What are markets, really?

I just finished a book called Welcome to the Urban Revolution: How Cities Are Changing the WorldIt’s an interesting book; I learned a lot from it, although I don’t agree with everything that he says (he has both a weirdly rosy view of certain cities, and a weirdly pessimistic view of the broader situation). The section of the book that I ultimately found most thought-provoking is part of a short preface to the section about Chicago where he introduces what he thinks a market is. I’m going to quote that five-paragraph section (pp. 254-255) almost in its entirety here because of how much it interested me.

It’s best to be clear about what we mean when we talk about a market. A market can be simply understood as a regular, patterned set of transactions between a group of buyers and sellers, which results in the predictable exchange of some mutually recognized value. That’s how we normally think about markets. This makes markets seem like generic exchange mechanisms but markets are anything but [sic].

The different markets within a city — whether for fish, houses, parking spaces, or engineering contracts — are defined by local and regional customs, laws, conventions, infrastructure, and spatial relationships. Many different forces in the city, not just its buyers and sellers, shape how each market works. In turn, each market determines which business models can thrive in a city. By constraining the types of business models that succeed in a city, a market also shapes the way the city itself develops….At their most mature stage of development, different local markets cluster activities together to create unique efficiencies and synergies in the physical form of a citysystem.

To explore the local character of markets, take the example of housing in a residential neighborhood. Theoretically, the housing market involves a generic product unit, a square foot of living space. The price for that unit is determined by supply, demand, and the cost of its production….But in reality, the nature of the product, its value on the market, and how the transaction is managed are all determined by dozens of local cultural, political, legal, and institutional factors. The cultural or social background of neighbors determines whether a home in this neighborhood secures a premium price. It also determines the allowable activities and income that can be derived from the building, such as whether an owner can operate a home business or rent units. Political and legal factors determine whether and how the building can be expanded on its lot and how much it will cost to do so….Institutional factors determine the availability and cost of finance, or whether owners have to look after their own water and sanitation services. These factors are part and parcel of the residential housing market. They greatly determine its prices and the nature of the building, its ownership structure, liquidity, and sales transactions. These local factors are not separable from the market. They define and govern it as much as the market governs the moments and ways that a city can pursue transformational change. To the extent that a city can shape its markets, it can also shape its own development.

Local markets are also socially regulated, even in free market economies. There are vast differences between the forms that a particular market takes in different cities….Each distinct market uses different buildings, supports different activities, and produces different externalities, such as waste streams and noise. These condition arise from historical compromises between different ethnic and economic groups and from political accommodations to religious, mercantile, labor, and government institutions. Conceiving a market that is void of culture, historical conventions, and institutions is a truly academic or ideological exercise.

To the extent that we manage national economies and multinational companies without reference to the diverse, evolving urban markets on which they stand, we welcome a world of economic surprise.

As with some of the other writing, this gets a bit incoherent in parts, but the basic notion here that even a free market is necessarily governed by its cultural, social, and institutional context is interesting to me. I generally tend to be a bit more of a free marketeer than a lot of people who are otherwise politically similar to me, and I often start my thinking about an economic issue from the basic idea that the cost of something is largely governed by supply and demand. When supply is low, and demand is high (see: Portland real estate right now) the price rises, and interfering in that process (by introducing rent control, for example) may have undesirable results by creating strange economic distortions. Brugmann’s contention, if I understand his argument here, is that a citysystem is necessarily an active participant in creating the conditions of a market, and reacting to them (as Portland City Council is currently being asked to do) is only changing the way that they are influencing them, rather than introducing a previously absent influence, and may be quite desirable from the standpoint of the wider well-being and economic dynamism of the city.

The concept Brugmann is illustrating of course has much wider applicability than Portland’s current housing crisis or even than real estate, but it’s a convenient example of why I was struck by this passage and wanted to pull it out for later, deeper consideration. My current conception of “free market” seems to be lazy and imprecise, and I’d like to think about how revising it would improve my understanding of the economic systems in cities, and especially the role of government, citizens, and culture in driving them.

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