On Reinventing the Bazaar

I recently finished reading Reinventing the Bazaar – A Natural History of Markets – by John McMillan. Below are key excerpts from the book that I found particularly insightful:

1- “A definition of a market transaction, then, is an exchange that is voluntary: each party can veto it, and (subject to the rules of the marketplace) each freely agrees to the terms. A market is a forum for carrying out such exchange.”

2- “Markets are too important to be left to the ideologues. In fact, markets are the most effective means we have of improving people’s well-being. For poor countries they offer the most reliable path away from poverty. For affluent countries they are part of what is needed to sustain their living standards.”

3- “The key feature of markets of all kinds is brought home when we look at the growth of new market mechanisms. Benefiting both buyer and seller, any transaction creates value. Buying and selling is therefore a form of creation. Elementary at this point is, its importance cannot be overstated. There are gains from trade, and people are relentless in finding ways to realize them.”

4- “Two kinds of market frictions arise from the uneven supply of information. There are search costs: the time, effort, and money spent learning what is available where for how much. And there are evaluation costs, arising from the difficulties buyers have in assessing quality. A successful market has mechanisms that hold down the costs of transacting that come from the dispersion of information.”

5- “Well-designed markets have a variety of mechanisms, formal and informal, to ensure there is indeed money in being honest. marketplace confidence rests on rules and customs that give even unscrupulous people reason to keep their word…Contracting rests not only on the courts but also on informal devices based on reputation. Information must flow in reputational incentives are to work.”

6- “Some externalities can be corrected by defining and enforcing property rights. In other cases the harmful activity can be taxed. In extreme cases the only solution is to ban it.”

7- “A workable platform for markets has five elements: information flows smoothly; people can be trusted to live up to their promises; competition is fostered; property rights are protected but not overprotected; and side effects on third parties are curtailed.”

8- “Governments sometimes conspire to undermine markets. Corruption cuts into productivity because firms that fear they will be at the mercy of bribe-takers are reluctant to invest. Price-fixing also cuts into productivity by preventing the price system from doing its job of allocating resources. Constructive government actions are needed…to help the market system work as it is supposed to. But there is a risk that government intervention will be perverted in counterproductive directions.”

9- “Well-functioning markets rely on a judicious mix of formal and informal controls. While the government helps to set the rules for the market, so do that market participants. an economy cannot be designed from above. If it were possible to plan the reforms, if would have been possible to plan the economy.”

10- “Those on the far left of the political spectrum, who abhor poverty, espouse policies that would entrench it. The fervent proponents of laissez-faire, who esteem market, advocate a system that would trigger their collapse.”

11- “The market system is like democracy. It is the worst form of economy, except for all the others that have been tried from time to time. It succeeds because, precisely as in Forster’s view of democracy, it admits variety and permits criticism. We should cheer it because it solves some all-but-intractable problems, which have been tackled by none of the alternative forms of economic organization. It generates wealth. It alleviates poverty. But it has its limits. There are things it cannot do. It does not necessarily do even what it is supposed to; it works well only if it is well designed. Two cheers are enough.”


Omar Halabieh

Reinventing the Bazaar


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