Nonmarket
Encyclopedia
In economics, nonmarket forces are those acting on economic actors from outside the market system
. They include internal and external organizing and correcting factors that provide order to market
and other types of societal institutions and organizations – economic, political, social
and cultural – so that they may function efficiently and effectively as well as repair their failures.
field:
However, other researchers have related nonmarket to the equally important societal institutions of community and culture as well as to command economies
, traditional exchange and non-profit organizations (see below).
” itself is a complex concept which Boyer (1997: 62-66) variously categorized as:
The following definition of market is adapted from Hollingsworth, Schmitter and Streeck (1994: 5) and is related to Boyer’s fourth and fifth meanings of "market":
” assume a capitalistic economic system
characterized by private property in the means of production and where markets provide a social space for voluntary contracts and competitive rivalry (Hollingsworth et al., 1994: 3). Economic markets tend to be very proprietary in that the costs and benefits of exchanges are more closely restricted to the parties directly involved in them – that is, people by and large get only what they pay for, and they pay for what they get – while nonmarket exchange arenas – political, social and cultural – are characterized by much greater spillovers and weaker links between costs and benefits so that a wider universe of parties other than those directly involved in exchanges bear costs and enjoy benefits (Hayes, 1981: 133; Tollison, 1982: 85-89).
s and firms in a capitalist economic system, nonmarket has also been applied to:
” way of running it. What would later be labeled the nonmarket referred to other macro
institutions (i.e., the state, community and culture), their organizations and actors that interchange and often conflict with interdependent market ones. Particularly since the publication of The Great Transformation (Polanyi, 1944), the concepts of “non-economic,” “social” and “nonmarket” successively emerged to refer to the internal and external factors that assist markets, firms and other types of institutions and organizations to function efficiently and effectively as well as repair their failures. Boddewyn (2003) interpreted them as “four perspectives on nonmarket” which the following sections analyze in terms of:
ones – including the issue of which one predominates over the others through both market and nonmarket modes of exchange (money, power, inclusion/exclusion, trust, zeal, moral commitment, etc.). At both extremes of this relationship, one has either an overly constrained market system
dominated by other societal institutions or a “market society” ruled by market actors, values and processes. Both extremes represent failures of effective integration between market and nonmarket societal subsystems.
(e.g., Milgrom & Roberts, 1992) interpret nonmarket to refer to institutions that are “not market in nature” – that is, not related to the pursuit of efficiency through complete information, unbounded rationality in relating ends and means, cost-benefit tradeoffs in choosing solutions, material incentives (e.g., prices reflecting supply and demand) used to reconcile divergent personal interests, and competition among actors pursuing such interests. This pursuit of efficiency depends on the existence of such institutions as private property and free contracting but, once the market system
is set in motion by society, it operates autonomously in isolation from other societal subsystems. In micro-economic
analyses, nonmarket factors either amount to “givens” (e.g., property laws), are treated as “allocationally neutral” because applying to all firms in a particular industry (e.g., corporate tax rates) or are ignored because “nontradeable” (e.g., reputation). Failure results from the lack of perfect competition in market
s.
in exchanges through personalized relations, internalized rules, norms and customs. For sociologists (e.g., Granovetter, 1985, 1992), nonmarket refers to endogenized social, political and cultural factors that permeate economic exchanges and are often necessary to achieve individual, organizational and interorganizational effectiveness which is not possible when economic action is “under-socialized.” Such factors allow many exchanges to take place even when pricing is difficult, money is inappropriate, market
s are not available, property rights are unclear and insecure, and the pursuit of self-interest is insufficient to guarantee orderly transactions free of malfeasance
and opportunism
. In other words, many micro-economic
exchanges are not purely dyadic, rational, self-interested and impersonal since cooperation is common among exchanging parties who frequently conform to rules, norms and customs, thereby developing a “socialized rationality” on account of “the social embeddedness of economic action.” Besides, firm actors have the moral obligation to consider the “appropriateness” of their actions. Failure is related to "under-socialized" behavior (e.g., "free-riding"), but also to the use of “over-socialized” collusion and fraud (e.g., the Mafia).
, state, civil society and culture – compete among themselves although inefficient or ineffective organizations may remain insensitive to competition because they can tap other resources (organizational slack, public funding, reciprocity
, nationalistic preferences, etc.) to survive even in the face of decline. If competition does not lead to the “exit” of inefficient or ineffective organizations, then political “voice” (petitioning, mobilizing opinion, protesting, etc.) is needed to change objectionable states of affairs. As such, nonmarket is related to the use of power (including force), with actors using their property and sovereignty rights to exert influence over others who deploy the same rights to resist such attempts. Market “exit” as well as nonmarket “voice” and "loyalty" are used by all organizations, and repair is enactable through these mechanisms even though institutional failure remains a constant occurrence through time and place.
Nonmarket refers to internal and external organizing and correcting factors that provide order to market
and other types of societal institutions and organizations – economic, political, social and cultural – so that they may function efficiently and effectively as well as repair their failures.
Market system
A market system is any systematic process enabling many market players to bid and ask: helping bidders and sellers interact and make deals. It is not just the price mechanism but the entire system of regulation, qualification, credentials, reputations and clearing that surrounds that mechanism and...
. They include internal and external organizing and correcting factors that provide order to market
Market
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
and other types of societal institutions and organizations – economic, political, social
Social
The term social refers to a characteristic of living organisms...
and cultural – so that they may function efficiently and effectively as well as repair their failures.
Uses, rationales and applications
Nonmarket (or non-market) forces are increasingly discussed in the literature of business, management, organization, strategy, social-issues, political-science and sociology.First uses
The term has been employed since at least the late 1940s. A.O. Hirschman defined “exit and voice as market and nonmarket forces, that is, economic and political mechanisms” in 1970, quoting a 1963 article by Kenneth Arrow which referred to “nonmarket social institutions.”Frequent association with government
In the business, management, economic and political-science literatures, nonmarket is overwhelmingly associated with government, compared to other non-economic institutions, as in economist Baron’s (1995: 47) often quoted definition in the strategic-managementStrategic management
Strategic management is a field that deals with the major intended and emergent initiatives taken by general managers on behalf of owners, involving utilization of resources, to enhance the performance of firms in their external environments...
field:
The nonmarket environment includes the social, political, and legal arrangements that structure interactions outside of, but in conjunction with, markets and private agreements. The nonmarket environment encompasses those interactions between the firm and individuals, interest groups, government entities, and the public that are intermediated not by markets but by public and private institutions. Public institutions differ from markets because of characteristics such as majority rule, due process, broad enfranchisement, collective action, and publicness. Activities in the nonmarket environment may be voluntary, as when the firm cooperates with government officials, or involuntary, such as when government regulates an activity or an activist group organizes a boycott of a firm’s product.
However, other researchers have related nonmarket to the equally important societal institutions of community and culture as well as to command economies
Planned economy
A planned economy is an economic system in which decisions regarding production and investment are embodied in a plan formulated by a central authority, usually by a government agency...
, traditional exchange and non-profit organizations (see below).
"Nonmarket" as the antonym of "market"
Nonmarket as well as its antecedents “non-economic” and “social” reflects the long search for a term that would encompass what is “not market” after this economic institution had become the dominant exchange mechanism in modern capitalist economies. “MarketMarket
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
” itself is a complex concept which Boyer (1997: 62-66) variously categorized as:
- a contract (that is, a deal)
- a physical place (e.g., a farmer’s market)
- a geographical area where sellers compete for buyers regarding a particular good (e.g., the U.S. market for beef)
- a mechanism for aligning supply and demand for goods and services through prices
- an economic systemEconomic systemAn economic system is the combination of the various agencies, entities that provide the economic structure that defines the social community. These agencies are joined by lines of trade and exchange along which goods, money etc. are continuously flowing. An example of such a system for a closed...
where competition is dominant and results in the immediate as well as intertemporal coordination and equilibration of many independent demands and supplies (for guns, butter, travel services, etc.) - any exchange whereby social actors compete for scarce resources (including power, status, legitimacy, justice and love) and ultimately reach some agreement (as in “the market for ideas”).
The following definition of market is adapted from Hollingsworth, Schmitter and Streeck (1994: 5) and is related to Boyer’s fourth and fifth meanings of "market":
Markets are arenas in which individual or corporate actors holding separate property rights in different resources voluntarily engage in free, legally enforceable contractual buying and selling exchanges, with prices providing information for the allocation of goods and services.
Association with a capitalist economic system
Most definitions and uses of “nonmarket” and “marketMarket
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
” assume a capitalistic economic system
Economic system
An economic system is the combination of the various agencies, entities that provide the economic structure that defines the social community. These agencies are joined by lines of trade and exchange along which goods, money etc. are continuously flowing. An example of such a system for a closed...
characterized by private property in the means of production and where markets provide a social space for voluntary contracts and competitive rivalry (Hollingsworth et al., 1994: 3). Economic markets tend to be very proprietary in that the costs and benefits of exchanges are more closely restricted to the parties directly involved in them – that is, people by and large get only what they pay for, and they pay for what they get – while nonmarket exchange arenas – political, social and cultural – are characterized by much greater spillovers and weaker links between costs and benefits so that a wider universe of parties other than those directly involved in exchanges bear costs and enjoy benefits (Hayes, 1981: 133; Tollison, 1982: 85-89).
Other applications of "nonmarket"
Besides its reference to marketMarket
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
s and firms in a capitalist economic system, nonmarket has also been applied to:
- command (or centrally-plannedPlanned economyA planned economy is an economic system in which decisions regarding production and investment are embodied in a plan formulated by a central authority, usually by a government agency...
) economies where the State owns the economic factors of production and is "the firm" by having internalized private external and internal markets which no longer exist outside of “black markets” (Daniels, Radebaugh & Sullivan, 2007: 141-142) - traditional types of exchange systems (e.g., intra-family, intra-clan and between-group trade) dominated by social reciprocity which balances out the giving and receiving of goods in the short and long runs in contrast to the market systemMarket systemA market system is any systematic process enabling many market players to bid and ask: helping bidders and sellers interact and make deals. It is not just the price mechanism but the entire system of regulation, qualification, credentials, reputations and clearing that surrounds that mechanism and...
where prices result from immediate bargaining for economic advantage (Polanyi, 1944; Smelser, 1963: 87) - the non-profit sector (Lohmann, 1989)
- Internal hierarchies (or “private bureaucracies”) within the business firm that has internalized external markets on account of the latter’s higher uncertainty and transaction costs (Williamson, 1991, 1999).
Underlying societal transformations
Most modern societies chose to separate what came to be called the "economy" from other subsystems, and they adopted a “marketMarket
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
” way of running it. What would later be labeled the nonmarket referred to other macro
Macro
A macro in computer science is a rule or pattern that specifies how a certain input sequence should be mapped to an output sequence according to a defined procedure...
institutions (i.e., the state, community and culture), their organizations and actors that interchange and often conflict with interdependent market ones. Particularly since the publication of The Great Transformation (Polanyi, 1944), the concepts of “non-economic,” “social” and “nonmarket” successively emerged to refer to the internal and external factors that assist markets, firms and other types of institutions and organizations to function efficiently and effectively as well as repair their failures. Boddewyn (2003) interpreted them as “four perspectives on nonmarket” which the following sections analyze in terms of:
- their level of analysis (macro or microMicroeconomicsMicroeconomics is a branch of economics that studies the behavior of how the individual modern household and firms make decisions to allocate limited resources. Typically, it applies to markets where goods or services are being bought and sold...
) - the contested subordination of market institutions to nonmarket ones
- the degree to which nonmarket factors are endogenized or exogenized in market models
- the enactibility of the nonmarket environment.
Nonmarket at the societal level
For political economists (e.g., Baron, 1995; Kindleberger, 1969), social-systems theorists (e.g., Parsons & Smelser, 1956) and some political scientists (e.g., Hirschman, 1970), society is made up of subsystems – economic, political, social and cultural – each one with its own institutions and organizations. In modern capitalist societies, the economic subsystem is mainly enacted through market institutions and organizations (firms). In this context, nonmarket refers to exogenous non-economic subsystems, institutions and organizations – political, social and cultural – and to their distinct functioning and interacting with marketMarket
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
ones – including the issue of which one predominates over the others through both market and nonmarket modes of exchange (money, power, inclusion/exclusion, trust, zeal, moral commitment, etc.). At both extremes of this relationship, one has either an overly constrained market system
Market system
A market system is any systematic process enabling many market players to bid and ask: helping bidders and sellers interact and make deals. It is not just the price mechanism but the entire system of regulation, qualification, credentials, reputations and clearing that surrounds that mechanism and...
dominated by other societal institutions or a “market society” ruled by market actors, values and processes. Both extremes represent failures of effective integration between market and nonmarket societal subsystems.
Nonmarket at the firm level
Micro-economistsMicroeconomics
Microeconomics is a branch of economics that studies the behavior of how the individual modern household and firms make decisions to allocate limited resources. Typically, it applies to markets where goods or services are being bought and sold...
(e.g., Milgrom & Roberts, 1992) interpret nonmarket to refer to institutions that are “not market in nature” – that is, not related to the pursuit of efficiency through complete information, unbounded rationality in relating ends and means, cost-benefit tradeoffs in choosing solutions, material incentives (e.g., prices reflecting supply and demand) used to reconcile divergent personal interests, and competition among actors pursuing such interests. This pursuit of efficiency depends on the existence of such institutions as private property and free contracting but, once the market system
Market system
A market system is any systematic process enabling many market players to bid and ask: helping bidders and sellers interact and make deals. It is not just the price mechanism but the entire system of regulation, qualification, credentials, reputations and clearing that surrounds that mechanism and...
is set in motion by society, it operates autonomously in isolation from other societal subsystems. In micro-economic
Microeconomics
Microeconomics is a branch of economics that studies the behavior of how the individual modern household and firms make decisions to allocate limited resources. Typically, it applies to markets where goods or services are being bought and sold...
analyses, nonmarket factors either amount to “givens” (e.g., property laws), are treated as “allocationally neutral” because applying to all firms in a particular industry (e.g., corporate tax rates) or are ignored because “nontradeable” (e.g., reputation). Failure results from the lack of perfect competition in market
Market
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
s.
Nonmarket at the organizational level
In reaction to this “economic-science imperialism” (Buckley & Casson, 1993), other social sciences identified and promoted political, social and cultural (including moral and ethical) factors as necessary complements to economic ones. Their inclusion would help achieve individual and organizational effectivenessOrganizational effectiveness
Organizational effectiveness is the concept of how effective an organization is in achieving the outcomes the organization intends to produce. The idea of organizational effectiveness is especially important for non-profit organizations as most people who donate money to non-profit organizations...
in exchanges through personalized relations, internalized rules, norms and customs. For sociologists (e.g., Granovetter, 1985, 1992), nonmarket refers to endogenized social, political and cultural factors that permeate economic exchanges and are often necessary to achieve individual, organizational and interorganizational effectiveness which is not possible when economic action is “under-socialized.” Such factors allow many exchanges to take place even when pricing is difficult, money is inappropriate, market
Market
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
s are not available, property rights are unclear and insecure, and the pursuit of self-interest is insufficient to guarantee orderly transactions free of malfeasance
Malfeasance
The expressions misfeasance and nonfeasance, and occasionally malfeasance, are used in English law with reference to the discharge of public obligations existing by common law, custom or statute.-Definition and relevant rules of law:...
and opportunism
Opportunism
-General definition:Opportunism is the conscious policy and practice of taking selfish advantage of circumstances, with little regard for principles. Opportunist actions are expedient actions guided primarily by self-interested motives. The term can be applied to individuals, groups,...
. In other words, many micro-economic
Microeconomics
Microeconomics is a branch of economics that studies the behavior of how the individual modern household and firms make decisions to allocate limited resources. Typically, it applies to markets where goods or services are being bought and sold...
exchanges are not purely dyadic, rational, self-interested and impersonal since cooperation is common among exchanging parties who frequently conform to rules, norms and customs, thereby developing a “socialized rationality” on account of “the social embeddedness of economic action.” Besides, firm actors have the moral obligation to consider the “appropriateness” of their actions. Failure is related to "under-socialized" behavior (e.g., "free-riding"), but also to the use of “over-socialized” collusion and fraud (e.g., the Mafia).
Nonmarket as corrective mechanisms
For political scientists (e.g., Hirschman, 1970), nonmarket refers to the power-based correctives – mainly, political “voice” – used to improve all organizations – economic, political, social and cultural – when competition among them fails to repair their decline or decay. That is, under any economic, political, social or cultural system, all individuals and organizations are permanently subject to lapses from efficient, rational, law-abiding, virtuous or otherwise functional behavior. Society’s welfare is optimized only when all organizations – those of the marketMarket
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
, state, civil society and culture – compete among themselves although inefficient or ineffective organizations may remain insensitive to competition because they can tap other resources (organizational slack, public funding, reciprocity
Reciprocity
Reciprocity may refer to:*Reciprocity , used to describe the concept of free trade with the United States of America** Reciprocal trade agreement, entered into in order to reduce tariffs, quotas and other trade restrictions on items traded between the signatories*Reciprocity , the relationship...
, nationalistic preferences, etc.) to survive even in the face of decline. If competition does not lead to the “exit” of inefficient or ineffective organizations, then political “voice” (petitioning, mobilizing opinion, protesting, etc.) is needed to change objectionable states of affairs. As such, nonmarket is related to the use of power (including force), with actors using their property and sovereignty rights to exert influence over others who deploy the same rights to resist such attempts. Market “exit” as well as nonmarket “voice” and "loyalty" are used by all organizations, and repair is enactable through these mechanisms even though institutional failure remains a constant occurrence through time and place.
General definition
Based on these four partial definitions, Boddewyn (2003) proposed the following general one:Nonmarket refers to internal and external organizing and correcting factors that provide order to market
Market
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
and other types of societal institutions and organizations – economic, political, social and cultural – so that they may function efficiently and effectively as well as repair their failures.
See also
- The Great Transformation
- MarketMarketA market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
- Market failureMarket failureMarket failure is a concept within economic theory wherein the allocation of goods and services by a free market is not efficient. That is, there exists another conceivable outcome where a market participant may be made better-off without making someone else worse-off...
- Planned economyPlanned economyA planned economy is an economic system in which decisions regarding production and investment are embodied in a plan formulated by a central authority, usually by a government agency...
- Porter five forces analysis