Markets and Fair Prices

In a “pure” market economy, cooperation among individuals is achieved entirely through voluntary exchange. In its simplest form, such an economy consists of a number of individual households—a collection of Robinson Crusoes, as it were. Each household uses the resources it controls to produce goods and services that it exchanges for goods and services produced by other households, on terms mutually acceptable to the two parties to the bargain. It is thereby enabled to satisfy its wants indirectly by producing goods and services for others, rather than directly by producing goods for its own immediate use. The incentive for adopting this indirect route is, of course, the increased product made possible by division of labor and specialization of function. Since the household always has the alternative of producing directly for itself, it need not enter into any exchanges unless it benefits from it. Hence, no exchange will take place unless both parties do benefit from it.1      —Milton Friedman

1 Price Theory (New York: Aldine Publishing Company, 1976),

 

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