The Market: As an Institution, Its Pros, and Its Cons

The Market as an Institution: ���The Market��� as an Institution:

We start from what look like to us deep truths of human psychology

People are acquisitive
People engage in reciprocity���i.e., want to enter into reciprocal gift-exchange relationships

In which they are neither cheaters nor saps
With those they trust���

We devised property as a way of constructing expectations of trust���

We devised money as a substitute for trust���

And so, on the back of these human propensities for acquisition and for trusted gift-exchange, we have constructed a largely-peaceful global 7.4B-strong highly-productive societal division of labor:

Built on assigning things to owners���who thus have both the responsibility for stewardship and the incentive to be good stewards���
And on very large-scale webs of win-win exchange���
Mediated and regulated by market prices...

This is a very valuable and important societal institution���

Economics is the study of how it���what we usually call ���the market������works���
In analyzing the market as an institution, we need to cover:

The success of the market
The failures of the market

Plus there is the peculiar domain of ���macroeconomics���

The political-economic-sociological-historical context of the market
The impact of a market economy on the other institutions and practices of society

 

Three Aspects of Market Success: The market failure-free competitive market in equilibrium, from the perspective of a utilitarian seeking to achieve the greatest-good-of-the-greatest-number, accomplishes the following goals. It:

produces at a scale that exhausts all possible win-win exchanges���and is ���efficient��� in that sense.

allocates the roles of producers and sellers to those who can make and sell them in a way least costly to society���s overall resources���to those with the lowest opportunity cost.

rations the commodities produced to those with the greatest willingness-to-pay���to those who, by the money standard, "need" (or rather want) them "the most" (by being willing to give up the most in terms of other societally-valued things in order to use or possess them).

 

Ten Modes of Market Failure: Markets can go wrong���badly wrong. They can:

not fail, but be failed by governments, that do not properly structure and support them���or that break them via quotas, price floors/ceilings, etc.

be out-of-equilibrium

possess actors have market power

be afflicted���if that is the word���by non-rivalry (increasing returns to scale; natural monopolies)

suffer externalities (in production and in consumption, positive and negative; closely related to non-excludibility)

suffer from information lack or asymmetry

suffer from maldistributions���for the market will only see you if you have a willingness to pay, which is predicated on an ability to pay���

suffer from non-excludability (public goods, etc.)

suffer from miscalculations and behavioral biases

suffer from failures of aggregate demand...




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