Political Science Glossary [4]
Capitalism
A form of economic order characterized by private ownership of the means of production and the freedom of private owners to use, buy and sell their property or services on the market at voluntarily agreed prices and terms, with only minimal interference with such transactions by the state or other authoritative third parties.
Market economy
An economy in which scarce resources are all (or nearly all) allocated by the interplay of supply and demand in free markets, largely unhampered by government rationing, price-fixing or other coercive interference. In classifying real historical economies, the level of “marketization” is not primarily an either/or issue but rather a matter of degree. The greater the proportion of the goods and services produced in the society that are allocated by market processes (rather than by government edict or the operation of unchangeable custom), the more meaningful it is to refer to its economy as a market economy — and the more useful is the abstract economic theory of the operation of markets likely to be for understanding and even predicting economic behavior within that society.
Probably the most critical single distinction between “basically market” and “basically non-market” (socialist, feudal, hunter-gatherer, etc.) economies is whether or not the determinations of what is to be produced and of the corresponding allocation of producers’ goods (land, raw materials, machinery, and other “capital,” as well as the services of labor) are accomplished primarily through free markets rather than primarily through government command or unalterable custom.
The concept of a market presupposes the existence of certain sorts of property relations in the society involved. At least some goods and services must be legally or socially regarded asalienable property — that is, there must be ascertainable individuals (or group representatives) who are recognized as having not just the right to use particular scarce economic resources for their own purposes but also the discretionary authority permanently to transfer such rights of use to someone else in exchange for some mutually agreeable quid pro quo, such as money or other goods or services. Not all human societies have recognized any such rights to transfer ownership, and most historical human societies have forbidden or placed stringent limits on the transferability of at least certain kinds of recognized property rights. In many societies (including most of Europe during the Middle Ages), individual or family rights to the perpetual use of particular plots of land were well established and protected by law — but such rights only rarely could legally be sold to someone else because the land was socially regarded as fundamentally the inalienable property of either the local community as a whole or of the tribe or clan or church or perhaps of the reigning royal family. And even in the USA since 1865, while each person’s ownership of his or her own body is well established, the law will still not allow you to make a binding contract to sell yourself into slavery or even to auction off your spare bodily organs for purposes of a surgical transplant.)
It is worth noting for clarity’s sake that the concept of a market does not logically presuppose the existence of “private property in the means of production” in the sense that private individuals or family households are the owners of land and capital and thus the recipients of profits, interest, rent etc. One may at least theoretically conceive of an economy of marketsocialism, in which workers’ collectives, consumers’ cooperatives, village communes or even autonomous state agencies leased from the state or held actual title to land, mines, factories, machinery and so forth — so long as the socialist production organizations were free to buy and sell their output and and the use of their assigned land or capital assets to each other at freely negotiated prices responsive to conditions of supply and demand (assuming, of course, they are allowed to keep effective control of the bulk of the proceeds). There are, of course, both theoretical and practical problems with market socialism, and the costs and benefits of capitalist markets cannot be uncritically attributed to such a system. The larger point is thatsocialist economies have historically included varying proportions of “remnant” market elements in their make-up, and the theoretical possibilities for additional “hybrid” forms are numerous.
Market
In its original meaning, a physical coming together of a sizable number of merchants and prospective customers at a pre-arranged time and place (in medieval Europe, typically once a week on the main square of the largest village in the vicinity) for the purpose of striking deals to buy and sell a variety of goods and services. Large numbers of customers came to such organized markets because they found it convenient to be able to make many of their necessary purchases on the same day in one central location (minimizing their total travel time and other travel costs) and because the presence of many merchants offering similar wares made it much more practical to comparison shop for the best deals in terms of quality and price. Merchants were often attracted from considerable distances to participate in such markets because of the opportunity to sell so many of their wares to such large numbers of potential customers in such a short time. Modern day flea markets, farmers’ markets, gun shows and crafts fairs are fairly close to the original concept.
In the language of modern industrial society, and especially in the language of professional economists, the concept of a market has been generalized and abstracted far beyond the original rather concrete and localized meaning of the term. In the more modern sense of the term, a market is the generalized name tag for the whole process that gets under way whenever a sizable number of people free to buy and/or sell a particular kind of good or service are in more or less close communication with each other (either personally and directly or else through the mediation of advertising, catalogs, news reports, postal carriers, telephone systems, computer networks, etc.) so that information about the terms of recent transactions and current offers to buy or sell is generally available to a large number of interested parties at relatively low cost — regardless of the participants’ physical proximity or distance. Such technological innovations of the industrial age as ever cheaper and more rapid transportation and communications over increasing distances both have dramatically increased the size of the areas from which buyers and sellers may be brought together to do business and have greatly reduced the need for them actually to meet face-to-face in one place in order to strike a bargain. The markets for many consumers’ durable goods like automobiles or TVs and major agricultural and industrial commodities like oil, natural gas, wheat, beef, steel, forest products and computer chips are now literally world-wide in extent. (Of course, for many markets there do still exist central gathering places or locations that play an especially important role in the local, national or even worldwide networks of buyers and sellers — for example, the New York Stock Exchange, the Chicago Commodities Exchange, the seasonal women’s fashions shows in Paris and Milan, regional baseball card collectors conventions and so on — but in nearly all such cases, it is not really necessary for an individual buyer or seller actually to travel to the relevant marketplace in order to participate in the broader markets of which these are nowadays only a part.)
Where markets exist and are allowed to function reasonably freely, there are certain predictable consequences for the way the economy will operate. Elaboration of these consequences is the primary purpose of most of the research in the theoretical subfield of microeconomics.
Property rights
A property right is the exclusive authority to determine how and by whom a particular resource is used. More broadly, property rights may be seen as a bundle of separate and distinct rights over a particular good — including at least the right of personal use, the right to demand compensation as a prerequisite for its use by other people, and the right to transfer any or all of these rights to others (either permanently by sale or temporarily through some form of contractual arrangement). Property rights may be exercised by governments through their designated officials (public ownership or public property) as well as by private individuals and other sorts of non-governmental organizations (private property).
Contract
A legally binding agreement between two or more competent parties fixing the precise terms and details for a voluntary exchange of goods or services over which the contracting parties possess property rights. An agreement is a legally enforceable contract if and only if:
- The agreement must be “mutual” (all parties have the same understanding of the meaning of their agreement — there is a “meeting of the minds”);
- The agreement must be “voluntary” (none of the parties is agreeing under the influence of violent threats or fraudulent misrepresentation of the facts);
- There must be actual “consideration” paid (that is, each party must be achieving a benefit by giving up something he controls to get something another party controls in exchange: a simple one-sided promise to give someone else a gratuitous benefit is not a contract);
- All parties to the agreement must be “competent” (children and the severely mentally impaired or insane are assumed by the courts to be incapable of forming a coherent intent or determining their own best interests, so the courts will not enforce the agreements they make);
- The substance of the agreement must not be “contrary to public policy” (for example, the U.S. courts will not enforce a contract that requires one or more of the parties to commit a crime, nor will they enforce a contract by which even a legally competent adult voluntarily sells himself into life-long slavery in exchange for, say, a ten million dollar payment to his children).
Transaction costs
The costs other than the money price that are incurred in trading goods or services. Before a particular mutually beneficial trade can take place, at least one party must figure out that there may be someone with which such a trade is potentially possible, search out one or more such possible trade partners, inform him/them of the opportunity, and negotiate the terms of the exchange. All of these activities involve opportunity costs in terms of time, energy and money. If the terms of the trade are to be more complicated than simple “cash on the barrelhead” (for example, if the agreement involves such complications as payment in installments, prepayment for future delivery, warranties or guarantees for quality, provision for future maintenance and service, options for additional future purchases at a guaranteed price, etc.), negotiations for such a detailed contract may itself be prolonged and very costly in terms of time, travel expenses, lawyers’ fees, and so on. After a trade has been agreed upon, there may also be significant costs involved in monitoring or policing the other party to make sure he is honoring the terms of the agreement (and, if he is not, to take appropriate legal or other actions to make him do so). These are the main sorts of transaction costs, then: search and information costs, bargaining and decision costs, policing and enforcement costs.
Elementary versions of economic theorizing often make the simplifying assumption that information and other transaction costs are zero (and, indeed, in a generally law-abiding society with a stable money system, cheap transportation and cheap communications, they are often pretty negligible). But realism nevertheless demands that we keep in mind the fact that the benefits to the participants in an exchange have to be high enough to cover their transaction costs if the trade is to take place at all. Indeed, many otherwise mutually advantageous trades do not take place because of the very high transaction costs that would be involved. High transaction costs are very often at the root of the problems discussed under the heading of externalities, especially in those situations where the external costs or benefits accrue to very large numbers of third parties and therefore a contractual agreement to internalize the externality is extremely costly to negotiate.
A Glossary of Political Economy Terms by Dr. Paul M. Johnson