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

Summary:
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

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Berkeley png 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:

  1. produces at a scale that exhausts all possible win-win exchanges—and is “efficient” in that sense.

  2. 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.

  3. 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:

  1. 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.

  2. be out-of-equilibrium

  3. possess actors have market power

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

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

  6. suffer from information lack or asymmetry

  7. 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…

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

  9. suffer from miscalculations and behavioral biases

  10. suffer from failures of aggregate demand...

#berkeley #economics #highlighted #marketfailure #marketsuccess #economicinstitutions
Bradford DeLong
J. Bradford DeLong is Professor of Economics at the University of California at Berkeley and a research associate at the National Bureau of Economic Research. He was Deputy Assistant US Treasury Secretary during the Clinton Administration, where he was heavily involved in budget and trade negotiations. His role in designing the bailout of Mexico during the 1994 peso crisis placed him at the forefront of Latin America’s transformation into a region of open economies, and cemented his stature as a leading voice in economic-policy debates.

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