Capitalism works for you? (2): what's a market about?

 *Simply put, what the heck is Capitalism????

Another name of capitalism is dubbed as "market" economy. Liberal economists believe that, as long as we keep the market to be efficient, then "invisible hands" will do the rest of job. The participants: firms and individuals, would settle their prices of various goods and services, and Voila~ the economy will run itself, as illustrated above. People are happy for what they get, end of the story.

Of course it is not that simple. Apart from "Market" I also save a place for "Planned Exchange". Some others would argue, if there is a centralized agency could "plan" things for all of us for exchange, that would be wonderful. We will see how it goes at the end of the article.

Let's stick to the market mechanism.Here comes a crucial question: How can we be sure of the market would function well?

A well-functioned market should (arguably) have the following features. All of them are crucial and link to each other.

1.) Rights of private ownership:
Last but not least, the right of private ownership. After all, you have to allow to keep what you get from the market. If you enter the markets, exchange what you want and bring them back home, on the very same evening there is a man in black knock on your door and tell you that your possession is his and he is going to take it away.

2.) Free of choice:
Once there is a market kick in, how people making choice would be important. Because if participant enter into the exchange with no choices, they cannot achieve better welfare. In the old times when social classes are still distinct. Some stores only serve certain people. There is no free of choice out there then. In other words, the things you desire is just not there, or even it is there, you cannot buy/sell it. We cannot call this a free market.

3.) Transparent information:
I have addressed this idea in my previous "Capitalism work for you?(1)" article. Entering into a market, a person would like to know of what they buy, or what they sell. Sellers would probably want to hide some information while buyers would probably desire more. Nevertheless, if the information is just flowing around the market, then participants can easily obtain information to evaluate the deals in hands. In other words, they will make their own choices based on these information. Why this to be crucial? Information can help the participants to achieve their "best" deal. Therefore, the market (price) would be more efficeint.

4.) Competition :
In most economics 101 classes, the textbook would tell you that there are various form of markets, and in some markets the producers can extract more profits from consumers. That is why "competition" being important. When producers in the market compete with each other fiercely  they would muscle their power to outperform others: cutting price, designing a new outfit or products, developing new technology. You name it. Idealistically, if all markets work well in this way, every individual should have the best deal out of the system.

In reality, we have more than "one" market. "market" can be in all kinds. Sometimes we have to exercise our imagination a bit. Plus, we have a thing called "government", who constantly apply something into the market. Liberal economists wouldn't like government too much. However, they are still a player we cannot exclude. The following illustration should be closer to reality.

Some explanations:
Starting from the tops, there are individuals in the world about to join the market. They will first participate into "Labor Market", the earn some "coins" (That coin actually has a lot to talk about, yet, we skip it for now), she would use it in a "Goods and Services Market" buy things she needs(two coins are taken away), she saves some, going to the "Financial market" to invest(3 coins). Notice that the number of coins doesn't add up if we ignore the existence of "government", which collect "tax"(one coin) out of your pocket.I place a black box right next to every market in the picture. As we constant hear "market is a black box", lots of people really don't know how it functions. 

Combined with the illustration and the elements above, we should have some ideas how a "Ideal" market to function well. However, it is easy to have a problem here and there.  We called it "market failure." It happens all the time. We all know that, conceptual frameworks usually wouldn't work just smoothly in reality.

Does it mean that we have to abolish market mechanism as a whole, using another mechanism to decide resource allocations? 

Some say "Government" should do more jobs. It collects some "tax" money to offer services. Those services could be public goods(e.g. waste collection, parks, etc), or most important of all, to offer a service called "supervision": making sure every participant in the market plays by rules.

Some say,even further, to make government as a "centralized agency", which could assess the economic conditions and plan the best for all their citizens. Some of them form "State Capitalism*", or "Socialism", or "Communism." 

Some thinkers even bring it further to other alternative system design. They think this "Centralized Agency" should be a super computer, which would be free of "human mistakes" and plans things to perfection. This is not in reality yet. I am not sure how that would work. Yet, I still keep that a place here.

As I said, market exists way earlier than any "-ism" kicks in. So, it won't be surprised that,if we exam closely,every political entities on this planet participates into this "market" economy.  The differences are, some runs it better, while other just not as well. Some have more "market failure", some can cope with it.

Here, we already have a lot. This article would end here. More will be brought up in examples and theories in the following series.