16.3 Stabilizing Unstable Markets

Learning Objectives

By the end of this section, you will be able to:

  • Situate businesses and their business models within their market governance structures
  • Define infrastructure, corporate governance, and market governance

 

The previous sections dealt mainly with the nature of the modern business enterprise as an individual organization.  But, of course, no business is created in a vacuum, and no business can operate in complete isolation.  This section will look at the economic, social, and political nature of markets to better understand how real businesses fit into a heterodox understanding of the economy.

Any business model–including those discussed above and beyond–is a plan for how to successfully operate a business within one or more markets.  A good business plan will have to consider, among other things, the competition, the potential customer base, rules and regulations, and the necessary infrastructure to produce and distribute the product, whatever it may be.  Established businesses will have worked out their business models over time, will have built (or had built for them) the necessary infrastructure (for instance, roads or communications protocols), and will typically have helped define the rules and regulations that dictate which individual and competitive activities are permissible and which are not.  This is to say that markets themselves are defined by (and the way business enterprises behave in these markets is guided by) their infrastructure and their corporate and market governance structures.

Definitions

Infrastructure: the common structures, facilities, and systems necessary for organizations to operate.  These may include physical infrastructure like highways, bridges, electrical grids, and sewage systems; as well as systems like the complex networks of computers tied together through communications lines and protocols we know as the internet.

 

Corporate governance: the rules and practices defining how and by whom a business is directed as well as how members of the business will interact with each other and those outside of the business.  These are both formal rules like accounting practices or the corporate hierarchy of who reports to whom, as well as informal norms, traditions, and relationships.

 

Market governance: the rules and practices defining how business enterprises will behave in a market, including especially how they will interact with their competitors.  These may include formal agreements–for instance, a consent decree by which a business agrees not to engage in an activity the government considers anticompetitive, or a joint venture operation between two energy companies to explore a potential source of crude oil.  Probably more important, though, are the various informal arrangements by which certain types of competition and cooperation between businesses are allowed while others are not.
A side note: these shared rules and infrastructure are not fixed in time–they evolve, whether by unintended consequence or intentional change.  Moreover, they are socially constructed, which means there is a political element to all of them.  Although we’re focusing for now on the private, business side of the matter, it should be remembered that there is almost always a government role in the development, regulation, and sometimes prohibition of these structures.  Finally, a fourth component, property rights, is worth adding.  Property rights are legal norms defining who can own what, what can be done with that property, and therefore how businesses can generate earnings and who has claims on those earnings.  While property is often considered simply a natural right, the actual content of property rights is a complex, perpetually evolving, and highly contested subject.

These attributes of the organization of businesses and the markets in which they operate are all geared toward essentially the same thing: stability.  As an earlier section explained, most parts of the modern economy involve sophisticated and usually large-scale technologies.  For this and other reasons long term planning is necessary for production to go forward; and long term planning requires predictable outcomes.  Hence, markets and businesses must be organized to promote stability.  In particular, as a previous section explains, businesses require predictability in prices.

Now, consider the neoclassical models of previous chapters.  In each of these some, perhaps natural, equilibration process is used–that is, a process by which firm’s, consumers, and ultimately markets move toward an equilibrium, toward stability.  The utility maximizing consumer seeks an optimal combination of consumers goods, the profit maximizing firm seeks an optimal level of production, and the market, through competition and price bidding, moves toward the equilibrium price and output.

Many heterodox economists reject each of these models, in part because of the unrealistic mechanisms by which equilibrium is reached.  For instance, as chapter “Costs and Prices” demonstrates, few markets in the modern US economy are characterized by the sort of price adjustments that the standard market model relies on to reach a stable equilibrium.  Moreover, considerable evidence suggests that competition–especially price competition–actually promotes instability.  And it is for this reason that the concept of market governance is so important.  Without a workable set of norms concerning acceptable and unacceptable forms of competition and cooperation, most markets would never reach equilibrium.  Instead, price competition and chicanery would wreak havoc on businesses and consumers alike.

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16.3 Stabilizing Unstable Markets by Rice University is licensed under a Creative Commons Attribution 4.0 International License, except where otherwise noted.

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