The Regulatory Policy Institute Research Group

The Nature of Markets: A Primer

Markets have the following characteristics or elements:

A. Like all social institutions they are shared sets of rules governing or guiding aspects of human conduct.

B. The relevant conduct is the exchange of goods and services.

C. Unlike many social institutions, markets serve a relatively tightly defined function or purpose: to facilitate (or to reduce the costs of) exchange transactions between buyers and sellers. Markets are not necessary for the existence exchange transactions, which can occur, for example, via ad hoc barter between economic agents.

Historically, buyers and sellers may have ‘gone to market’ to meet many sellers and many buyers conveniently gathered together in one place and in one time window. Today, ‘going to market’ may simply entail going online. Markets have developed because in many circumstances the shared rules have the effect of reducing the costs of transactional behaviour . In this they are like a second, fundamental institution of commercial society (i.e. a society characterised by an extensive division of labour), ‘money’.

The three characteristics/elements raise questions and issues concerning: market governance, market transactions, and market purposes.

The first element engages social or collective action; the second is individualistic, at least at the level of the transacting agents (the buyers and sellers). Markets are therefore ‘dualistic’ in nature, involving a collective acceptance of shared constraints or set of expectations which have the purpose of expanding an individual’s economic freedom.

The rules tend to be a varying mix of the formal (laws and regulations) and informal (conventions, social norms, shared understandings and expectations, etc. — which together can be summarised as the market ‘culture’).

A particular market is defined by (1) its rules and (2) the transactional activities that those rules govern (such as goods and services of various types, labour, capital, land, etc.), usually including the geographical scope of those transactions.

Rules necessarily exhibit a significant degree of stability over time (otherwise they are not ‘rules’ and their economic/social co-ordinating effects are lost). They are not, however, immutable: they change and adapt in response to changing circumstances.

Informal rules tend to change over time via diffuse, evolutionary processes, as do informal ‘enforcement’ methods. Formal rules, on other hand, tend to be enforced and changed by governance processes that are themselves specified or recognised within the market rule-book itself.
‘Participation in a market’ can be at one or both of two levels. The lower level is engagement in the transactional processes that are governed by the rules, taking those rules, their enforcement and their adaption over time as givens (transactional participation). The higher level is participation in the formal (legislative/regulatory) market governance processes that concern themselves with rule-making and enforcement (governance participation).

This binary division is, however, a simplification: groups of individuals may adopt their own conventions or develop their own sub-cultures when trading with one another and those conventions may evolve to become an accepted market norm.

The points can be illustrated by current Brexit issues. Two distinct markets are involved, formally defined by the Lisbon Treaty and the EEA Agreement respectively. These are two different rule-books, of very different lengths, with different objectives, and covering different product/service and geographic domains. (In retrospect, the ‘single market’ terminology used in the course of Brexit debate has been highly misleading: the existence of two, albeit overlapping, markets sits uneasily with the ‘single market’ soundbite.)

The UK government position is complex. It unambiguously wants to participate in the transactional processes of both markets (the buying and selling); wishes no longer to participate in the governance structure/processes of the EU Internal Market (governed by the EU Treaties); and, from evidence to date, doesn’t appear to want to think about the EEA issues at all. It does, however, wish to change the rule-book of the EU Internal Market, via a process of barter (by seeking ‘bespoke’ arrangements), but it has been unclear as to exactly what it wants changed and in what ways. In effect, it wants to be a participating non-participant in market governance.

The EU position is much more straightforward. It is that, to have influence on major aspects of market rule-making and enforcement (whether for the Internal Market or the EEA), it is necessary to participate in a market’s own governance processes (in which rule-changes do occur over time, but according to well-defined and stable processes). Bartering such major rule-changes with an outside party in a one-off ‘deal’ would serve to undermine the integrity/stability of the market rules themselves, particularly since they work together as a whole ‘system’ or ‘ecology’ (and, in technical terminology, markets are complex, adaptive systems). In respect of market governance, therefore, the EU sees market governance in terms of in/out choices for the UK, whether in relation to the EEA or to the EU Internal Market.

The UK Government appears to have difficulty understanding Monsieur Barnier’s logic, but logical he is. It is, in fact, a pro-market logic (see above, particularly in relation to a shared set of reasonably stable, shared rules), whereas, possibly for the first time in around a millennium, UK commercial policy has found its way to a position that is, in a very fundamental sense, anti-market.

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