How Markets Work and Fail, and What to Make of Them

How Markets Work and Fail, and What to Make of Them

New Horizons in Institutional and Evolutionary Economics series

In this thought-provoking book, Bart Nooteboom offers a radical critique of the principal intellectual and moral assumptions underlying economic science, unravelling the notion of markets: how they work and fail, and how they may be redirected to better serve us.

Chapter 2: Foundations of markets

Subjects: business and management, corporate governance, organisational innovation, organisation studies, economics and finance, evolutionary economics


Markets yield a matching of supply and demand of products. Here products are defined as anything that has added value, including both physical goods and intangible services. Markets are needed, as Adam Smith proposed, to enable division of labour, needed as a source of prosperity. Rather than producing our own goods and building our own houses we can exchange with people specialized in them. Markets for consumer goods and services are the most obvious, but equally important are markets for production factors of land, labour, capital and technology. Those determine the possibilities, quality and efficiency of the production of consumer products. Markets operate on the basis of private choice and initiative (in contrast with central planning) that yield selection of success by competition (in contrast with bureaucrats or committees) and institutions (laws and regulations, market structures, habits and customs). While money greatly facilitates markets as a medium of exchange, it also functions as a store of wealth. As a result, goods not only have use value but also exchange value. Exchange may occur not for consumption but for accumulation of wealth. Exchange can take also take the form of barter or use of non-monetary means such as vouchers or credits or IOUs, which are more dedicated to specific kinds of consumption and mostly cannot function well as a store of wealth. Market places are places where supply and demand meet. That may be a virtual place, as in electronic trading.

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