Market system
Encyclopedia
A market system is any systematic process enabling many market players to bid and ask
: helping bidders and sellers interact and make deals. It is not just the price mechanism but the entire system of regulation
, qualification, credential
s, reputation
s and clearing
that surrounds that mechanism and makes it operate in a social context.
Because a market system relies on the assumption that players are constantly involved and unequally enabled, a market system is distinguished specifically from a voting system
where candidates seek the support of voters on a less regular basis. However, the interactions between market and voting systems are an important aspect of political economy
, and some argue they are hard to differentiate, e.g. systems like cumulative voting
and runoff voting
involve a degree of market-like bargaining and tradeoff, rather than simple statements of choice.
Market systems are more abstract than their application to any one use, and typically a 'system' describes a protocol of offering or requesting things for sale. Well-known market systems that are used in many applications include:
The term 'laissez-faire' ("let alone") is sometimes used to describe some specific compromise between regulation and black market, resulting in the political struggle to define or exploit "free market
s". This is not an easy matter to separate from other debates about the nature of capitalism
. There is no such thing as a "free" market other than in the sense of a black market, and most free-market advocates favor at least some form of regulated market, e.g. to prevent outright fraud
, theft
, and retain some degree of credibility with the larger public. This political debate is out of the scope of this article, other than to note that the "free" market is usually a "less regulated" market, but not qualitatively different from other regulated markets, in any society with laws, and that what opponents of "free markets" usually seek is some kind of moral purchasing rather than pure rationing.
As this debate suggests, key debates over market systems relate to their accessibility, safety, fairness, and ability to guarantee clearance and closure of all transactions in a reasonable period of time.
or central bank
) is often critical in determining the success of a market. A market system depends inherently on a stable money
system to ensure that units of account and standards of deferred payment are uniform across all players - and to ensure that the balance of contracts due within that market system are accepted as a store of value, i.e. as "collateral
" of the holder of the contract, which justifies "credit
" from a lender of cash.
Banks, themselves, are often described in terms of markets, as "transducers of trust" between lenders (who deposit money) and borrowers (who take it out again). Trust in the bank to manage this process makes more economic activity possible. However, critics say, this trust is also quite easy to abuse, and has many times proven difficult to limit or control (see business cycle
), resulting in 'runs on banks' and other such 'crises of trust' in 'the system'.
However, market systems are usually flexible enough to be refined and have its detailed rules adjusted so as to regain the trust of participants relatively quickly - most market systems tend to degrade gracefully, with a few exceptions, e.g. hyperinflation
, South Sea bubble, tulip boom
, dotcom boom, depression
, that are very damaging, but nonetheless relatively infrequent.
Bid and ask
Price mechanism is an economic term that refers to the buyers and sellers who negotiate prices of goods or services depending on demand and supply. A price mechanism or market-based mechanism refers to a wide variety of ways to match up buyers and sellers through price rationing.An example of a...
: helping bidders and sellers interact and make deals. It is not just the price mechanism but the entire system of regulation
Regulation
Regulation is administrative legislation that constitutes or constrains rights and allocates responsibilities. It can be distinguished from primary legislation on the one hand and judge-made law on the other...
, qualification, credential
Credential
A credential is an attestation of qualification, competence, or authority issued to an individual by a third party with a relevant or de facto authority or assumed competence to do so....
s, reputation
Reputation
Reputation of a social entity is an opinion about that entity, typically a result of social evaluation on a set of criteria...
s and clearing
Clearing (finance)
In banking and finance, clearing denotes all activities from the time a commitment is made for a transaction until it is settled. Clearing is necessary because the speed of trades is much faster than the cycle time for completing the underlying transaction....
that surrounds that mechanism and makes it operate in a social context.
Because a market system relies on the assumption that players are constantly involved and unequally enabled, a market system is distinguished specifically from a voting system
Voting system
A voting system or electoral system is a method by which voters make a choice between options, often in an election or on a policy referendum....
where candidates seek the support of voters on a less regular basis. However, the interactions between market and voting systems are an important aspect of political economy
Political economy
Political economy originally was the term for studying production, buying, and selling, and their relations with law, custom, and government, as well as with the distribution of national income and wealth, including through the budget process. Political economy originated in moral philosophy...
, and some argue they are hard to differentiate, e.g. systems like cumulative voting
Cumulative voting
Cumulative voting is a multiple-winner voting system intended to promote more proportional representation than winner-take-all elections.- History :...
and runoff voting
Two-round system
The two-round system is a voting system used to elect a single winner where the voter casts a single vote for their chosen candidate...
involve a degree of market-like bargaining and tradeoff, rather than simple statements of choice.
Protocols
The market itself provides a medium of exchange for the contracts and coupons and cash to seek prices relative to each other, and for those to be publicized. This publication of current prices is a key feature of market systems, and is often relevant far beyond the current groups of buyers and sellers, affecting others' supply and demand decisions, e.g. whether to produce more of a commodity whose price is now falling.Market systems are more abstract than their application to any one use, and typically a 'system' describes a protocol of offering or requesting things for sale. Well-known market systems that are used in many applications include:
- auctionAuctionAn auction is a process of buying and selling goods or services by offering them up for bid, taking bids, and then selling the item to the highest bidder...
s - the most common, including:- Dutch auctionDutch auctionA Dutch auction is a type of auction where the auctioneer begins with a high asking price which is lowered until some participant is willing to accept the auctioneer's price, or a predetermined reserve price is reached. The winning participant pays the last announced price...
s - reverse auctionReverse auctionA reverse auction is a type of auction in which the roles of buyers and sellers are reversed. In an ordinary auction , buyers compete to obtain a good or service, and the price typically increases over time...
s - silent auctions
- Dutch auction
- rationingRationingRationing is the controlled distribution of scarce resources, goods, or services. Rationing controls the size of the ration, one's allotted portion of the resources being distributed on a particular day or at a particular time.- In economics :...
(including the command economy of some states) - regulated marketRegulated marketA regulated market or controlled market, is the provision of goods or services that is regulated by a government appointed body. The regulation may cover the terms and conditions of supplying the goods and services and in particular the price allowed to be charged and/or to whom they are distributed...
(including most real-life examples as above) - black market (the term 'black' indicating lack of regulation, or any trade, often illegal, operating in violation of official regulations)
The term 'laissez-faire' ("let alone") is sometimes used to describe some specific compromise between regulation and black market, resulting in the political struggle to define or exploit "free market
Free market
A free market is a competitive market where prices are determined by supply and demand. However, the term is also commonly used for markets in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts...
s". This is not an easy matter to separate from other debates about the nature of capitalism
Capitalism
Capitalism is an economic system that became dominant in the Western world following the demise of feudalism. There is no consensus on the precise definition nor on how the term should be used as a historical category...
. There is no such thing as a "free" market other than in the sense of a black market, and most free-market advocates favor at least some form of regulated market, e.g. to prevent outright fraud
Fraud
In criminal law, a fraud is an intentional deception made for personal gain or to damage another individual; the related adjective is fraudulent. The specific legal definition varies by legal jurisdiction. Fraud is a crime, and also a civil law violation...
, theft
Theft
In common usage, theft is the illegal taking of another person's property without that person's permission or consent. The word is also used as an informal shorthand term for some crimes against property, such as burglary, embezzlement, larceny, looting, robbery, shoplifting and fraud...
, and retain some degree of credibility with the larger public. This political debate is out of the scope of this article, other than to note that the "free" market is usually a "less regulated" market, but not qualitatively different from other regulated markets, in any society with laws, and that what opponents of "free markets" usually seek is some kind of moral purchasing rather than pure rationing.
As this debate suggests, key debates over market systems relate to their accessibility, safety, fairness, and ability to guarantee clearance and closure of all transactions in a reasonable period of time.
Importance of trust
The degree of trust in a political or economic authority (such as a bankBank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
or central bank
Central bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...
) is often critical in determining the success of a market. A market system depends inherently on a stable money
Money
Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past,...
system to ensure that units of account and standards of deferred payment are uniform across all players - and to ensure that the balance of contracts due within that market system are accepted as a store of value, i.e. as "collateral
Collateral (finance)
In lending agreements, collateral is a borrower's pledge of specific property to a lender, to secure repayment of a loan.The collateral serves as protection for a lender against a borrower's default - that is, any borrower failing to pay the principal and interest under the terms of a loan obligation...
" of the holder of the contract, which justifies "credit
Credit (finance)
Credit is the trust which allows one party to provide resources to another party where that second party does not reimburse the first party immediately , but instead arranges either to repay or return those resources at a later date. The resources provided may be financial Credit is the trust...
" from a lender of cash.
Banks, themselves, are often described in terms of markets, as "transducers of trust" between lenders (who deposit money) and borrowers (who take it out again). Trust in the bank to manage this process makes more economic activity possible. However, critics say, this trust is also quite easy to abuse, and has many times proven difficult to limit or control (see business cycle
Business cycle
The term business cycle refers to economy-wide fluctuations in production or economic activity over several months or years...
), resulting in 'runs on banks' and other such 'crises of trust' in 'the system'.
However, market systems are usually flexible enough to be refined and have its detailed rules adjusted so as to regain the trust of participants relatively quickly - most market systems tend to degrade gracefully, with a few exceptions, e.g. hyperinflation
Hyperinflation
In economics, hyperinflation is inflation that is very high or out of control. While the real values of the specific economic items generally stay the same in terms of relatively stable foreign currencies, in hyperinflationary conditions the general price level within a specific economy increases...
, South Sea bubble, tulip boom
Tulip mania
Tulip mania or tulipomania was a period in the Dutch Golden Age during which contract prices for bulbs of the recently introduced tulip reached extraordinarily high levels and then suddenly collapsed...
, dotcom boom, depression
Recession
In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way...
, that are very damaging, but nonetheless relatively infrequent.
See also
- CapitalismCapitalismCapitalism is an economic system that became dominant in the Western world following the demise of feudalism. There is no consensus on the precise definition nor on how the term should be used as a historical category...
- Financial capitalFinancial capitalFinancial capital can refer to money used by entrepreneurs and businesses to buy what they need to make their products or provide their services or to that sector of the economy based on its operation, i.e. retail, corporate, investment banking, etc....
- Free price systemFree price systemA free price system or free price mechanism is an economic system where prices are set by the interchange of supply and demand, with the resulting prices being understood as signals that are communicated between producers and consumers which serve to guide the production and distribution of...
- Market abolitionismMarket abolitionismMarket abolitionism is a belief that the market, in the economic sense, should be completely eliminated from society. Market abolitionists argue that markets are morally abhorrent, antisocial and ultimately incompatible with human and environmental survival and that if left unchecked the market...
- Market forms
- MoneyMoneyMoney is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past,...
- Moral purchasing
- RiskRiskRisk is the potential that a chosen action or activity will lead to a loss . The notion implies that a choice having an influence on the outcome exists . Potential losses themselves may also be called "risks"...
- Voting systemVoting systemA voting system or electoral system is a method by which voters make a choice between options, often in an election or on a policy referendum....