What Makes a Market?

Economists talk about markets all the time, but what exactly is a market, and what makes them useful?

John McMillan begins his book Reinventing the Bazaar by stating

"The dictionary defines a market as "a meeting together of people for the purpose of trade by private purchase and sale,"and "a public place where a market is held." This does not go deep enough though."

 If this is true, what does McMillan find to be sufficient to describe a market?

There are many aspects, though McMillan particularly emphasizes market design and the role of people in transactions.

On page 9 of his book, he writes:

"Market design consists of the mechanisms that organize buying and selling; channels for the flow of information; state-set laws and regulations that define property rights and sustain contracting and the market's culture, its self-regulating norms, codes and conventions governing behavior."

This is basically a rewording of the fundamental characteristics of a perfectly competitive market - reworded for the casual reader. From this, one can see that McMillan finds the perfectly competitive structure to be the most suitable to fit the description of a general "market," and I would agree. Modern markets need exactly the above, and with such a strongly interconnected global market, I feel that self-regulating norms will become more and more useful as intergovernmental action will be a lagging factor.

Of course, it doesn't stop there - McMillan also notes the importance of human interaction in the market structure.

Richard Dawkins described biological evolution as the actions of a "blind watchmaker," an intentionally ridiculous analogy to demonstrate that evolution happens not by the intention of an intelligent being, but by natural forces. McMillan brings forth this concept to illustrate that economic systems also evolve - but not as biological systems do. People - the agents of the market - are intelligent: they have the ability to walk away from deals they don't like and change aspects of the market structure over time. McMillan uses folk football as an example: as people played football, rules were established and upheld according to safety needs and player preferences, bringing forth sports we know today like soccer, rugby and American football.

McMillan also notes the inequality that arises from markets, saying

"Markets provoke clashing opinions. Some people revile them as the source of exploitation and poverty. Others extol them as the font of liberty and prosperity."

This, of course, stems from the fact that markets lead to to both winners and losers. I personally side with the latter opinion - entrepreneurs have the ability to take their ideas and prosper from their innovation and intelligence, and in a perfectly competitive market structure like the one above, consumers are able to purchase these goods at their lowest possible price as firms produce at the lowest possible cost.

And so while markets can be described very simply, they are also very complex, with a human element that cannot be predicted. While people's opinions differ on markets, they are still seen as the most economically efficient model for exchanging goods and services.