Markets as institutions Historically, markets emerged in particular locations as places where goods

Markets as institutions Historically, markets emerged in particular locations as places where goods

and services were exchanged. Over centuries, markets have developed to become more diffuse in their physical forms with greater volumes of exchange operating at great distances and, more recently, via technology such as the internet directly linking buyers and sellers in distant locations. It is therefore not location that defines a market. So what defines it then? In contemporary usage, the term refers to supply and demand, buyers and sellers, and competition and exchange. But, surprisingly, the definition of ‘market’ itself has not been much discussed by economists. Indeed, it is notable how little attention mainstream economics has devoted to either defining markets or studying how they work. As North (1977, p710) observes, ‘It is a peculiar fact and services were exchanged. Over centuries, markets have developed to become more diffuse in their physical forms with greater volumes of exchange operating at great distances and, more recently, via technology such as the internet directly linking buyers and sellers in distant locations. It is therefore not location that defines a market. So what defines it then? In contemporary usage, the term refers to supply and demand, buyers and sellers, and competition and exchange. But, surprisingly, the definition of ‘market’ itself has not been much discussed by economists. Indeed, it is notable how little attention mainstream economics has devoted to either defining markets or studying how they work. As North (1977, p710) observes, ‘It is a peculiar fact

As we have indicated above, the 1990s saw a transition in the dominant development discourse from ‘getting prices right’ to ‘getting institutions right’. Under the Washington Consensus (see endnote 13, Chapter 1), it was expected that significant liberalization and de-regulation of the economy would enable markets to operate. Prices would become effective incentives and lead to efficient resource allocation and eventually improved productivity and economic growth. The failure of governments to allocate resources effectively through either planning systems or state intervention in developing countries led to the unexamined view that markets would be effective where governments and planning had failed. There was little real thought or policy on how exactly markets would be developed, simply because mainstream economics did not have the analytical tools with which to examine them. Indeed, markets were expected to emerge spontaneously or, as Williamson (1983, p20) puts it, ‘in the beginning there were markets’. In some contexts, especially the transition economies of the socialist bloc, this belief caused widespread problems since the mechanisms through which markets could work effectively did not ‘spontaneously’ emerge, and the vacuum left by planning failures allowed opportunism to fill the gap. This inadvertently led to the emergence of markets, but markets that were turbulent and chaotic and not those anticipated by the proponents of market reform.

This episode of failed policy led to the re-examination of a few underlying assumptions about markets. Specifically, it led to the recognition that markets require a wide variety of institutions in order to work effectively. Hence, the transition to ‘getting institutions right’ is significantly related to the view that markets can work to allocate resources effectively if they have the ‘right’ institutional framework.