Types of Markets

Now that we have a rigorous foundation which can be used to analyze markets, we can start looking at specific types of markets. This is the section in which we can begin to discuss what it means for a system to be “capitalist”, “socialist”, etc. A market can be seen as analogous to biomes. They are large scale regions with similar types of business entities existing with them. The types of business entities are largely influenced by the type of government which acts upon the region as well as the views of the people within the region. Like in the case of biomes, markets have smaller components analogous to ecosystems.

Key Variables

Existence of currency and form it takes, flow of resources (individual to individual or individual to central to individual)

Market Topology

There are three primary stratum in commonly used socio-economic models of class stratification in American society: lower, middle, and upper class. Position within these strata are determined by factors such as income, net worth, and to some extent, type of worth. These three strata are often subdivided. Gilbert, 2002, William Thompson & Joseph Hickey, 2005, and Leonard Beeghley, 2004 offer some ways in which these divisions can be decided. Gilbert utilizes the type of work performed and the level of education obtained; the other two include estimates of income in their divisions. While an imperfectly functioning market can be split into three broad categories, these categories do not always tell the whole story.

The Three Groups

In order to study the topology of a natural market, we can look at the general function of each component of the market system and split the market into three groups: the consumer-producer complex, the elites, and the poor.

The consumer-producer complex

Producers are a result of technological revolutions. As technology advanced, and skilled labor started to emerge, the producer class started to form. Early producers traded within their own groups using various systems of distribution including bartering. The consumers constitute a large portion of what is generally considered the middle class. The consumers formed primarily during the industrial revolution because the amount and variety of goods and services that could be produced increased dramatically. Of course, the producers also consume, and so the consumers and the producers function as a unit in a sort of consumer-producer complex. This complex can be thought of as the middle class, and from now on in my articles, when I use the term middle class, I mean the consumer-producer complex.

Elites

When discussing the elites, I am not referring to those with a large sum of money. Though that is generally a corollary to being an elite. However the defining factor of an elite is control. How much control does a person have over others and over the general decision making processes within a community? If the person’s decision making ability far exceeds the average, then he or she would be considered elite. Elites may or may not be political elites, but they are often directly linked to the decision making power within government.

Poor

The poor includes everyone below the poverty threshold. These people do not have the resources required to obtain basic necessities such as food, clothing, and shelter.

False Classifications

The consumer-producer complex is not the same as the middle class. In reality, there is no such thing. Unfortunately the simplistic perception of class stratification as resulted in many problems. Now one might wonder, what kind of decisions do we make based on the perceived location of certain individuals within the system? Well, as has become quite apparent with recent media attention, we very often make emotional judgments based the status of individuals. We may even view someone who is perceived to be in a higher division with envy. Tax policy is also affected by these divisions. It might seem reasonable to assume that someone within the upper divisions could handle a greater tax burden than can those in lower divisions, and perhaps to some extent, that is true.

Oversimplification: An Example

Yet such gross oversimplification is concerning. There are issues with the current models of socio-economic stratification. The people, who may be put into the same class, can have quite different lives and impacts on the economy, and the economy may have very different impacts on these people. To see how this could happen, it might help to look at three individuals, all with approximately the same income and net worth, each of whom would be characterized as being within the middle class under the current model, and see that they have quite different positions within the socio-economic system. The three individuals are a telecommunications mechanic, working full time, a small business owner working upwards of 60 hours a week who cuts himself a paycheck every two weeks, and a lottery winner who receives monthly distributions. Admittedly these examples are somewhat contrived, but are not unreasonable.

So clearly these three individuals make roughly the same amount each year. However, almost everything else about them is different. The telecom mechanic might have a relatively stable job, but it could certainly be lost during a recession. Most likely this person also has a fair amount of debt; it’s unlikely that one could purchase a house outright with that income. This person’s net worth, therefore would probably not be too high. The second person: the business owner, is in a high risk position. If the economy were to tank, the business would be at risk. In terms of net worth, given that a business may take on a lot of debt, especially in its early years, may not be too much higher than the telecom mechanic’s. What is really quite different between the business owner and the telecom mechanic however is the value that these two put back into the system. The business owner may be responsible for employing a dozen people.

Spectrum Based Class Stratification

Perhaps a more scientific and precise view of class would be useful. This view could be predicated on more quantitative values and instead of crisp separations between classes, we could utilize ranges of values. What values should be used as metrics? Property value, debt, income and income rigidity, hours worked, input back into the system, and ability to influence the flow of resources through the system all seem like reasonable factors in making policy decision. Property value and debt are more or less trivial to determine, as is income. Income rigidity, by which I mean how unlikely it is to lose the source of income is somewhat more difficult to calculate, but still not impossible. Actuarial work to estimate the the probability of becoming unemployed exists to some extent due to unemployment insurance programs. Evaluating the number of hours worked is no more difficult than determining income. However, the last two concepts: the input back into and the ability to influence the flow of resources through the system are far more difficult to measure.

Governments Evolve

When discussing the evolutionary dynamics of markets, I should make it clear that I am not saying that governments do not evolve. They do. As Martin A. Nowak points out “human language is a tool for unlimited replication of cultural information, and led to an unprecedented explosion of cultural evolution. We spread our ideas and inventions, sometimes ignoring our genes.” (Evolutionary Dynamics p. 250) This includes all aspects of culture, including our political and legal systems. However, governments evolve at a much slower pace than businesses within a market, in part because one government may not replace another for a long period of time and because there are so few governments at any point in time. In addition, in order for a new government to emerge, it must replace an existing government. Governments are tied to physical regions. Businesses, for the most part, lack these constraints. It is difficult to get an exact measure of the number of businesses in the world, but people have tried. According to Dr. Paul D. Reynolds, Director, Research Institute, Global Entrepreneurship Center, “world wide, there are about 300 million persons trying to start about 150 million businesses. About one third will be launched, so you can assume 50 million new firm births per year. Or about 137,000 per day.” (http://www.moyak.com/papers/business-startups-entrepreneurs.html) That averages out to roughly 3 new businesses every two seconds.

Future Work

Because governments do evolve, and because they are connected to markets, and more importantly, are methods of resource management, it may be useful to include them in our taxonomy. We may also want to include volunteer organizations. For this, we could create a new root level for our taxonomy and create two new subdivisions: government, and volunteering. This would help us look at natural market anarcho-communism as well.

In terms of government, we have the general divisions in place: democracy, republic, monarchy, aristocracy, dictatorship, and democratic republic. Many of the attributes of government revolve around how the form of government interacts with the rest of the market. For instance, does the government regulate currency production? Another attribute, which would be metric in nature, is centralization. Additionally, we have the topological question of whether or not the government oversees smaller governments or is if it is overseen by a larger government. Unfortunately it is beyond the scope of this paper to address in detail the taxonomy of government, so I will leave it at this, allowing the reader to consider options and implications.

Philosophy

On a final note before finishing this book, I would like bring the discussion back to the very beginning by addressing philosophical aspects of economics. Philosophy is useful in applied economics: making decisions based upon predictions made using the theoretical model addressed above. Philosophy helps to answer questions like “what should we do” and “what system is best”. For instance, while discussing Ancient Egypt, it’s important to note that the region was quite stable for a very long time, the nation as a whole had quite a bit of wealth, and people were taken care of. Public work programs did ensure that people had the basics necessary for survival. However, that is all that most Ancient Egyptians had. So whether or not we “should” choose a system like the one that existed in Ancient Egypt depends largely on what we think is better: a system which just manages to take care of everyone, or a system which doesn’t manage to take care of everyone but gives the bulk of the population a robust lifestyle.

Partial Source List

1. The evolution of fairness through spite
2. Evolutionary Dynamics: Exploring the Equations of Life
3. Wealth distribution in an ancient Egyptian society
4. Redefining Class Stratification
5. Using Income Data to Predict Wealth (http://www.federalreserve.gov/pubs/oss/oss2/papers/wealth.income.7.web.pdf)
6. The Evolution of Personal Wealth in the Former Soviet Union and Central and Eastern Europe*
7. Community Structure in Large Networks: Natural Cluster Sizes and the Absence of Large Well-Deﬁned Clusters
8. CO-EVOLUTION OF NEOCORTEX SIZE, GROUP SIZE AND LANGUAGE IN HUMANS

Economy and Government: an Evolutionary Perspective