must be traded. These three classes of objects are sometimes conceived as belonging in three tight compartments; the transference of objects designated as "free goods," or "ceremonial goods," to that of "priced goods" is outside the realm of what is possible. In more advanced societies the separation between goods that can be traded and those that cannot be is less sharp; and in certain circumstances commodities that normally are acquired by gift or tribute may become priced goods. For example, commonly consumed foodstuffs, which in many simpler societies are normally regarded as commodities not subject to trade, may be traded in a period of shortage or famine; but such

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