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Three conceptualisations of the market

from Terry Hathaway – http://www.paecon.net/PAEReview/issue97/Hathaway97.pdf

Watson (2018) shows that within neoclassical economics the shifting definition of the market has led to three conceptualisations of the market that are rolled into one another; the descriptive concept, the analytical concept, and the formalist concept. The descriptive concept can be seen in Smith where the idea is of “the market literally as a marketplace, with all the hustle and bustle of people going about their business” (ibid: 21). The analytical concept is the most common economics textbook account and is used to describe market-clearing dynamics. It stems from neoclassical thinking about partial equilibrium in a single product market. Finally, the formalist concept is the concept deriving from general equilibrium neoclassical models. However, as Watson notes, “nobody can relive their everyday economic experiences and imagine themselves in the context captured by the formalist market concept in the same way that they can in the context captured by the descriptive market concept. General equilibrium models have a curious dual characteristic of being irreducibly products of the mind but simultaneously impossible to call to mind in any familiarly recognisable form” (ibid: 28). In essence, as White (as quoted in Swedberg, 2009: 121) explains, the central problem with neoclassical definitions of the market is that “there does not exist a neoclassical theory of the market – [only] a pure theory of exchange”.

Seeking to move beyond the standard economic definition, non-neoclassical authors have reached for alternative abstract principles by which “market” can be defined. Weber (1978: 635) offers a broad definition that emphasises the existence of alternatives, writing that “a market may be said to exist wherever there is competition, even if only unilateral, for opportunities of exchange with a plurality of potential parties”. Block (1990: 50-51) instead uses a more restrictive definition based on the separation of actors, arguing that “the term market should be reserved for situations in which relatively independent actors come together to make economic transactions of limited duration.”

What is missing within all these definitions is the thing that Cournot stripped out – the role of place in a marketplace. Place is essential to markets as it is where buyers come looking for, and expecting to find, goods and services; what marketplaces do is centralise exchange. Centralisation, in turn, is what facilitates competition between sellers. One element of this facilitation is that centralisation keeps information costs low for sellers, thereby enabling their competition over custom – within a marketplace rivals are easily identifiable and their pricing and business strategies are clear. The place need not be physical, and increasingly isn’t. eBay, for example, is an electronic market that works to centralise economic exchange by being a place for individual sellers to promote and sell their goods.

Furthermore, unlike in neoclassical understandings the market is not a singular mechanism or institutional set-up – as a place it can be formally and informally instituted in many different ways. Pricing, for example, can occur through haggling, posted prices, auctions, etc. As such, being able to set the rules of a market and to extract tribute for access to a market provides a source of power within the economy – it’s in this light that we should consider many of the new digital markets like Amazon, Deliveroo or UberEats.

A market, then, should be defined as a centralised place of exchange with multiple sellers. Applying this definition, however, renders markets a much more marginal part of contemporary capitalism. While exchange is central to capitalism, the vast majority of exchange does not take place in a market. For example, the primary organisation responsible for food distribution – the supermarket – does not count as a market, as it’s a centralised place of exchange with only one seller; its offerings are akin to a menu rather than a market. Similarly, the “labour market” is not a market at all, with most labour instead being provided through contractual relations (i.e. ongoing relationships) with firms. When individuals are “on the market” for labour – when they are actively looking for a job – and seeking a job through direct applications (Granovetter, 2018: 11) they will engage in a series of discrete one-shot competitions against different self-selecting and relatively tiny pools of applicants who consider themselves capable of doing the job and who find the contractual terms being offered sufficient; there is no centralised place of exchange with labour.

  1. Ken Zimmerman
    October 24, 2021 at 10:07 am

    French economist Robert Guesnerie writes about markets (my translation).

    L’économie de marché De Robert Guesnerie, Dominos Flammarion, 1996.

    The market economy is first a historical category constructed from the observation of multiple markets and the diversity of their arrangements in time. Appropriate legal forms have enabled the emergence of organized trade and modern companies.

    But the market is also an intellectual class built gradually by economists. The analytical approach of economists captures an isolated market operating before turning to the study of the generalized market and its interdependencies.

    Today, the idea of market associates a place, the place of the market, and terms of trade, physical confrontation of buyers and sellers. And yet, the concept of property market makes no reference to the location of the exchange but only the exchange object. Indeed, the definition of a property market is more problematic than those markets tied to a geographic location. There is not a housing market but many micro housing markets. What is in question here it is the homogeneity of the product.

    Pushing further reflection, is the labor market a true market? Is the work a commodity? Financial markets create derivative products, the homogeneity of the product is once again in question.  These questions illustrate the fact that to talk of markets today is problematic.

    What do market economies have in common? First of all, each market is in relation to the economic agents who are interested having their own purposes who proceed to achieve an “economic calculation”. Then, the interests are different on each side of the market, sellers and buyers have opposing goals. And finally, the transaction solves the conflict by showing a price. If this price is not necessarily unique, it follows a significant trend that is the same regardless of the location.

    Similarly, to differentiate the economy of the former Soviet Union market must be added that the market is decentralized. Thus, decentralization is accompanied by a system of accountability, itself backed to the market. If the constraints are not the same according to the companies, the budget constraint exists all the time. In addition, prices are not the result of administrative decisions but are the result of a process of adjustment.

    However, just as there was a market share in the Soviet planning, the market described above is a borderline case. Out of this borderline case, calculating economic results is not necessarily decentralized, the budget constraint of the companies is relaxed and prices are not perfectly flexible.

    Markets do not exist ex nihilo; not only are they themselves institutions, but their existence depends itself on a number of other institutions.

    The first of these institutions is the legal institution. Without rule of law, we can’t imagine that trade can develop. For the school of “Public Choice”, the law of property remains the cornerstone of the market economy.

    The second crucial institution for the market is the currency. If the barter is a modality of the market, the increase in trade is historically linked to the use of the currency. Indeed, the currency significantly facilitates the exchange. Thus, it is preferable to reserve the expression of “market economy” in monetary economies.

    At this point, it should be noted that the law and the Mint, two key market institutions, are consolidated with the development of the sovereign powers of the State. The role of central banks appears to be more and more important, yesterday like today. Central Organization, State and market appear here complementary rather than antagonistic.

    Also, there were differences that affect the nature of the products, the size of the production units, distribution on the territory, etc. Then come the legal differences, one holds the right to property and is the property of the companies (the creation of anonymous corporations is the innovation that attaches to the concept of capitalism).

    But equating capitalism and market is an overly dogmatic position which does not do justice to the richness of the historical experiences of market.  

    All modern market economies are mixed economies, that is to say where the nesting of the State and the market in economic activity is considerable. The role of the State strengthened, in particular in Europe, after the crisis of ‘29 and then after the 2nd GM [la Seconde Guerre mondiale; World War II]. According to some authors, this development would significantly disrupt the conditions of the economic regulation of capitalist economies, by passing a “competitive” said regime to a “Fordist” plan.

    The time of reflection and theory, the stylized market. The balance of an isolated market. There is a price equilibrium and the price on the market, transactions carried out by officials correspond to their wishes. In addition, market depletes the exchange earnings and finally, the price coincides with the cost of the last unit produced.

    The market of Walras. Around 1870, Walras was the first to have developed a mathematical model to provide a more rigorous framework for discussion. Walras’ model is the universe of the generalized market, sometimes referred to as a “no friction” or “perfect” market.

    The balance of the generalized market. A question for economists since the emergence of an autonomous economic discipline in the 18th century: does the order of essentially decentralized and publicized price regulation emerge from the initial chaos of a complex system? For some economists, the market has no capacity for self-regulation. Sismondi does not adhere to the proposal of Say that “supply creates its own demand”. Marx believed that instability in the market in the short term will inevitably manifest in the long term.

    Market, planning, welfare. Prices as signals. In a situation of social optimum can attach to each property a number that represents both the cost of production and the value that has the use of a unit of that good in society. This number is an essential ingredient in market coordination. Even if these signals do not necessarily guarantee perfect coordination, however, they are required, without them it is a series of “invisible waste.”

    The market failures. Are the prices good approximations of ideals but “shadow” of the imaginary Walras Planner cost? A first distinction between the case of the property for private use and the case of the property collective. A property class can be defined by the fact that consumption by the individual prevents anyone else to do the same. At the same time, the collective good is “evil collective” called economic negative externality. The cons of collective property faces the problem of the stowaway who without participating in cost benefits [is advantaged]. On pollution, which is a negative externality, the implementation of the polluter-pays principle tax should restore the true price. Indeed, if the production of a good causes pollution, taxation of pollution should inflate the price of this property so that the price deters consumption downstream and therefore reduces its production and, in time, the pollution it creates. Public goods are a prime example of market failure.

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