The Market System

1. The Market System Profit and Competition

2. Efficient Markets The Evolution of the Market System

3. What do we want from an economy? • Production – getting the most from scarce resources • Exchange – minimizing transaction costs 7 Market System

4. Social Cooperation: How does this happen? • Kenyan coffee • Scottish sweater • Banana from El Salvador • Dishwasher assembled in Mexico • Thai restaurant • French movie • Stereo from Hong Kong 7 Market System

5. Because of scarcity, someone will always be told NO! • The trick is to get as much as possible from scarce resources. • What are the most efficient systems of production and exchange? 7 Market System

6. Different methods of production and exchange • Tradition -There is no need for success; you do what your parents did. • Command – You do as you’re told. • The market - You do what is in your best interests and by so doing, provide the material wants of society; incentives are the key. 7 Market System

7. Market: An interaction of buyers and sellers 7 Market System

8. Necessary Components of a Market (CIIP) Competition Information Incentives Property Rights

9. Feudalism didn’t include CIIP 7 Market System

10. Andreas Ryff - Germany, 1550 • Customs toll every ten miles • Each community has its own: • money • rules and regulations • law • measures • Transaction costs are very high 7 Market System

11. Robert Keayne - Boston, 1639 • Crime - sixpence profit on a shilling, fined 200 pounds • False principles of trade • That a man might sell as dear as he can, and buy as cheap as he can. (Buy low; sell high.) • If a man lose, by casualty of sea, etc., in some of his commodities, he may raise the price of the rest. • That he may sell as he bought, though he paid too dear.

12. Colbert - France, 1666 • Too much initiative - the reglement • Dijon and Selangey - 1,408 threads • Auxerre, Avalon, & 2 others - 1, 376 threads • Chatillon - 1,216 threads • If fabrics don’t conform, they will be pilloried; if found three times to be objectionable, the merchant is to be pilloried. 7 Market System

13. FEUDALISM No property rights, no productive resources, no innovation

14. LAND • Land was not real estate to be bought be bought or sold • Land formed the core of social life • Lord could not sell his land 7 Market System

15. HUMAN CAPITAL • No labor market • Peasant tied to Lord’s estate • Performed duties as a serf 7 Market System

16. FINANCIAL CAPITAL • No risk, no change, safety first • Longest and most time consuming technique of production preferred • Producing product better than colleagues treasonable • Mass production and innovation forbidden 7 Market System

17. FEUDALISM • Production and exchange are inefficient • Market components (CIIP) don’t exist • Transaction costs are high 7 Market System

18. THE SOVIET UNION • Production and exchange were inefficient • Market components (CIIP) don’t exist • Transaction costs are high 7 Market System

19. Will Russia develop into a market system? • Competition – most industries run by monopolists • Information – difficult to obtain • Incentives – Russians not used to profit motive • Property rights – yes, for the few 7 Market System

20. What caused emergence of market system? • National political powers • royal patronage for industries • national laws, common measures, standard currencies • encouragement of foreign adventure • Decline of religious spirit, rise of humanism • Max Weber: Capitalism and the Protestant ethic 7 Market System

21. What caused emergence of market system? • Material changes • towns • roads • Familiarization with money and markets • Double entry bookkeeping • Scientific curiosity and idea of invention • printing press, paper mill, mechanical clock, map, compass and other navigational tools, longitude 7 Market System

22. The Plague – 14th century • One third of European population dies • Workers bargaining power increases • A labor market develops 7 Market System

23. What caused the market system to replace feudalism? • Emergence of market components (CIIP) • Reduction of transaction costs

24. 1776 7 Market System

25. ADAM SMITH(1723 - 1790) Profit is the motivator, competition is the regulator. 7 Market System

26. Profit is the Motivator “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their self-interest. We address ourselves, not to their humanity, but to their self-love, and never talk to them of our necessities, but of their advantages.” 7 Market System

27. Competition is the Regulator “If he charges too much for his wares, or if he refuses to pay as much as everybody else for his workers, he will find himself without buyers in the one case, and without workers in the other.” 7 Market System

28. The Invisible Hand (self-interest and competition): • rewards efficient producers and buyers • results in: • goods society wants • quantity society wants • prices society is willing and able to pay • normal profits 7 Market System

29. The Entrepreneur: the driver of the market system. • combines resources to produce a product • takes the risks associated with innovation • the “residual claimant” 7 Market System

30. Why the market? • Scarcity exists • Societies must find a way to allocate scarce goods and services • In any allocative mechanism, some people will be told “No.” • The market system is efficient, but… • Neither markets nor other economic systems are “fair.” 7 Market System

31. Main Points • A market is an interaction of buyers and sellers. • Markets work with competition, information, incentives, and property rights (CIIP). • Feudalism had high transaction costs and none of the components of a market system. 7 Market System

32. Main Points • The market system developed as legal, social, political, and commercial institutions evolved. • Adam Smith’s An Enquiry into the Nature and Causes of the Wealth of Nations, published in 1776, described the market system. • According to Smith, the “Invisible Hand” is the combination of profit and competition that results in the efficient production and exchange of goods and services desired by society. 7 Market System

33. Main Points • In a market system, profit is the motivator and competition is the regulator. • The entrepreneur is the driver of the market system. • The market system is efficient; neither it, not other economic systems are “fair.” 7 Market System