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.
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...
#berkeley #economics #highlighted #marketfailure #marketsuccess #economicinstitutions