Markets and Other Allocation Systems in History- The Challenge of Karl Polanyi Pt.2

Price-Mediated Markets in Neoclassical Economic Theory

• Price-mediated markets are simply "there"
• Products are homogenous
• Personal characteristics of parties are irrelevant
• There are no barriers to entry and exit
• Complete and perfect information is available
• A market is a completely abstract meeting of supply and demand
• Trade occurs quickly without frictions or transaction costs in a social vacuum between faceless buyers and sellers
• Standardized products are traded at equilibrium prices

Perspectives on Markets

• Ben-Porath (1980) describes markets as places where faceless entities use objective functions to exchange standardized goods at equilibrium prices
• Coase (1988) suggests that detailed analyses of individual exchanges are not helpful for understanding real-world market functions
• Williamson (1985) states market-mediated contracts break down, transactions are organized internally
• The "in the beginning there were markets" presumption informs this perspective
• North (1981) points out that modern neoclassical literature views firms as market substitutes
• Economic historians find this perspective useful but limited, as it ignores that hierarchical organization and contractual arrangements predate the price-making market

Reciprocity & Distribution: Karl Polanyi

• Karl Polanyi (1886-1964) was an Austro-Hungarian economic historian, anthropologist, sociologist, political economist, and philosopher
• Resource allocation in societies historically follows cultural, social, and psychological principles more than economizing behaviors
• Important forms of exchange according to Polanyi have included reciprocity and distribution
• Reciprocity involves exchanging presents with the expectation of a return gift
• Distribution includes political exchange as payment for "followers" or political support
• Trade's extent and form require understanding the underlying social structure

Reciprocity & Distribution: Mauss (1925)

• Primitive societies exchange through gifts and counter gifts
• There is no explicit agreement for immediate or future rewards and there is a gift economy
• Polanyi in Dalton (1971) suggests that the idea of profit is barred and giving freely is acclaimed as a virtue
• Exchange transactions are governed mainly by social norms and customs
• Geertz (1978) notes how bazaars in Northern Africa are similar

North on Polanyi

• North (1977) suggests that Karl Polanyi cannot be dismissed

Non-Market Forms of Economic Organization: Douglass C. North

• Douglass C. North (1920-2015) was an American economist known for his work in economic history
• North received the 1993 Nobel Memorial Prize in Economic Sciences with Robert W. Fogel
• Breakthrough contributions were made to "research in economic history by applying economic theory and quantitative methods in order to explain economic and institutional change"
• North (1977) stated that all societies have elements of reciprocity, redistribution, and markets
• North (1977) questioned how substitutes for price-making markets allocate resources and how governments are explained
• Substitutes for markets have dominated exchange in past and present societies

North's Perspective on Markets and Resource Allocation

• Price-making markets have never completely dominated economic decision-making throughout history
• Resources are allocated by market prices inside households, voluntary organizations, and governments
• Throughout history economic activities have shifted from households to markets to government
• Non-market allocation of resources was a significant aspect of economic organization
• Transactions costs analysis is a promising analytical framework to explore non-market forms of economic organization

North's Conditions for Price-Making Markets (1977)

• Well-defined and enforced property rights are essential for price-making markets
• Costs of defining/enforcing property rights lead to non-price allocation of many goods and services
• Forces substituting firms for markets explain the variety of economic organization forms

Salisbury and Coase on Market Organization

• Salisbury (1968) notes the historical sequence from (1) ceremonial gift exchange over (2) simple barter trade to (3) personalized trading relationships and (4) anonymous markets
• Coase (1988) characterized market organization as an entrepreneurial activity with the King being responsible for physical facilities, security, and governance
• Coase questions whether geographically dispersed trading partners leads to market fragmentation
• Legal systems are needed and may depend on the state instead of market participants

North's Theory of Institutional Change (1981)

• Exchange in small societies can occur without formal institutions
• Institutions are needed to protect against opportunism over longer distances
• Urbanization and globalization require institutional developments to facilitate trade by using signalling mechanisms

Fafchamps on Market Exclusion

• Costly screening devices leads to exclusion from markets

Examples of Market Organization and Signaling

• Important signaling mechanisms involve shared beliefs, long-term relations, brands and the "Made in Germany" label
• Stocks, commodities, primary products, plea Markets, wholesale markets, drug markets, real estate and online markets are included
• The mafia in Italy, Russia, and Asia are examples
• Reciprocity in labor market, regional business clusters/networks, differences between B2B and B2C markets are included
• Social capital is included