Marketcraft: What Does It Really Take to Make a Market Work?

How do you craft a market?  A modern market economy requires much more than the rule of law and the protection of private property.  This paper reviews some of the critical institutions that make markets work: corporate law, accounting systems, banking regulation, capital market rules, corporate governance mechanisms, labor market institutions, antitrust policies, sector-specific regulatory regimes, intellectual property protections, and deliberate market designs.  These institutions structure markets by defining market actors, such as corporations; establishing market arenas, such as stock exchanges; setting rules of exchange, such as stock trading practices; and promoting competition via antitrust enforcement or pro-competitive regulation.  They expand the scale and the scope of markets by disseminating information, coordinating exchange, limiting market risk, and enforcing market rules.  They comprise both formal institutions, such as laws and regulations, and informal ones, such as business practices and social norms.  And they include institutions that fall between the poles of public (government) and private (firm), such as industry associations and sectoral networks.

The substantive examples reviewed in this paper share some common features.  In all of the cases, government regulation and private sector coordination are not impediments to markets, but preconditions to their creation, expansion, and dynamism.  That is, there is no free-market solution to the governance challenges in these realms.  It is even difficult to imagine what it would mean to move toward the free market in many of them, because attempts to reduce government or private sector regulation would be more likely to undermine markets than to liberate them.  There is not a single market-oriented equilibrium, but rather a multitude of possible market arrangements.  Policy options do not align along a spectrum from government to market, or from regulated to competitive markets.  Rather, the dimensions of choice and the cleavages of interest hinge on complex issues of market governance.  The critical debates involve practical questions of market design and political choices about whom to favor in that design.