Theories about markets stand in a complicated relation to theories about organization. Some economic theories state that the opposite of the market is hierarchy. But the opposite of hierarchy is not market but rather voluntariness; hierarchy means that someone else decides what is to be done while voluntariness means that the actor himself makes the decisions, something that occurs in many other contexts than on markets. It sometimes seems as if by hierarchy is meant organization. It is a confusing usage: organization is an institution in which one element may be hierarchy but which also contains a number of other elements.
We hold that it is more fruitful to compare market to organization than to hierarchy. Market and organization constitute different institutions. That does not mean that they are opposites or irreconcilable. In this paper we shall argue that they can be combined and that they are nearly always combined in practice. We argue that markets are nearly always organized, even though the degree and kind of organization may differ. The fact that hat markets are organized has important consequences for how they function and for how we can understand and analyze them.
1. Market or organization? Economists tend to see markets as naturally generated. They stress that markets appear and function well when ”economic men” meet to satisfy their preferences by trading goods and services. Neither economic men, preferences, commodities, nor the institutions making commerce possible are explained – they are instead exogenously given in relation to the market. The market is described as a natural consequence of people’s mutual adjustment to each other (Lindblom 2001). Nobody needs to tell market actors what to do, or tell them to start acting; they are, so to speak, born with these capacities. As the market actors signal their preferences through prices, there will be a balance in each market between supply and demand. A market equilibrium has been established as a consequence of mutual adjustment (Hayek 1973; Hayek 1988; Smith 1981).
Because this process is considered a ”natural” or ”spontaneous” consequence, there is no need to explain markets according to many economists; the existence of the market is rather the starting point for further analysis. Oliver Williamson, for instance, argued, ”In the beginning there were markets” (1975:20). Organization is, at most, something that can replace the market when the price equilibrium fails, ”organizations are the means of achieving the benefits of collective action in situations in which the price system fails” (Arrow 1974:33.)
Sociologists are more divided on the question of whether markets are spontaneously arisen or actively administered. Some sociologists have emphasized how markets are the result of mutual adjustments (Luhmann 1982; Luhmann 1988; Smith 2007; White 1981; White 2002a; White 20089. Most sociologists argue, however, that markets are actively administered. Several use the terms organization and organizing to describe this administration. The most prominent idea is seeing states as central to the formation of markets, (Fliegstein 2001; Fliegstein and Mara-Dritta 1996.) Already Polanyi meant that markets are organized by a central administration: ” Where markets were most developed, as under the mercantile system, they throve under the control of centralized administration… Regulation and markets, in effect, grew up together” (1957:71.) Fliegstein argues that organization of markets should be considered a political process (Fliegstein 2001), and his focus was on strategies and ”conceptions of control”. But the active administration does not have to be through a state. Abolafia stressed the importance of markets being constructed, not least in the study of market makers. He argued that: ”The social constructivist perspective suggests that markets are not spontaneously generated by the exchange activity of buyers and sellers. Rather, skilled actors produce institutional arrangements: the rules, roles, and relationships that make market exchange possible” (Abolafia 1996:9.) According to Abolafia, these market makers see themselves as the creators of the market. They organize the market by upholding rules and standardising commerce. Callon emphasises that ”the market implies an organization, so that one has to talk of an organized market (and the possible multiplicity of forms of organization) in order to take into account the variety of calculative agencies and their distribution!”(Callon 1998b: 3.) Donald MacKenzie, influenced by Callon, has made several thorough studies of how markets have been organized, e.g. markets for emission allowances (MacKenzie 2009.) These have been created by political decisions with more or less support from market actors. Furthermore, he has shown that organizing by organizations has been a central part of the organizing of markets.
By maintaining that markets are actively administered sociologists criticise the economic approach. They often use the concept of organization as a term for this active administration. But what is meant more exactly by organization is often unclear and several questions are left unanswered: which elements on markets are organized and which are not, and not least, how does the organization happen? This goes also for the literature in political economy that describes how unions have influenced markets directly and through the state (e.g. Hall and Soskice 2001; Korpi 1983), but focus has not been on how this has been brought about. The latter literature has often taken over the view of what a market is from economists and as we have seen, this means that the question of organization tends to disappear.
What is missing from today’s literature on this subject is a systematic discussion of how organization and market are connected. One might say that economists have taken the market for granted. Sociologists have touched upon organization but have not succeeded in explaining what it means. We shall describe the connection between organization and market and how markets are organized. We shall take as our point of departure a fairly precise concept of organization that is both more comprehensive and narrower than those current.
We shall start by defining the concepts of market and organization. In section 3 we shall show that it is possible to achieve well functioning markets on the basis of complete, formal organizations and in section 4 is shown how markets also can be partially organized. In the 5th section we describe the consequences of organization, not least for the stability and changeability of markets. Markets are formed by the interplay and conflicts between different organizers. In section 6 we point out some different types of organizers, including buyers and sellers. In the last section we take up a few problems for further research on market organization.
2. Market and organization!
So, what is a market? Particular markets may have many and various characteristics but it is possible to discern a few elements that are fundamental or constitutive for the institution of market: without these elements most people would not think it was a question of a market or at least not a ”true” market. There have to be a minimum of characteristics for us to conclude that we are observing a market – there are a number of necessary market elements. A market is a social structure for the exchange of owner’s rights. There are two parties exchanging, seller and buyer. They shall have the right to own and the right to buy and sell. In most cultures only individuals and organizations (including states) can have these roles. It should be voluntary to take part in exchanges, i.e. the buyers must want to buy and the sellers want to sell for an exchange to happen.
There must also be something to trade - a good, usually consisting of an object, a service or money or other financial instruments. The parties do not have to perceive the goods in the same way but they must perceive it as goods. It is a question of exchange of goods, not gifts or robbery – one party cedes the right of ownership of a piece of goods and in turn gets ownership of another piece of goods. There must be a means of deciding the value of the goods and in a developed economy this normally means that monetary prices must be set. It may be at an auction, such as when buying furniture at Sotheby’s, or as when the price is set in a shoe shop.
The most important argument for legitimating markets is to try to point out that they are characterised by competition (Boltanski and Thévenot 2006). By referring to competition one can legitimate sellers’ and buyers’ rights to act as they want themselves: sellers have the right to set what prices they want and sell to whomever they want and buyers in their turn are free to buy or not. Without competition the voluntariness of one of the parties could put the other party in a coercive situation. Competition means that at least three actors have to be in a relationship in which two are on one side and one on the other side of the market. Only in this case can there be a competitive relation between either two buyers of the same goods or two sellers competing for the same buyer. The competitive relation is different than the conflict of interest existing between sellers who want to make as much profit as possible from the thing sold, and buyers who want to pay as little as possible for the same goods or services (Geertz 1992:226.) It is the ”third party” (Simmel 1923), i.e. the one who can benefit from the fact that at least two others are competing for a deal who can profit from the competition. Markets not characterised by competition are difficult to legitimate and lack of competition may also lead to a conviction that there is no market but only a case of barter.
A formal organization - a state, a company or an association – is built on the institution Organization. For us to conceive of something as an organization it should show a number of elements and these differ from those of the market. Organizations are constituted by other elements. Organizations are decided orders. Organizations are formed by decisions and in organizations there are decision makers who decide over and on behalf of the members of the organization. The decisions concern, among others, a number of fundamental elements in organizations. One is membership: organizations are not open to anybody but organizations decide who is member or not. There is a hierarchical principle in organizations, i.e. a right to make binding decisions for the members of the organization; however, hierarchy is not an obligation – an organization can also make decisions that are not binding for the members. And members only have to follow decisions within their zone of indifference (Barnard 1938: 168-69.) Inside this zone of indifference organizations may decide on rules for the actions of members. These rules may be made binding for members and rules are very common in organizations. A rule stabilizes actions: it stipulates similar actions in similar situations. Organizations also have the right to monitor its members and they have the right to issue sanctions, both positive and negative. All these elements of organization are fundamental for formal organization – formal organizations have access to them and are also expected to use them (Ahrne and Brunsson 2008.) Organizations are legitimated in a different way from markets: not by the idea of competition but by the idea that members have chosen voluntarily to belong to the organization or because the decision principles or leadership of the organization have been designated in a manner that reflects legitimate values, e.g. democracy or ownership.
Described in this way market and organization appear very different from each other but they are in no reasonable sense each other’s opposites and they are not incompatible with each other. The fact that mutual adjustment between parties with high degrees of liberty happens on markets seems to have tempted many to suppose that everything else on markets also is a result of this type of processes in which no one decides on the actions of others; more or less well functioning markets is an unintentional consequence of economic men acting in their own interest. It is assumed that sellers and buyers in a market are not decided by membership but by their voluntary decision to take part or not, that the parties are free to act as they wish in each situation, that they do not expose themselves to control and that there are no other ”sanctions” than the decision of individual parties to interact or not with a particular other agent. But although such markets may exist, it is more common that markets are combined with organization. There is no fundamental opposition between organization and market but these forms may be combined. Many markets have arisen with the help of organization and markets are regularly exposed to various attempts at organization. Something may be highly organized and still be regarded as a market.
Markets are organized in different ways. We shall begin by discussing completely organized markets and then proceed to those who are partially organized.
3. Completely organized markets
The fact that contemporary economists make a sharp distinction between market and organization and assume that markets appear naturally is somewhat surprising as their market theory is based on Walras’ and Marshall’s studies of Stock Exchanges (Aspers 2007). Marshall wrote already in 1920 ”The most highly organized exchange are the Stock Exchanges. As a rule those who deal in it are in effect a corporation: they elect new members as well as the executives of their body and appoint the committee by which their own regulations are enforced” (1920:256-7.) What Marshall noted is that exchanges are formal organizations. Usually, they have the form of associations or companies. As formal organizations they may not only make decisions, they also have access to all fundamental elements of organization. To deal on exchanges one must be a member and membership is decided by the exchange. This means that the exchange is in control of who may deal (although nearly all members deal on behalf of others, their clients.) There is a hierarchy in that decisions may be binding. This possibility to make binding decisions is often used. One decides on membership and decides on a large number of detailed rules such as exactly what goods are to be handled. There are often decisions on detailed rules for classifying goods in fixed and clearly separated groups. One defines different kinds of securities or different qualities of commodities. The rules normally include also how exchanges should be carried out as well as how information should and may be distributed. The Exchange is entitled to control what deals are made and how the members act. It can issue negative sanctions in case breach of the rules is discovered. But as in other organizations the Exchange does not decide on everything the members do. The members are left some areas where they can decide themselves – they have a zone where they are not indifferent. Members may decide themselves when to be sellers and when to be buyers, how much to exchange (although there may be some restrictions) and what prices they are willing to accept. And these prices create competition between members. Without this degree of freedom it would no longer be a market. One might say that the extensive organization of the exchange is a precondition for this freedom. The market is thus an effect of organization.
It is interesting to note that it is correctly organized exchanges that can create markets that come closer to the market ideal of economists than all other markets. Walras stressed that ”the markets which are best organized from the competitive standpoint are those in which purchases and sales are made by auction… this is the way business is done in the stock exchange, commercial markets, grain markets, fish markets, etc”(Walras 1954: 83-84.) On an ideal market (Knight 1921:76-81) there are competing buyers and sellers and the role of each individual buyer or seller is marginal and cannot affect how the market works or how prices are formed. The transaction cost is zero and the products are homogenous. These products are changed between operators who can act both as sellers and buyers. The market operators have access to plentiful and equal information. A modern stock exchange fulfils these requirements to a very high degree. Stocks are homogenous; one H&M stock is identical to another. There are rules for the giving out of information and traders with privileged access to more information than others, so called insiders, are subject to special rules. Computerised price mechanisms have been created which increasingly remove personal relations on the floor, increase monitoring and make the cost of a particular transaction minimal. The price of the standardised goods becomes the only information needed and sellers and buyers compete with the price. (Spence 2001.)
It is interesting that the creation of such a near perfect market requires much organization. We must ask ourselves if a perfect market presupposes full organization.
Another case of markets organized within the frame of a formal organization is the setting up of so-called internal markets in companies or states. The leadership of the organization allows various units to exchange goods against payment from other units. This organizing requires more decisions than those in stock exchanges. In stock exchanges one can let in members who already possess the basic skills of buying and selling. It is a question of selection of such operators. When one creates internal markets the sellers and buyers have to be actively created; units must be provided with some kind of ownership rights, anchored in the rules of the organization, not in those of the state, an accounting system must be set up to measure the flow of resources between departments and assets in each separate department, and there must be decision makers who can decide about purchase and sale. The management of the organization often sets prices in the form of so-called internal prices. Competition is guaranteed because departments also have the right to buy from outside suppliers or from several suppliers within the organization. The actors on internal markets usually act only in one of the capacities as buyer or seller on a specific market.
Yet another form of complete organization of markets is cooperative association. One example is economic associations in the farming and forestry sectors. The members ”own” the society but are at the same time its most important suppliers (e.g. of timber) and customers (e.g. purchase of forestry services). In this case some actors who originally were sellers associated and established an organization that functions as buyers. The consumer co-operations are originally associations of buyers who create sellers within their organization. Members decide jointly which goods should be sold, to which prices and in which shops. But the individual member is free to decide what to buy and in which shop and she may also shop from competitive sellers outside the association.
Completely organized markets, however, are only a minor part of all markets. Most markets are not organized within the framework of a formal organization. On the other hand, this does not mean that they are not organized at all. They nearly always contain some elements of organization. Such partial organization is the theme of our next section.
4. Partially organized markets A formal organization has access to all the elements of organization we have mentioned above. But the different elements may be used separately or in different combinations outside formal organization. Society contains plenty of partial organization (Ahrne and Brunsson 2011.) By this term we mean that individuals and organizations may use the elements of organization, membership, rules, monitoring, sanctions, and even hierarchy, without being combined in a formal organization. This holds for markets, too, also those outside formal organizations can be, and nearly always are, organized to some extent through combinations of one or more elements of organization. These elements of organization are geared towards different market elements: to goods, sellers, buyers, exchanges, prices or competition.
Such partial organization is typical of so called fixed-role markets (Aspers 2011.) They differ from security markets and other ”switch-role markets” in which persons or organizations are sometimes buyers and sometimes sellers, so that some actors are always buyers while others are always sellers. On the clothing market retail-clothing companies are sellers while the clothes consumers are buyers, while the clothing company is a buyer on the labour market of employees. In the market for special steel Sandvik is a big seller while, for instance, mining companies and machine manufacturers are buyers. As we saw above, economic theory was not originally developed for fixed-role markets, and these do not usually function in accordance with how markets called efficient by economists should function. We shall now look closer at the various elements of organization in them.
Membership may be used on markets to decide who may appear as a seller in the market, if at all. In the guild system admittance as seller was decided (Commons 1931.) A modern variant is the requirement in some countries or cities to belong to an organization to be able to offer taxi services. Arrangers of market places of various kinds nearly always have to decide who will be allowed to appear in the market – space is limited in the market place or the exhibition hall and furthermore, the arranger will perhaps only allow sellers of particular goods or sellers with particular qualities, for instance especially serious ones.
Membership can also be a means of strengthening sellers even though it does not lead to direct exclusion of some potential sellers. Sellers may associate in trade associations, sometimes with the purpose of giving sellers a certain identity as particularly serious or reliable through membership. Sellers on some markets often state in their information material that they belong to for instance, the French Union des Syndicats de l’Immobilier or The Swedish Bar Association. Airline alliances give greater possibilities for coordinating long distance flights between airline companies. On labour markets the existence of strong unions forces employers to negotiate with them rather than with individual employees.
Membership in itself is not something positive on a market; it is also about what the organization does in relation to the market. To be a member of a cartel is nowadays not considered a desirable identity; on the other hand cartels can coordinate prices or distribute sales commissions between members in a way that will benefit them and palpably influence the function of the market.
Buyers can also be organized through membership. Employers organize in employers’ associations before negotiations with unions. Dissatisfied train commuters create a society whose membership size is an argument and they complain collectively instead of individually. Many sellers are interested in organizing their customers in various ”clubs” that generally do not contain any other element of organization than the membership itself. Airline companies create customer clubs for frequent flyers or for customers whom they hope will become frequent flyers because of the membership. In the last decades the functioning of the aviation market has become strongly influenced by these customer clubs and by airline alliances.
Membership may also be used as a means of limiting the number of possible customers although this is unusual and often forbidden by law. Restaurants can be made open only to certain customers by being turned into clubs with membership lists as a way of raising the status of the club and ensure customers about what kind of other customers they are likely to meet.
Rules are probably the element of organization of markets that has attracted most attention, particularly state rules but rules of other types and origins are common on markets. They may deal with how products should be designed, how sellers or buyers should be, which prices should apply, or how the exchange should be made.
States issue rules about all markets within some territories or even globally. But states can also issue rules that are valid only for specific markets. There are, for instance, rules that regulate which goods may be sold on markets for medicines. Buyers must be of a certain age, an age that may be higher than the age of majority. To deal in firearms the seller needs a special permit and the buyer needs a gun licence. Other organizations also issue rules. As we saw above stock exchange members as well as enterprises listed at stock exchanges, must follow many rules. Trade associations can set up rules that are conditions for membership.
Many market rules are standards, i.e. rules that are not binding (Brunsson and Jacobsson 2000.) The rule setter does not force the intended rule followers to follow the rules – because the rule setters are not entitled to do so or because they do not wish to force the followers of the rules. Some state laws are standards. In Sweden the Sale of Goods Act, for instance, is dispositive, i.e. voluntary for the parties.
But most standards are set by other organizations than states. National, and increasingly, international standardising organizations, have set a very large number of standards for goods in the last hundred years. There are standards for clothing sizes, screw dimensions, for computer and telephone components. Standards are used to categorise goods into those that comply with standards and those that do not. There are standards for which goods can be counted as safe or environmentally friendly. If many follow the same standards it means in many cases that the possibilities to combine different goods increase.
In some areas standards very efficiently limit which goods are offered in the market at all, as is the case for telephone components. It is not meaningful to try to sell components that do not follow established standards and therefore cannot be used in telephones. In other respects standards influence many buyers’ evaluation of various goods, for instance in the case of eco-labelling. Membership organizations for sellers may also develop quality standards to make consumer choices easier, among other things by introducing ”judgment devices”, in other words tools for facilitating for actors on markets to make decisions to act because goods and services can be evaluated (Karpik 2010.) Sometimes standards are developed in organizations that are common to sellers and other interested parties. One example is the Forest Stewardship Council in forestry (Boström 2006.) In other cases standards are defining for goods, for example so called appellations (Karpik 201:45-46.) Champagne must be produced exclusively in the district of the same name and by designated methods. Standards for different qualities of a particular commodity, such as farming products, make it possible for sellers and buyers to interact without the commodity being present. They are able to trust that the commodity complies with the standard. Historically, standards, including the introduction of a standardised means of exchange in the form of money, have been decisive for making it possible to deal in rights on stock exchanges and for the emergence of futures contracts.
Standards are also used to categorise sellers and buyers, especially if they are firms. Accounting standards used to judge the economic strength of a firm, belong here, or quality standards, or standards for environmental work or social responsibility governing how the internal work of a firm is administered and which should assure buyers that they are buying from solid, reliable and ethically acceptable sellers; (Botzem.) Standards may concern several parts of supply chains. Standards for fair trade, for example, concern from what type of firm a seller in his turn may buy – a clothing company should not buy its fabrics from sellers using child labour. And as a direct buyer of labour the company should not employ child labour.
Just like rules organized monitoring is relatively common. There are many who monitor if standards and other rules are complied with on markets. States control market transactions, to collect taxes, to ensure that goods are not dangerous or to maintain competition.
But much monitoring is carried out by other organizations. There are other organizations that certify or accredit other organizations. Companies may be certified as quality businesses or as businesses that are socially responsible. Rating institutes such as Standard and Poor’s or Moody’s survey the credit worthiness of businesses. It happens that senior citizens’ organizations decide to systematically survey the pricing of everyday commodities. Newspapers and other media publish and compare prices on consumer commodity markets. Companies may also be investigated on how ethical they are. In many cases monitoring may happen against the will of those monitored, in other cases companies themselves take the initiative to be monitored by applying and paying for a certification. In all these cases an outsider monitors the sellers and the motive is to inform potential buyers so they can make a better choice in some sense.
There are examples, however, of cases when buyer and seller have agreed to organize some form of independent monitoring to enable exchange and pricing in the market to work, i.e. to bring about a functioning market at all. One case is so-called timber measurement, which occurs when buying, and selling harvested wood. It is not so easy to measure exactly the amount of wood when the trees are still standing in the forest. The parties have therefore agreed to let independent timber measurers estimate the amount of wood, its quality and thus the prices when the harvested wood is delivered to the buyer.
Sanctions may consist of rewards and penalties. By organized monitoring one can facilitate for individual buyers, for example, to carry out a kind of sanction by refraining from buying from some sellers or by favouring other sellers. But groups of market operators or outside organizers can also institute sanctions. Such sanctions can be decided without the use of any other element of organization. Organizers decide on sanctions against market operators who do not have to be members and there does not have to be organized monitoring. An organizer can award something he, she or it deems worthy of encouragement. Such a sanction is recognition in the form of awards, e.g. on the book market or the film market. A prize is awarded to show what is considered a meritorious achievement, perhaps in the hope that an increase in output and demand of this kind of quality in books and films will follow. Sanctions, not least positive sanctions, are also a means of advertising the awarder of the prizes. An example of organized punishment is a decided boycott of certain goods or goods from certain sellers (Micheletti 2003.)
Monitoring is often followed by organized sanctions. Certification of an enterprise can be seen as positive sanction that follows after organized monitoring, refused certification as a negative sanction. The scrutiny of companies from an ethical standpoint by media can lead to listings in which some are pointed out as particularly bad. In this way the brand is denigrated. A bad report in a food guide can kill a restaurant while a good review can keep it fully booked for weeks ahead.
Hierarchy may be used by formal organizations. This means that the leadership of the organization use their right to make decisions that are binding for the members. Breach of such decisions may ultimately lead to expulsion from the organization. As we have pointed out, hierarchy is often put in opposition to market. But markets contain many hierarchical elements. It is common to point to states in this context. States are organizations that can decide on membership, rules, monitoring, and sanctions that will be binding for the actors on different markets. States can, for instance, force sellers to sell to certain buyers: large producers or wholesalers cannot simply refuse to sell to certain retailers. But which state shall offer hierarchy is not always a given thing. In international trade it is common for sellers and buyers to agree that hierarchy should settle disputes and which hierarchy should take precedence, which court or other arbitral institute that should be applied to. This principle can be traced back hundreds of years to the development of Lex Mercatoria, principles for trade, which governed economic transactions even between merchants from different countries and without direct state intervention (Volckart and Mangels 1999.)
Not only states establish hierarchy on markets. Organizations for sellers or buyers may do it as well. In such organizations hierarchy means that individuals or organizations voluntarily have ceded the right to make decisions on some of its actions to somebody else. They have the possibility to make decisions on rules, monitoring, and sanctions that the members are forced to follow as long as they wish to continue as members. The members of a trade association may, for instance, be made to follow certain ethical rules, and they may be forced to permit monitoring and accept sanctions, e.g. to pay damages. In cartels, such as those on the labour market, the rules may concern which prices can be accepted. A trade association can also decide how competition should be. NHL decides, for instance, that the teams that have done poorly in the previous season get to choose new players first, before the better teams in the post-season draft. It is not a matter of course, however, that trade associations are able to use the hierarchical principle in practice very often. It is usually meta-organizations, i.e. organizations in which the members themselves are also organizations. Such organizations often find it difficult to make binding decisions on questions that are controversial among members (Ahrne and Brunsson 2008.) Instead they use standards, voluntary control, and avoid negative sanctions.
Markets are differently organized
Even though it is unusual for markets to be organized in one single formal organization such as a stock exchange, nearly all markets contain elements of organization. It is easy, however, to observe that different markets are organized to varying degrees and in different ways. The market for clothing is differently organized than the market on groceries or train transports. The rental market is differently organized than the labour market. Different elements of organization are used to a varying degree and they organize the different market elements to a different extent.
Partial organization is not necessarily the same as an unequivocal order. As there are different interests behind the organization there may also be different rules and different forms of monitoring and sanctions in one and the same market. The point is, however, that markets cannot be explained without looking at how they are organized and that changes in the form of market exchanges always occur in interplay with different types of organization.
What is the significance of market organization? What consequences does organization have for how markets develop?