Two opposing definitions of "the market"

I'll borrow, and twist, Mark Twain's thought about the weather: Everybody talks about the market, but nobody ever defines it. 

Well, it's not quite that bad (a few economists have defined it), but after forty years of thinking about it, I've boiled it down to two possible definitions concise enough for my mental dictionary.  I know which one I favor—and the good news is that a few billion people seem to agree; the bad news is that a few billion don't.  So, I'll throw it out there to get your opinions.   

Which of the following two very different definitions better describes "the market": 

1 - A forum for voluntary cooperation between informed sellers and buyers, in which both parties profit from any given transaction.

2 - A forum in which predatory sellers exploit the ignorant, sheep-like buyers they have successfully hypnotized. 

Feel free to leave a civil comment explaining which one you prefer, and why.

Comments

[Ron Hardin]

The reason you want economic activity is not to keep people off the streets, but that both sides of every voluntary transaction make a profit. Otherwise the transaction would not happen.

Since every transaction profits both sides, every transaction raises the standard of living of the nation.

The more economic activity, the higher your standard of living.

If you lose the insight that both sides profit on every voluntary transaction, of course you might think that state control would raise standards of living better. So some people are motivated to the predatory market definition.

That said, supermarkets do sell stuff with prices like 7/$20 to keep you from figuring out what the price is. Kroger in particular.

Perhaps somebody with the mutual profit insight could point out that that seeks to profit at the expense of the buyer explicitly.

[Fredex]

A market is cooperation masquerading as competition.

[Olivier]

In the present context it is difficult to see the market as defined by (1): a little too Candide for me. On the other hand in times of less trouble, it is hard to see the market as entirely (2). Sellers are certainly predators and buyers sheep, yet it turns out that most of the time, the overall situation is not that bad (at least compared to alternatives). )f course you can always improve things.

[Ken]

Nice definitions. You forgot the poor working families being forced to sell their belonging to capitalist carpetbagger pig scum, or something like that. Anyways, it’s all Karl rove's fault.

On a more serious note: The buyers/Sellers in the market are not always informed. I remember reading about a psychological experiment, in which people were asked to recite their SSN, and then guess the price for a common, low cost item (such as toothpaste). People with a higher last digit in their SSN would give about 50% higher value to those items, just from the suggestiveness of having said a number. You could say that there is a certain threshold below which people do not consider it worth their time to inform themselves. But the phenomenon exists in higher priced items as well. How many people paid more for hybrids than they will save in gas? Or think of all the "features" that you find in both the tech and automotive world that are nothing more than marketroid talk, yet still cost extra?
On the seller side, I worked for a company which at one point bought several of its suppliers, and as a result grew considerably, very quickly. In the chaos, there was no way to trace the price of how much it was costing to manufacture a product.
What I'm saying is, perhaps "informed" should be preceded with "hopefully".

[Ed Grimes - San Diego]

Both definitions are true.

The key word is "informed."

[Bret]

I'd lean towards one except that both parties may or may not be informed and both parties may or may not profit (have you never sold stock at a loss?).

[JBL]

My issue with the first definition is that not all transactions are informed, and not all are voluntary.

My issue with the second definition is that not all loss transactions are the result of propaganda; many are due to error, negative externalities, or unintended consequences.

Here's an alternative phrasing:

1 - A forum which seeks to maximize (but does not assume)voluntary cooperation between informed sellers and buyers, in which both parties profit from any given transaction.

2 - A forum which seeks to maximize utility for certain individuals, largely (but not exclusively) at the expense of ignorant or less capable individuals.

[gilleland]

JBL, I'm struggling to understand in which cases market transactions are not voluntary.

Regulated monopolies would be a rare exception assuming there is no substitute.

[gilleland]

There is something to be said for a "lifecycle" concept for how markets for specific goods evolve over time.

As markets for new goods emerge perhaps there is less price and quality information available, market participants don't even have the opportunity yet to be well informed (both buyers and sellers), and one party or the other appeared to be taken advantage of in retrospect (but still doesn't resolve the issue that at the time of the transaction both parties considered it a win-win.)

I don't see how you could argue that definition 1 isn't more accurate for "mature" markets where information on price and quality is readily available for the goods themsevles and substitutes.

Factoring in the incentives of being an informed seller and an informed buyer that the market mechanism provides, I think it's a slam dunk for definition 1.

[gilleland]

Is the inclination to favor definition 2, a sad tendency for some people to abdicate personal accountability for the choices they make?

If you don't understand fully what you are buying, don't buy it. If it is a case of fraud then that is another matter where both market-oriented and regulatory mechanisms exist to minimize that over time.

[Steve]

"Informed" is a key word in (1). The price is in theory a condensation of a vast quantity of information; but it sometimes excludes an important consideration or two, frequently about externalities.

Here's an example:

http://tinyurl.com/ytjvsf

Excerpt:
Information, another advantage of property rights, is produced as a byproduct of bids offered and prices asked in the market, and is vital to the coordination of plans made in the economy by individuals.*4 Activities not marketed are proving very difficult to manage rationally for there is little or no concrete evidence on how people really evaluated nonmarketed activities relative to other resource-using activities. We know, for example, how much people are willing to sacrifice for a thousand board feet of lumber of a given species and grade, but how much would they pay for a day's access to a wilderness area? In the latter case of a nonmarket good we have only rough estimates. Even the best manager cannot make good resource management decisions without knowledge of the input and output values.

[Jose]

Fredex,

"A market is cooperation masquerading as competition."

I like that. There are depths in that short statement. Did you make that up?

Jose

[Bob]

Hhhhm. There is a lot to say about personal choice in this subject. Wants and needs enter into it as well.

I may choose to have rotten teeth and forgo the toothpaste. I may need transportation, but don't want a Hummer.

In terns of the financial markets one would have to add in the risk one is willing to take to profit from participating.

[JBL]

There are several types of involuntary transaction in a market economy.

One group is the receiving end of externalities. The textbook example is pollution - if I buy gas and drive my car, that is a voluntary transaction between me and the gas station, but I don't get permission from everyone who breathes the exhaust.

Another group is those adversely impacted by government taxation and regulation in order to address various market failures. Licensing medical doctors arguably increases market efficiency, since the average citizen lacks (and cannot reasonably aquire) sufficient knowledge to independently evaluate doctors, but there are undoubtedly certain individuals who would benefit from unlicensed medical practice.

[Gil]

Hmmmmm . . . Are the two options a combination to form a trick question? The first one is the anarcho-Capitalist/laissez-faire argument that there can be no interference to trading whatsoever (all interference = bad because it distorts prices and creates zero-sum situations and even events where some who shouldn't profit do and vice versa). Option 2 is the Socialist/Communist argument that Capitalism is really exploitation of the strong against the weak.

I'm sure many who like Ayn Rand like her statement about the poor - "don't be poor". Which really, I s'pose, means the rich don't exploit the poor, rather, the poor exploit themselves because they aren't willing to work hard, scrimp and save, attain high-level skills that pay well, etc. Is it a form of weakness to complain about the plight of child labour in certain countries? If a child had a choice between hard work in exchange for a meal and a roof over their head versus starvation, is the potential employer a good guy in that he is helping to save another child from starvation and doing his bit to improve the local economy? That to complain is to forget the rich nations were once poor and had to work their way out of poverty? That to have welfare programs does nothing but slow growth, reward sloth and create dependency and increased poverty? That to not choose the laissez-faire option 1 is setting the stage for the transition to Soviet-style Socialist states because there's 'no third way'?

I don't know. Sigh :(

[Zack]

I would venture that the phrase "opportunity to be informed" would link both statements. The lens through which one views the "opportunity" one has to information would likely decide which definition an individual decides as correct.

/I like statement #1
//slashy, slashy

[Zack]

I would venture that the phrase "opportunity to be informed" would link both statements. The lens through which one views the "opportunity" one has to information would likely decide which definition an individual decides as correct.

/I like statement #1
//slashy, slashy

[Aaron]

Re: pricing in grocery stores...check the little price label and often they have unit pricing (its probably mandated legally.)

In Taiwan, Carrefour is great as they do it by gram or liter or whatever. I often buy my beer this way - say choose a quality level (Japanese beer) and then check the unit pricing for the best deal. At Costco they tell by "bottle" which is not as helpful, though Costco often doesn't have really comparable items.

[gilleland]

It is critically important to separate the morality and efficacy of the market mechanism itself from the fact that in most markets large corporations are the dominant suppliers / sellers that have significant resources and ability to overpower and unduly influence consumers.

Note: I am not a big business basher but the institution of the corporation, especially large corporations, deserve some criticism.

This weekend, I just happened to watch the 2004 documentary “The Corporation” which “explores the nature and spectacular rise of the dominant institution of our time. Taking its status as a legal "person" to the logical conclusion, the film puts the corporation on the psychiatrist's couch to ask "What kind of person is it?" The Corporation includes interviews with 40 corporate insiders and critics - including Noam Chomsky, Naomi Klein, Milton Friedman, Howard Zinn, Vandana Shiva and Michael Moore - plus true confessions, case studies and strategies for change.”

Although I believe the market mechanism itself is best characterized by definition 1, large corporations have had success and continue to have success shaping / distorting the market to be more like definition 2. Fortunately, as a result of our fundamental individual rights (free speech, due process) the market enables feedback to attempt to limit corporations’ attempts at tilting markets in their favor.

It ain’t easy being an informed, rational consumer in a market economy dominated by large corporations but it is largely possible and I much prefer it to any socialist alternatives. We need to continue taking a hard look at where both large government and the large corporation institutions are taking us.

[Tinfoil]

Modern market is more sinister
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3. When sellers and buyers exchange goods and services, the medium of exchange "token" issuers (banking tribe) "skim" both sides through fiat currency inflation and enjoy a lavish life style!