Market day. The open stalls bubble with activity as vendors show off their products. Small handwritten signs tell you what it will take to make them yours, but you know that’s just a starting point. You can offer less, especially to the quieter booths away from the activity. But have cash on hand to make the trade quickly once you have a mutual agreement on what everyone considers fair.
That’s the common view of what a “free market” is, and it’s something everyone around the world has experience with. It seems perfectly natural, an essential part of being human. It can’t possibly need interference from other people to make it work, can it?
Yet as the world comes closer together, the definitions of nearly everything wind up befuddled in language, definitions of fairness, and sometimes the simple lack of a personal connection.
Economists use the term “Open Market” distinctly from the “Free Market” example above. It generally defines markets which operate at a distance, which is to say away from the human touch. That means that certain systems have to be in place and a lot more has to be agreed on up front.
This doesn’t feel right to many people. Advocates of unfettered markets often talk about the “invisible hand,” first described by Adam Smith in 1776, as the driving force of what feels like a very natural thing. In practical terms, it is spoken of as something like the hand of God, and any other than “laissez-faire” or hands-off policy feels like corruption.
Yet there are well known market failures which have been identified for any market. The most common are the tendency toward monopoly and a lack of information, just to name two. The world often appears to divide into two camps on the question of markets as a result. There are those who see an open market as a natural or even saintly venture and those who see it as a flawed concept full of inefficiency and unfairness.
Who is right?
The answer is that both are correct. An open market, particularly at a distance, is indeed a social creation of tradition, agreement, and even laws. When these are not in place or well understood, known market failures can take over. Once in place, those who take advantage of these problems have a vested interest in maintaining them, particularly monopolists. They can be very hard to change.
That doesn’t mean that open markets are not ideal. It simply means that they require more care than is usually described.
This isn’t a practical, centrist splitting of the difference. It’s an understanding that especially over distances and time markets do not function the same as the open air stalls that make for a great visual. What can be worked out as a matter of agreement and tradition should be, but there are times when the hand of enforcement is necessary to make sure that the invisible hand is not tied down.
This is particularly true in job markets, more and more so as skill comes to define workers and societies. A highly integrated and complex system of specialization requires that skills be acquired, often new skills every day. But which ones are needed? How are the learned? Is the investment in time and money going to have a reasonable payback?
In economic terms, there are two potential market failures confounding each other. One is a “barrier to entry” and the other is an “information asymmetry.” These probably have to be handled by some agency outside of the market itself to make the information public so that the barrier can be overcome. And there is a public interest in full employment for everyone and no lack of skilled workers.
A deeper understanding of open markets, operating across this kind of investment and often apart from human interaction, shows that the failures do come in broad categories – a lack of accessibility and a lack of transparency. Creating markets requires both. It is perfectly reasonable to restrict intervention to these areas, but they are critical in many ways. And they can be met without a strong need to centralize systems with planning functions that take over what would otherwise be free
For example, regulation is often needed. But how can it be done with a high degree of respect for market forces? Disclosure, or requiring information, is often the best way to go about it. If that fails, it should be documented exactly why it has failed, such as an “externality” like pollution. In those cases, a higher degree of regulation can be applied, but only once the need has been defined.
In all cases, what matters most are the people who make up the market, not the money exchanged. If they are lacking access to a market, the market itself is failing. If they do not have the information they need to make good decisions, particularly in the long term, the market will be inefficient. It is always tempting to correct these flaws with central planning, but that distorts markets and should be done only in rare circumstances.
People can make decisions once they have what they need to make them. That is the principle.
Market day is a colorful and vibrant image of markets with a strong allure. We all have experience with it. But it relies on a buyer and a seller looking each other in the eye, checking out the goods, and finally shaking hands on a deal. Step back from this experience even a little bit, and some more effort is required. That’s not a problem, at least not if it is done properly.
What defines market day are people, not goods or money. People, and their needs, have to define open markets separated by time and distance. The tools for doing this are well known and need to be at the core of our understanding of how our world works for people to truly master their own world.