The Market System

1
The Market System

• Profit and Competition

2
Efficient Markets

• The Evolution of the Market System

3
What do we want from an economy?

• Production getting the most from scarce
  resources
• Exchange minimizing transaction costs

4
Social Cooperation How does this happen?

• Kenyan coffee
• Scottish sweater
• Banana from El Salvador
• Dishwasher assembled in Mexico
• Thai restaurant
• French movie
• Stereo from Hong Kong

5
Because of scarcity, someone will always be told
NO!

• The trick is to get as much as possible from
  scarce resources.
• What are the most efficient systems of production
  and exchange?

6
Different methods of production and exchange

• Tradition -There is no need for success you do
  what your parents did.
• Command You do as youre told.
• The market - You do what is in your best
  interests and by so doing, provide the material
  wants of society incentives are the key.

7
Market An interaction of buyers and sellers
8
Necessary Components of a Market
(CIIP)

• Competition
• Information
• Incentives
• Property Rights

9
Feudalism didnt include CIIP
10
Andreas Ryff - Germany, 1550

• Customs toll every ten miles
• Each community has its own
• money
• rules and regulations
• law
• measures
• Transaction costs are very high

11
Robert Keayne - Boston, 1639

• Crime - sixpence profit on a shilling, fined 200
  pounds
• False principles of trade
• That a man might sell as dear as he can, and buy
  as cheap as he can. (Buy low sell high.)
• If a man lose, by casualty of sea, etc., in some
  of his commodities, he may raise the price of the
  rest.
• That he may sell as he bought, though he paid
  too dear.

12
Colbert - France, 1666

• Too much initiative - the reglement
• Dijon and Selangey - 1,408 threads
• Auxerre, Avalon, 2 others - 1, 376 threads
• Chatillon - 1,216 threads
• If fabrics dont conform, they will be pilloried
  if found three times to be objectionable, the
  merchant is to be pilloried.

13
FEUDALISM

• No property rights, no productive resources, no
  innovation

14
LAND

• Land was not real estate to be bought be bought
  or sold
• Land formed the core of social life
• Lord could not sell his land

15
HUMAN CAPITAL

• No labor market
• Peasant tied to Lords estate
• Performed duties as a serf

16
FINANCIAL CAPITAL

• No risk, no change, safety first
• Longest and most time consuming technique of
  production preferred
• Producing product better than colleagues
  treasonable
• Mass production and innovation forbidden

17
FEUDALISM

• Production and exchange are inefficient
• Market components (CIIP) dont exist
• Transaction costs are high

18
THE SOVIET UNION

• Production and exchange were inefficient
• Market components (CIIP) dont exist
• Transaction costs are high

19
Will Russia develop into a market system?

• Competition most industries run by monopolists
• Information difficult to obtain
• Incentives Russians not used to profit motive
• Property rights yes, for the few

20
What caused emergence of market system?

• National political powers
• royal patronage for industries
• national laws, common measures, standard
  currencies
• encouragement of foreign adventure
• Decline of religious spirit, rise of humanism
• Max Weber Capitalism and the Protestant ethic

21
What caused emergence of market system?

• Material changes
• towns
• roads
• Familiarization with money and markets
• Double entry bookkeeping
• Scientific curiosity and idea of invention
• printing press, paper mill, mechanical clock,
  map, compass and other navigational tools,
  longitude

22
The Plague 14th century

• One third of European population dies
• Workers bargaining power increases
• A labor market develops

23
What caused the market system to replace
feudalism?

• Emergence of market components (CIIP)
• Reduction of transaction costs

24
1776
25
ADAM SMITH(1723 - 1790)
Profit is the motivator, competition is the
regulator.
26
Profit is the Motivator

• It is not from the benevolence of the
  butcher, the brewer, or the baker that we expect
  our dinner, but from their regard to their
  self-interest. We address ourselves, not to their
  humanity, but to their self-love, and never talk
  to them of our necessities, but of their
  advantages.

27
Competition is the Regulator

• If he charges too much for his wares, or
• if he refuses to pay as much as everybody
• else for his workers, he will find himself
• without buyers in the one case, and without
  workers in the other.

28
The Invisible Hand (self-interest and
competition)

• rewards efficient producers and buyers
• results in
• goods society wants
• quantity society wants
• prices society is willing and able to pay
• normal profits

29
The Entrepreneur the driver of the market
system.

• combines resources to produce a product
• takes the risks associated with innovation
• the residual claimant

30
Why the market?

• Scarcity exists
• Societies must find a way to allocate scarce
  goods and services
• In any allocative mechanism, some people will be
  told No.
• The market system is efficient, but
• Neither markets nor other economic systems are
  fair.

31
Main Points

• A market is an interaction of buyers and sellers.
  
• Markets work with competition, information,
  incentives, and property rights (CIIP).
• Feudalism had high transaction costs and none of
  the components of a market system.

32
Main Points

• The market system developed as legal, social,
  political, and commercial institutions evolved.
• Adam Smiths An Enquiry into the Nature and
  Causes of the Wealth of Nations, published in
  1776, described the market system.
• According to Smith, the Invisible Hand is the
  combination of profit and competition that
  results in the efficient production and exchange
  of goods and services desired by society.

33
Main Points

• In a market system, profit is the motivator and
  competition is the regulator.
• The entrepreneur is the driver of the market
  system.
• The market system is efficient neither it, not
  other economic systems are fair.