Markets and their social construction

Social Research, Summer, 2004 by Warren J. Samuels

INTRODUCTION

My objective is to outline a model of how markets arise and work and are worked. My argument is that markets are neither given nor transcendental but are constructed by the actions of firms and governments. Several qualifications apply.

First, a model is given, not a theory. A model is a set of variables structured in a particular way to explain something. A theory is a hypothesis specified as a particular explanation, the social space to which it is applied, the evidence by which it will be tested, and the decision rule governing acceptance or rejection.

Second, no model can answer all questions. To answer other questions, other models are needed.

Third, every element of the model can be combined with different theories.

Fourth, no particular theory is adopted; the model is suggested in which particular theories have meaning.

MARKETS

"Market" is typically understood as the price mechanism and analyzed through some definition of "competition." typical are fix-price and/or flex-price and strategic game-theoretic models, including limit-entry, administered, and mark-up pricing models. Price is not transcendent; it both controls firms and is an instrument of their power and policy. Economic actors are treated as active agents of change.

Markets are socially constructed, neither given and transcendental nor natural but organized to promote some interests rather than others; which interests and how they are chosen and structured, are issues to be determined.

A distinction exists between (a) a pure abstract a-institutional conceptual market, and (b) an actual market that is a function of and gives effect to the institutions and forces that structure and operate through it. One tendency is to theorize in terms of (a) and assume that (b) comports with (a), selectively reinforcing or criticizing existing law.

The market as an institution and a product of other institutions differs from its conceptualization as a mechanism of price formation. The former view of the market--as process, the result of power, and an arena of power--is absent in the latter (Swedberg, 2003, chap. five). The belief that markets are necessarily competitive begs the definition of competition.

Markets are not themselves efficient; they can yield efficient results. The "efficient functioning of markets" and "efficient market" lack substantive content. Analyses typically explain and designate an outcome as efficient in the sense of either exhausting gains from trade (Pareto optimality) or output maximization. Efficiency in either sense takes place in markets but is driven by agents' actions, not by "the market" alone. No single efficient result exists. Efficiency is rights-structure dependent; different rights structures yielding different efficient allocations, each specific to and generated by a particular rights structure. Efficiency cannot be used to determine rights without the use of some antecedent normative premise as to whose interests are to count; indeed, the structure of rights is often the point at issue. Resource allocation is driven not by markets alone but by the institutions and forces that form and operate through markets, plus agents' actions.

The evolutionary dynamics of markets--the core of the present model--and the equilibrating adjustment process are more relevant here than the properties of static equilibrium.

One circularity in the concept of "market" relates to the "law of one price": that only one price for a commodity can exist in a market. However, a market is often defined in terms of there being only one price for a commodity.

The "market" is increasingly seen to be a metaphor. But a metaphor for what? A mechanism, an institution, a process, all of the above, or what? If the invisible hand is identified as the market, one metaphor is used to define another metaphor. The "market" is used here as a primitive, undefined term--both begging numerous questions and cautioning the reader not to substitute his or her favored connotation(s).

THE MODEL

The social construction of markets combines two models of social control: the market-plus-framework model of the economic role of legal and moral rules and the opportunity-set model of power in which actors' respective opportunity sets are a function, in part, of their legal rights and obligations, the choices made by other actors, and the impact of those choices on a given actor. The combination enables objective analysis of the determination of whose welfare counts through the determination of whose customs and interests count (for details, see Samuels, 1989, 1992a, 1992b, 2002; Samuels and Schmid, 1981; Samuels, Medema, and Schmid, 1997; and Samuels and Mercuro, 1999). An alternative formulation is governance, defined as the making of decisions that affect others, including official government and firms whose decisions to expand, contract, relocate, etc., impact others' opportunity sets.

The analysis premises markets and government as both selection processes and the result of selection processes and as arenas of power, the product of power, the vehicle of power, and a check on power.