In our July 2026 blog in the Wealth of Nations (WoN) series, we set out Adam Smith’s exposition (in Chapter 4 of Book 1) of the development of money as an institutional mechanism in the economic system which serves the function of reducing transactions costs, the costs associated with the acts of buying and selling, and spoke of the restoration of this neglected perspective in post-Smith economics by Ronald Coase.
This follow up blog would be a rinse and repeat exercise in relation to a second, fundamentally important mechanism of a Commercial Society, namely markets, but for the fact that a historical, evolutionary account of the development of markets is nowhere to be found in the WoN. While there are around 650 usages of the word market, there is no ‘theory of markets’ as such.
Smith’s general tendency is to use the word to refer to places where buyers can be found. Thus, while there are lots of references to ‘bringing goods to market’, the places to which they could be brought varied enormously in geographic extent: the Windsor market; the Winchester market; the home market (all of Britain); the European market; the English colonies market; the East Indies market; and so on.
This failure to go into greater detail about the nature of markets and their historical development may appear to be a matter of small account: the methodology of Chapter 4 on money is, after all, there to see, available to all to adopt and to adapt. However, given the influence of the WoN on succeeding generations, we would argue that it had very major consequences for the later development of economic thought and its influence on political discourse.
Today, suppose an economist, an historian and a sociologist went into a public house and the bartender said to the economist: “I see and read about politicians arguing about markets. Some say they are pro-market and some say they are anti-market. I’m not sure what they are for or against. Can you please tell me what a market is?” One answer might be ‘a place where things are bought and sold’, but then the bartender’s desire for an understanding of the controversies would likely be unsated. “Why then should people be pro- or anti- places where things are bought and sold?”
If, on the other hand, the economist concerned were a specialist in competition economics, the answer to question might be: “a set of goods of services that are highly substitutable in demand.” We can conjecture in this case that, as well as bartender’s dissatisfaction with the answer, the historian and the sociologist might look at each other in puzzlement and wonder what their companion was drinking.
It’s not just the WoN that lacks a theory of markets: it is a feature of most modern economics textbooks, where supply and demand do their balancing act in some undefined, ethereal space.
Something akin to the methodology of Chapter 4 of the WoN, concerning money, could easily, have been approximated, and it has been, but not by economists who have influenced the mainstream areas of the discipline. An example of the path less followed is ‘The Rise of Market Society in England, 1066-1800), by a German Professor of British History, Christiane Eisenberg. And that story could have potentially been cast further back into the pre-Conquest period to encompass, for example, King Edgar’s decree that weights and measures should be standardised for trading throughout the kingdom (see Yarrow (2015) on the political economy of markets, published by the RPI).
It is, though, a combination of economic theorising and historical analysis that best helps achieve a policy-relevant understanding of the nature of markets and it is here that Ronald Coase enters the scene again, by asking and answering a simple question. The question is: what is the primary function or purpose of a market? The answer is that the primary function is to lower the transactions costs of exchanging goods, services and assets, exactly the same function as money.
Both are economic institutions, but money is a universal (whole-economy) institution, whereas markets are much more variegated in their forms: only the function or purpose is universal. Different market forms are defined by their ‘rule books’, by which is meant a set of ‘rules’ that encompasses legislation, relevant regulations, conventions, and even just habits that give rise to the repeating set of behaviours that is sufficient for classification as an institution, e.g. a regular meeting up of people in a medieval village in the vicinity of a church after a Sunday service to do business with one another.
Smith could have accompanied his Chapter 4, with the an account of the development of markets through the centuries, e.g the standardisation decree of King Edgar, the evolution of village and town markets, the emergence of itinerant merchants, the accompanying development of courts of piepowder making use of common law for fast dispute resolution, (Itinerant merchants couldn’t sit waiting around for judgments and cases were settled within 36 hours), the development of staple courts in larger trading hubs, and so on.
To this Smith would no doubt have added the economic insight that the institutional innovations that occurred were largely driven by competitive pressures to discover ways of reducing transactions costs, the costs of buying and selling. Later followers could have brought the history up to date, pointing to the long rule books for exchanges that dealt in stocks and shares and in commodities, right through to the online marketplaces of today.
It didn’t happen and that’s a cause for regret, but we can still imagine and learn.
And part of that learning is to expose an irony. The textbooks for students, with their demand and supply curves and the rest, typically rely on an implicit assumption (not often emphasised) that there are zero transactions costs, when, if that were so, there would be no costs for markets to reduce. They wouldn’t exist.