Building Efficient Markets
An efficient market is one where the price paid for a product is the lowest for a given quantity of product. Free market economics assumes that a free market of many buyers and many sellers will reach an equilibrium where the sellers make enough profit to sustain their business and buyers pay the lowest price. This is the so-called “invisible hand” of the free market, which will theoretically result in the most efficient or lowest price for a given quantity of goods and services.
Unfortunately, the world of commerce rarely meets the conditions necessary to set an efficient price. To overcome the implementation issues, market regulators adjust the terms and conditions by establishing rules of conduct to stop both buyers and sellers taking advantage of the other party. Consumer protection laws, anti-competitive behaviour, punishments for non-compliance, commercial in confidence rules, market makers, insurance and intellectual property laws are a few of the methods. The resulting rules, regulations and red-tape are expensive to operate and have many side-effects that result in more complexity and cost.
The problem compounds because the success of a market is judged by the money profit generated not whether the market delivers the most efficient price. A way to generate more money profits is to increase prices with no increase in the value of goods and services and the easiest way to do this is to work within the rules and regulations to increase prices while at the same time restricting competition. The more rules and regulations there are the greater the opportunity to find ways to legally increase prices and restrict competition.
A solution to reducing the cost of operating markets is for local communities to find low-cost ways to implement markets that combine together the profit incentive with economically efficient prices.
The Design of an alternative market.
Setting prices is difficult. In designing an alternative market we can design a market that does not have to set a price. Instead, use a price from the existing energy market as the reference point.
Markets with many possible participants increase in operational complexity, and cost, by some function of the number of participants. However, economies of scale reduce costs by another function. Reorganising the existing system into smaller markets preserves economies of scale while reducing operational complexity.
With these broad principles we can design alternative markets with the following features:
- Create a self-contained market of buyers and sellers governed through a not-for-profit cooperative.
- Existing members invite new members and the cooperative approves new members who accept the invitation.
- Use all the existing systems of exchange of value. They already exist and they work well so leave them in place.
- Give the ownership of the assets used in the market to the cooperative. By having buyers and sellers in the same cooperative the distribution of profits and setting of prices within the cooperative is determined by negotiations within the cooperative rather prices being discovered in a wider market.
- Give members a continuously updated right to the assets of the cooperative in case the members decide to terminate it.
- Specify a fixed return for the seller and the investor when they participate in the market. This will remove the ability of investors and sellers to take profits from the market before the market generates them and so prevents members from becoming rentiers.
- Specify the obligations of the cooperative members and ask members to find another cooperative if they fail to keep their obligations.
- Do not allow the use of financial products, such as loans or capital gains, to increase the amount of money in the market. This prevents any value from being extracted from the market before the exchange of goods and stops all participants from using the market to profit from price speculation.
- Give returns on investment by giving buyers discounts when goods are exchanged. Do not allow the trading of discounts separately from the assets owned by the cooperative. This prevents the market from generating speculative returns and prevents rentier behaviour.
- Keep the cooperatives to human manageable numbers so there are close human connections and commonality of purpose.
- Use information system platform cooperatives and common administrative systems to make it seamless for individuals to move between cooperatives.
- Administer cooperatives through cooperatives of cooperatives to reduce costs and to scale information systems.
- Provide ways for cooperatives to vary their internal rules to meet challenges created by the external environment particularly the regular market in which their members live.
Products and Services suited to cooperative markets.
The easiest markets to use cooperative markets are natural monopolies and local commodity markets. Examples are electricity, water, transport, education, health, and food.
Implementing an efficient cooperative market requires no changes in the production and selling of the products. Changing from setting prices to sharing the profits is a book-keeping or software cost. Such changes are relatively straight-forward and low cost and can work within the existing market regulations.
The cost of operating a closed market is at least an order of magnitude lower than running a market with price discovery.
To see an example of how to do it and what it means, visit “Funding Solar for Low Income Households in Canberra”.