2: The Market as an Institution: Theory and History


Markets occupy a central role in economic theory. It is assumed that we understand them – but do we really? This chapter suggests that we do not. We know a lot, but not so much as we should. Markets remain a subject of controversy in popular debates over economic policy and historical debates over commercialization and capitalism. That is why we need to learn more. Markets facilitate trade. Trade, it is often assumed, developed from small beginnings in chance encounters; for example, two people meet on a country path and one swaps their coat for the other’s piece of jewellery. But there is little evidence for this ‘chance encounter’ theory. The key question is ‘Can you really trust a stranger?’ Why does the stronger person not just rob the weaker one? So why would the weaker person go out alone? Trade, it would seem, needs a secure environment. Security needs to be provided by someone who can observe a situation and has the power to detain and punish a wrongdoer. Hopefully, the threat of being captured and punished will deter the wrongdoer. Trade therefore requires a strong individual who can provide that security, such as a tribal leader. Archaeological evidence from the Stone Age suggests that neighbouring tribes would meet at ceremonial centres to marry off their children, worship their gods and trade some goods as well. Provided the tribal leaders were at peace with one another, the ceremony would provide a safe environment where trade could take place. By the Bronze Age, long-distance trade was common in many parts of the world, supported by a network of small cities.

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