The spiciness causing chemical in peppers is called capsaicin. It is produced by the plant probably in order to prevent animals from eating the peppers another time. Milk is the best way to battle the spice because casein (main protein in milk) interacts with the capsaicin. There are actually a variety of uses for capsaicin ranging from a simple food additive to topological treatments in medicine. I have included a wikipedia site that is pretty comprehensive in its overview of capsaicin. Also, I included a site that discusses other flavors

The heat of chili peppers is caused by a chemical called capsaicin.

Chili peppers are members of the nightshade family, and like all nightshades (including tomatoes), they are poisonous. The poisons in the fruits of nightshades are moved into the seeds as the fruit ripens, in order to make the fruit an appetizing food item for an animal. The bitterness of under ripe tomatoes is actually the taste of the poisons inside them. In the case of chili peppers, capsaicin is the poison, and the effect it has on us humans is to create the familiar burning sensation when we eat the spices. Interestingly, we actually like it in small amounts - although people who constantly eat extremely spicy food for their entire lives are known to have higher rates of cancer in the tongue and lips. The occasional chili pepper won't kill you, though, and (ripe) tomatoes are among the healthiest foods there are.