DEFINITION: A market is a place where people come together for the purpose of exchanging valuable goods, whether directly via barter of one type of good for another or indirectly via the sale of goods for monetary consideration.
ETYMOLOGY: The word “market” comes via Middle English and Old North French from the Latin term mercatus, meaning “business,” “traffic,” or “trade,” as well as the place where the business or trade occurs, which is to say, a “marketplace.”
Mercatus, in turn, is connected to the deponent verb mercor, meaning “to traffic in” or “to trade,” and the noun merx (mercis), meaning “goods” or “merchandise.”
USAGE: Markets are almost certainly as old as humanity.
Wherever there is any degree of division of labor in a society—which is to say, in all known societies—the motivation exists for people who specialize in producing one type of good to exchange the portion of their production that is in excess of their personal needs for other types of goods produced by others.
Over the course of history, direct barter has been almost entirely replaced by indirect exchange based on sales for consideration within a money-based economies.
Moreover, over time—and in recent years at an accelerating pace—many new kinds of markets have come into existence. However, it is interesting to note that the new types of markets typically exist side by side with the older ones, they do not replace them.
For example, to this day, farmer’s markets—in which primary agricultural producers haul their produce into local market towns or nearby cities for face-to-face sales to customers—still exist throughout the world, including many of its most highly industrialized regions, such as Europe (the US is an outlier here).
With modernization, intermediate transactions arose in between the primary producers and the ultimate users of most goods. In the agricultural sector, this process took the form of large grocery stores, which were pioneered in the US, although they are now increasingly found in Europe and around the world.
In other sectors, the distinction between retail and wholesale businesses is much older.
Technically speaking, each such additional step in the chain between the producer and the ultimate consumer constitutes a transaction or exchange unto itself, thus creating a market of its own.
Over time, one may safely say that the overall number of such markets has proliferated exponentially. Thus, one aspect of the new forms that markets have taken historically is quantitative in nature.
However, in addition to this enormous proliferation in the sheer number of markets, we must also look at qualitatively new forms that markets have taken, especially since the industrial revolution:
For example, in addition to wholesale markets, we may distinguish the following specialized markets:
- Intermediate goods markets, for the production of goods required for the production of other goods
- Labor markets, for people to exchange their labor in exchange for a wage
- Auctions, in which goods are sold to the highest bidder
- Energy markets, in which sources of specific sources of energy (oil, gas, electricity) are bought and sold
All of the above are markets in physical, tangible goods. In addition, there are markets in non-tangible goods, including the following:
- Media markets, including newspaper, magazine, television, radio, and Internet markets
- Electronic commerce markets, in which goods are sold directly to customers via the Internet
A subset of markets in non-tangible goods is markets based on contractual obligations, also known as “financial assets.” Among the many kinds of markets in financial assets, we may mention the following:
- Stock markets, for the trade in corporate stocks
- Bond markets, for the trade in corporate and governmental bonds
- Currency markets, for the trade in sovereign-state currencies
- Money markets, in global lending and borrowing
- Insurance markets, in buying and selling insurance coverage
In addition to all of the above, there are also “black markets” in a wide variety of contraband goods. In some countries, black markets constitute a significant proportion of the nation’s GDP.
Finally, we ought not to leave the subject of markets without discussing their economic—or, perhaps, philosophical—dimension.
The reality of markets lies at the very foundation of all economic thought.
For example, according to the subjective theory of value first advanced by thinkers like Carl Menger, William Stanley Jevons, and Léon Walras in the late nineteenth century, and accepted by all but Marxist economists ever since, the value of a thing is determined by the equilibrium arrived at by the aggregate “forces” of supply and demand in operation within a market (which may be quite extensive geographically).
Intuitively, it is easy to understand how this can be so. For example, in an old-fashioned farmer’s market, there is usually room for haggling.
The price arrived at through a process of haggling represents the equilibrium point between the desire of the seller to sell his eggs, say, at the highest price possible and the desire of the buyer to buy a dozen eggs at the lowest price possible.
If one could record and aggregate all the prices at which all the eggs are sold by various sellers at all the farmer’s markets over a given geographical region, then it seems that one should in principle be able to calculate a mean price for a dozen eggs over that region.
If one did the same thing for all goods sold in all the markets in the region, then one could calculate all the mean prices for all the goods on offer in the economy in question.
This is precisely what socialism (communism) in a pure form requires of the economics commissars of socialist (communist) governments.
As Friedrich A. Hayek and Ludwig von Mises pointed out during the 1920s and 1930s, this task is inherently impossible. Even today, with the advent of supercomputers, it is still impossible.
How, then, did the economics commissars of the old USSR manage to set prices? The answer is twofold.
First, they did a notoriously poor job of it. After all, economic planning in a centralized economy must still be based on some determination of what people want.
Without market-generated prices, the commissars had nothing to go on when it came to establishing the prices of goods. So, in many cases, they simply guessed.
The result was chronic gluts in some goods and chronic shortages in others.
In all the old communist countries, the shelves of the government-run retail shops were frequently mostly empty. When shipments of goods in demand did arrive in a shop, a long line winding out the door and down the street would form immediately. Moreover, black markets were rampant.
In short, suppression of what Adam Smith called the “invisible hand” of the market mechanism for setting prices led to the severe dysfunction and eventually the collapse of the economies of the communist countries.
The second price-setting method that the old Soviet commissars employed was more pragmatic: They imported copies of the Sears Catalogue from the US and set their prices accordingly!
Thus, to the limited extent that the communist consumer economies worked, they did so only because they were parasitic on the unfettered free market of the capitalist countries.