The New Institutional Economics of 'The Market Itself' - An Attempted Answer to a Complaint by Ronald Coase
This paper is motivated by the remark of Coase (1988, p. 7) that "although economists claim to study the working of the market, in modern economic theory the market itself has an even more shadowy role than the firm." It is argued that under conditions of positive transaction costs, incomplete foresight and bounded rationality – the conditions of the New Institutional Economics (NIE) – the institutional framework not only of firms but also of markets matters. Actors who plan to buy or sell a good under conditions of NIE are facing two institutional choice problems: First, to choose or establish a specific market system within which to trade the good and, second, to choose a specific exchange contract. Both are nonmarket coordination problems – the first is a problem of collective action between a multiplicity of suppliers and demanders; the second is a problem of bilateral action: the coordination of individual plans between two parties. Only the first problem is object of this paper. Our hypothesis is that the organization of markets is a collective good, which may be a product of laissez faire or of planned collective action. So far there exists no systematic theory of the NIE of markets, only a number of considerations on specific issues concerning the basic functions of trade, viz., the activities of search, inspection, bargaining, contract execution, control, and enforcement. We content ourselves to describe and comment on some prominent examples from the NIE literature and related approaches to illustrate the kind of considerations that are part of an evolving new institutional economic theory of “the market itself” and argue that, for reasons of the general interest of traders themselves, some forms of planned collective actions are unavoidable.