How are markets organized?


Consequences of organization



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5. Consequences of organization

To emphasise organization on markets does not imply a denial of other processes by which order is created. The effects different elements of organization give rise to can be reached by other processes, above all by the mutual adjustment often held to be significant for markets (Lindblom 2001) or the development of special cultures on markets (Aspers 2011.) It is not only decided memberships that rule the access to a market. Economists have pointed at other obstacles to access. Access to markets may also be limited because everybody does not have resources enough to buy, to manufacture or to sell. The corresponding differences are valid for other elements of organization. The non-decided correspondence to rules is norms that are developed on markets and to a large extent differ between different markets (Aspers 2011.) Non-organized monitoring consists, for instance, of the consumers’ daily monitoring of goods and prices in various shops. And the most important sanction on most modern surplus markets is the buyers’ refusal to buy from some sellers because their products or prices are not accepted. All these forms are different than the corresponding elements of organization.

Sellers and buyers make a large number of decisions about their own actions on markets, e.g. about what to sell or buy. However, elements of organization are decided and those decisions affect others than only those who make them. Therefore, organizing decisions must also be communicated to others and thus achieve a greater visibility and publicity than the decisions the individual sellers and buyers make on their own behalf. Elements of organization thus get a different attention than market elements.

The decision aspect of organization has several important consequences (Ahrne and Brunsson 2011): decisions are attempts, decisions create a form of uncertainty, decisions give explanations, they stress the importance of specific decision makers who are responsible for the decisions and they call attention to the possibility that people can influence the situation.

As decisions on different elements of organization are about what others shall do there is a potential gap between the contents of the decision itself and what will happen; there is an uncertainty whether the decision will be followed or not. Organization is therefore always an attempt, but it is a question of attempts that have been publicized. Those who have made such a decision have also stated what they want others to do. It can therefore be seen if this succeeds or fails and such failures often become more visible than ordinary market failures. This may be one reason why it is often said that organization destroys markets. At the same time decisions can lead to greater transparency in that they are always visible.

Decisions also imply that there have been options and a decision can therefore be questioned; why was this option chosen instead of another; other members could have been chosen, rules could have been formulated differently, etc. It is therefore easy to question the design of various elements of organization.

Decisions are in themselves attempts to create certainty and predictability and to stipulate how the nearest future will turn out. At the same time uncertainty is created (Luhmann). Through a decision a particular option has been selected before another and thereby is shown that there are in fact options. Thus an organized order always involves some instability – it may change and may change fast.

Decisions are made by specific individuals or organizations that become responsible for the decision and its consequences. Consequently, there is also somebody to turn to if one is dissatisfied with a decision. For every element of organization there is somebody responsible. For that part of the market that is the result of mutual adjustment or development of a culture, the responsibility is highly diluted. There are many buyers and sellers but none of them are responsible for the market itself. There is instead talk about “market forces”.



All in all, these consequences of organization combine to make elements of organization visible and attract attention. In this way focus is moved from market elements to elements of organization. If one is dissatisfied with something on a market it is common to direct one’s complaints to organizers rather than to individual sellers or buyers; one complains of environmental organizations which issue eco-labels, trade associations that lay down guiding principles or states that make laws.
At the same time criticism against organization often leads to new decisions being made for others and the result is more organization. To change a market generally requires fairly much organization. Even the idea of “setting the market free” leads to demands for organization. In some cases this idea leads to an extreme amount of organization. A case in point is today’s European train transport market (Alexandersson.)
Markets are often described as highly dynamic. But much of the dynamics is created by organization. To the extent that a market is organized it is also unstable and quick changes cannot be excluded. Organizers strive to stabilize the market on their conditions but cannot guarantee the result. The mutual adjustment most often leads to slower changes. Those who analyse the consequences of mutual adjustment on markets have shown great interest in possible equilibriums. But when organization is concerned there is no equilibrium that guarantees stability. Precisely therefore is it common that market actors dream of and ask for so called stable rules of the game. But because it is a question of rules of the game they can change very suddenly and it is difficult to predict when and how. The organization of a market typically leads to a compromise, not to efficiency – it is unlikely that the organization of a market should be the unambiguously most efficient solution of anyone’s problem. Rather than emerging as functions of different kinds of goods that necessarily will generate different forms of market organization, single markets are temporary and the not particularly stable results of a struggle between many people and organizations with different interests (cf. Weber 1978). The rules of the game are rarely the fulfilment of the dreams of anyone particular.
All this has implications for how we can understand and explain markets. They can partially be explained by reference to organizers who have appeared, met with resistance and support and by the fact that some organization has succeeded and some other has failed. To understand why markets look in a particular way just now one must analyse different organizers, their interests and chances of influence. In the next section we will look at important market organizers.


6. Organizers of the market
There are a large number of market organizers and there is reason to distinguish between some major categories. Sometimes, not least in so-called regulation research the role of states is particularly stressed and is contrasted to “private” or “non-governmental” regulation. But states have many roles on markets and we will instead make another classification of the market organizers.

We discern three major categories – Others, profiteers and market actors. They all use organization to try to change the market order that has been created by others’ organization efforts, by in the market mutual adjustment or by cultural development. But their roles and motives differ.


Others”

Modern society contains a growing number of private individuals and organizations we might call “others”, i.e. persons and organizations that claim not to act in their own interest but in that of others or even all. (Meyer). They do not act themselves but offer views and advice on how other people and organizations should act. One group of others that has attracted special attention in the research on how markets are organized are economists. This research has often been called performativity theory (Callon 1998a), since the theoretical statement on how a market should be organized, i.e. the theory, is the template for how real markets are organized. Economic sciences have not only studied markets but also developed models for what properties markets should have, e.g. in the form of the ideal market which we described above. By the increasingly central role of the social sciences they no longer are a mirror of the laws of society, but can instead be viewed as an integral part of its own object of study (Latour 2005.) Economists have also succeeded in influencing the organization of quite a few real markets (Callon 2007; e.g., Callon, Millo, and Muniesa 2007; MacKenzie and Millo 2003.)


The economic theories that have had an impact have been very general and dealt with markets at large. There are also “others”, more interested in the function of specific markets. Some markets are supposed to give rise to negative so-called external effects, for instance, in the form of environmental pollution, injustice, health problems, moral decay, or misery in general (Satz 2010.)
Markets are culturally prominent today, and moreover, in many cases ethically controversial (Satz 2010); there is hardly anyone today without an opinion on sweatshops in publicly well-known industries like coffee and clothes (Aspers 2006; Micheletti 2003; Stehr, Henning, and Weiler 2006.) Such markets attract many “others”. The external effects constitute the basis of legitimacy of proposals for re-organization of problematic markets or even proposals that goods dealt in them should no longer be traded at all. Those who wish to organize markets for this reason can join in associations, for instance, environmental movements or temperance societies. Although these organizations have more purposes than organizing markets they sometimes are examples of organizing buyers through membership. Members may be exhorted to buy only certain goods from certain sellers.
Another strategy is to set standards for goods, a possible strategy for influencing what is sold. Such standards can state which goods are acceptable and which are not. It is often possible to combine it by some kind of monitoring. This is the case when approved goods are marked with certain symbols, as for instance eco-labels or fair trade labels. Sometimes sellers are compared to standards. Sellers who do not confirm to certain rules may be sanctioned by boycotts.
Various “others” have different chances to influence the organization of markets. When they wish to strengthen their influence they often approach states or organizations with states as members. Economists try by moulding public opinion or by lobbying to influence states to organize markets in the way they think is the correct way. Economists have often been engaged by states to design rules for how to organize markets. OECD is a well-known organization of states in which economists both survey how different states organize their markets and issue standards for how markets can be “better” organized. The EU also uses economic experts to create the so-called inner market, which among other things is built on comprehensive standardisation, and action plans for competition (Fliegstein 2008.) In a similar way, organizations such as environmental movements often wish that their organizing could be made into imperative laws, with legal sanctions upheld by states or associations of states. They may also want states to set up rules for buyers, for instance in the form of age limits, or some kind of approval as a licence to buy firearms or through membership in a club or that the exchange itself should be organized, for instance, by rules on opening hours, spatial allocation and design.
States as organizations are often a medium for various interest groups to influence markets, states thus become one “other” among several. The central role of states for explaining the emergence and form of markets (Fliegstein 2001) should be understood in the light of their unique position and concomitant power to organize markets. Following various forms of globalization states have got a different and often weaker role. This has led to an increased transnational organizing of states but also to greater scope for non-governmental “others”, not least for those with transnational agenda.
States also have other roles in the market. They are always large buyers and often also sellers in select markets. They also have an economic interest in markets.
Profiteers of the market

One of the historically most important motives for states to organize markets has been to make money. States have organized markets to make it possible and more efficient to collect taxes. Instead of buyers and sellers dealing with each other without outside intervention, states and princes have established market places to gain control over the economic life (Masschaele 1992.) To be able to hold a market was almost identical to being a prince (Weber 1998:163.) Weber argued, “princes … wished to acquire taxable dependents and therefore founded towns and markets” (Weber 1981:132.)


Others, too, wish to make money on markets and have an interest in influencing their organization. Brokers are an example. Brokers act in the market as representatives of buyers or sellers. On the stock exchange each side has its own representative, while on property markets and in the case of auctions there is one representative who handles the relation for both parties. There are different variants for what side that bears the costs, and to what degree. It is thus a case of two combined markets. On one primary market there is exchange of, for instance, stocks, property, or antiquities. On the other market brokers and auction houses compete for their clients’ commission to sell or buy. It is a market that is parasitic on the primary market in that it can exist only if the primary exists. At the same time the establishment of a parasitic market means that the primary market will be differently organized, with other sellers or buyers or because existing sellers and buyers will acquire the competence of a broker, for instance.
Sellers on the parasitic market have an incentive to make sure there are many deals on the primary market. Brokers and auction houses rarely take any great risks, as they never own the securities or the properties; they are only intermediaries. They live on the volume of deals for which they will get commission. It is in their interest that markets are organized so that volumes are maintained, regardless of whether prices go up or down. Agents for players, models, photographers and other services also occupy this structural position.
Further examples of organizers who make money on markets are consultants who help sellers to translate standards to the sellers’ specific conditions, or who offer certificates or help with certificates. Such consultants often work very actively to bring about standards, their look, and they thus contribute to and form much of this kind of standardization (Tamm Hallström.) They live on the fact that it is often easier to make people agree on abstract rather than concrete standards; thus many standards are not too explicit and concrete but need to be interpreted. .
Another example of market profiteers are media who attract readers by watching over markets by testing various consumer goods, writing film reviews or rating the service of different airline companies (Karpik 2010.) They help customers by scanning the market but they also set the standard for what is a good bargain, directly or indirectly.
Common to all market profiteers is that they have double interests, on one hand they want a market that functions well to be attractive for others, but they do not want to make themselves superfluous. They have thus often reasons to unite to organize the market in order to make it an attractive marketplace.
Sellers

Thus, sellers and buyers act on markets that are to a large extent organized by others. As there is voluntariness they may step in and out of markets. But most sellers cannot simply go from one market to another; if one sells cars it is not so easy to switch to selling butter. On the labour market those who sell their labour encounter similar blocks. Instead of exit they therefore often use voice. They may react against the organization of others by supporting some organization and oppose others. Moreover, they can more pro-actively organize the market they themselves are working on. Large companies are well-known and important lobbyists and opinion-makers with decided views on market organization. They operate singly but above all through various meta-organizations that together can form entire systems (Andersson 2011; Fries 2011.) These meta-organizations can create organization among their members and influence organization decided by others.


A central uncertainty problem meeting sellers in a market is competition. The pressure of competition can be diminished through organization. One method is for the seller to organize buyers with the help of membership. The single seller also has the opportunity to diminish its uncertainty and arrange the competition with the help of other elements of organization. Price cartels are examples of attempts to remove the price as a factor of competition. Standardization of the merchandise is an attempt to exclude its characteristics or at least certain of its qualities from competition. By setting standards for different components in a good, a seller can make sure what characteristics buyers will be interested in at the same time; this will not be dependent on sudden changes on the part of buyers or competitors. In lines of business with fast product development sellers put great effort into making standards for their goods. Systems of standardization and certification of sellers is one means of diminishing the number of competitors and make them more equal. In this way one can increase predictability – both by increasing the predictability of present competitors and decrease the risk for new competitors to appear all of a sudden. Sometimes a trade association and rules for membership in it have a similar effect. But at the same time the organization itself is a source of uncertainty.
Buyers

Many of the “others” that try to organize markets refer to the circumstance that ultimately they work in the buyers’ interest. And everybody is a buyer of consumer goods at least. It does happen that people engage in organization in their capacity as buyers. They have often, but far from always, an interest in promoting competition among sellers. They can create more or less complete organization such as the cooperative movement. They can form consumer associations that make demands on sellers and producers and survey some goods. Another example is initiatives to boycott particular goods or sellers.


One way of analysing buyers’ interests is to look at what is called transaction costs (Williamson 1981.) The concept of transaction costs refers to costs in the form of time, efforts, and uncertainty a buyer has to find what he wants on a market. Primarily one can distinguish three types of such costs: search and information costs, bargaining costs and policing and enforcement costs (Williamson 1981.) Variations in transaction costs may occur because of the accessibility of a piece of goods, what form it has and how it should be delivered; if it is something that will be delivered for a longer stretch of time, for instance, an education or a treatment of some kind. It may also concern difficulties to judge the quality of the goods.
Several of the market organizers we have distinguished above argue that they decrease the buyers’ transaction costs. For enterprises like stock exchanges, brokers, or auction houses, diminished transaction costs for others are an important part of their business concept. Precisely by a division of interest can the more fundamental problem of trust on markets be solved; as owners of rights you have a business partner (broker) you can trust and do not have to build up trust from the start for every single transaction. Competition between exchanges to tie up clients is primarily about transaction costs and what services they can offer their clients apart from buying and selling securities. Consultants of various kinds make money by decreasing their clients’ transaction costs by monitoring or sanctioning sellers by certificates or ranking. These consultants often estimate to what extent sellers and buyers follow certain standards. Here it is much about diminishing the so-called policing and enforcement costs. Auction houses deal in unique items, such as antiques or art objects that cannot be standardized. But by arranging auctions an enterprise can organize purchase and sale to decrease the transaction costs for their customers, for search and information costs as well as bargaining costs.
According to the original theory of transaction costs (Williamson 1975), too high transaction costs will make organizations that are dependent on buying something on a market, e.g. commodities or a particular type of services or labour, include the production of the commodity or service in the own organization. In the theory organization (called “hierarchy”) and market are alternative solutions. If, however, one understands organization as combinations of elements of organization, it will be possible to modulate the picture.
First, one does not have to see organization as opposed to market but can see how different elements of organization instead can be a precondition for or simplify market exchanges. Second, one can see that there are several different combinations of elements of organization that make markets more or less and differently organized. Their organization influences the transaction costs and thereby the buyer’s cost estimate. A highly organized market diminishes the buyer’s incentive to incorporate production of the goods in his own organization. Third, and most important, incorporation is not the only means of organizing. To diminish the transaction costs a company may try to influence the organization of the market instead. The choice is thus not only between buying and producing but organizing may instead lead to organization in order to be able to buy simpler and safer on a market.
The great engagement of some companies in standardization work, their demands for certification of their suppliers and their lobbying of states and other organizations, can partly be understood as attempts to influence their transaction costs. At the same time these organizational activities come at a cost just like incorporation into the own organization (Williamson 1985:162), which may explain why companies do not always choose organization alternatives before status quo. In standardization theory one has pointed out that smaller firms (as well as consumers) rarely have enough resources to be on an equal footing with, or able to take part at all, in international standardization work (cf. Djelic and Quack 2007.)

7. Questions about organization and market
This paper has combined two literatures. The first is the economic sociological literature about markets. This literature has touched upon organization of markets only to a limited degree. The other literature is the literature on organization. It has only touched upon markets to a limited degree. We have shown the fruitfulness of combining these two literatures, to enable us to better understand how markets are organized and how they become organized.
Classical economists and sociologists seem to agree that an efficient and well functioning market requires a high degree of organization but what exactly they mean by organization is often unclear. We have discussed the organization of markets from a concept of organization that is wider than only comprising formal organizations but narrower than embracing all order or active ordering. By breaking down the concept of organization into different elements a better analysis is feasible as well as a deeper understanding that markets are organized and how they are organized.
Organization is more than hierarchy or rules. To put market against hierarchy runs the risk of hiding essential elements of the organization of markets. The same risk exists when one speaks of the regulation of markets. And it is definitely not exclusively, or even mainly, states that organize markets. There are many market organizers.
The elements of organization and the market elements can be combined in different ways. Existing markets are organized to different degrees and in different ways. Common for all market organization is that it provides space for buyers and sellers with some form of free choice, and that there is competition on either or both sides. Organization of markets does not mean that they will be eliminated. On the contrary, organization is often a central element to bring about a market or to change a prevailing market structure. An organizational perspective on markets also gives rise to new research issues. During the last half-century scholars have put a number of fundamental questions about how formal organizations are constructed and function. Most of these questions can also be asked about the organization of markets but can be expected to yield different answers.
A comprehensive question is how organization can contribute to create markets. What do such processes look like and what decides if a market arises and why it gets a particular organization from the beginning? Are there, in spite of the modern faith in markets, still areas that are especially difficult to organize as markets and how are such difficulties overcome? Why are not all markets organized like stock exchanges?
One might also ask who the organizers of the market are and how they appear. Most organizers are formal organizations and knowledge about them is necessary for understanding how they operate. We have distinguished between “others”, profiteers, and market actors and demonstrated that they have partly different functions and characters. But are there other or more detailed subdivisions that are more relevant and clarifying?
Organizers can be expected to have different interests and values. Some wish to maximize their own profits, others wish to promote efficiency or ethics, while still others worry about the impact of markets on environment or distribution. What conflicts arise between these organizers and how are they handled? The instruments for solving conflicts on markets seem to be fewer than in organizations. To what extent and in what way are conflicts about market organization solved and to what extent do they persist? Why are some interests and values dominant on some markets?
How does the organization of markets change? As in the case of formal organizations, there are many who wish to reform markets with various arguments. Sometimes such reforms are attempts to rectify previous reforms that one dislikes; at other times they are reiterations of reforms that have not had the wanted impact. Sometimes they are reactions to the perception that markets have developed in a negative way due to other processes than organization. From where do the ideas for these reforms come and what possibilities to learn from experience exist? What influences the transition from organization to institution and vice versa?
As all organization consists of attempts the question of its effects becomes central. What effects do different elements of organization or combinations of them have in different situations? Is it more difficult to organize some elements of the market than others? Are there strategies that organizers use that is more successful than others? Under what circumstances can market organization be institutionalised?
Taken together the answers to such questions may elucidate issues of power and responsibility on markets. Who gets power over the market organization? Formal organizations concentrate responsibility while markets dilute it to a higher degree. What effects do different degrees and types of market organization have for the division of responsibility for markets?
The answers can also elucidate the comprehensive question of to what extent markets are ruled by mutual adjustment, institutions, or organization, and how these forms interplay?
The answers to all these questions are, of course, interesting in their own right. They may also be compared to the answers given about formal organizations. Such a systematic comparison can be used as a research strategy to generate further and more precise questions and answers. But the comparison also has a value of its own. Formal organizations and markets are the central forms of the economy and it is important to better understand the differences and similarities between them. And the difference is not that one is organized and the other is not.




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