1.1 Coordination in the Economy
The following topics on this page will coordinate with readings from Chapter 1 and 2 of your textbook, Markets.
Sociological Understanding of Markets
Reading the Markets book by Patrik Aspers is intended to provide you with a sociological understanding of how markets develop, how they are shaped, how they are organized, how they are transformed, and how they are sustained. While we will engage with various aspects of economics in this course, this is not a course about energy economics. Markets are a form of economic coordination, but markets alone are not the only form of economic coordination, either (we will come back to the other main forms later).
To be able to study markets, we have to be able to identify market fundamentals. First, we have to be able to identify what the market is about. That is, markets trade in the same or similar things. For example, stock markets trade in stocks, commodity markets trade in commodities, and of course, energy markets trade in energy. To be able to trade between these markets, we need to translate the means of assessing value into "common currency" because it can be difficult to, for example, attempt to directly trade so much of a given mineral for 1 kilowatt of energy. This leads us to the second aspect of market fundamentals, which concerns how things are done in the market. We have to be able to understand the culture of the market, the rules that need to be followed to participate in the market, and specific terms and language in which the trade occurs. Third, we also have to be able to understand the value of the offer. For example, it might not be exactly clear that one is trading land for beads, as supposedly was the case when the Dutch purchased New Amsterdam (New York) from the indigenous tribes. It is these three market fundamentals that provide the basic order for market coordination in the economy. Again, what is the market about, what are the procedures and practices for getting things done in the market, and what are the values of the offers of exchange in the market?
Economic Order and Uncertainty
Markets are specific mechanisms within the economy to move, transfer, trade, and distribute various units of value. The definition of economy that we will be using here entails the same modes of coordination and distribution, but also includes production and consumption. That is, the study of the economy concerns how wealth is produced, consumed, and distributed in a coordinated manner. But, no matter how coordinated, organized, or well-planned the economy is, there is always risk and uncertainty in the future. If we knew the future in perfect detail, we would know exactly how much food to produce, how much clean water we would need, how much energy we would require, etc. This is not the case, however, and it is this uncertainty and risk that also creates winners and losers in economic outcomes.
Types of Economic Coordination
There are three main types of economic coordination that we will consider here; namely, networks, hierarchies, and markets. Networks are a way to map the structure and flow of social relationships between various economic actors and institutions. Establishing connections within the relevant network can be as basic as establishing a connection between buyer and seller, or as complex as a deeply interlinked globally distributed supply chain. Networks allow for a flattening of transactions, that is, any part of the network can generally speak to another part of the network. Hierarchies, on the other hand, are a form of economic coordination that requires central control and a top-down form of decision-making. Most corporations, for example, are examples of institutionalized hierarchies in action. Corporate structure often depends on hierarchical decision-making practices, such as from the CEO on down the chain of command. Though, it should be noted that very large corporations can contain networks in and of themselves. In a similar manner, we can see the third form of coordination are markets, which is typically the transparent and open forum for trade of goods and services. Transparency is highly important in market interactions, because advantages in information for only a few cause unfair conditions across the market, which we typically refer to as insider trading.