The sixth report in our series dealing with networks, platforms, markets and the economics of order (pdf, 45 pages, including a six-page summary of conclusions). Details below, with a link to a downloadable pdf table of contents.
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Mainstream economics has assumed the existence of the markets or taken them as given. It has devoted little, if any, attention to the process by which markets themselves are formed, how it is that they arise, what makes them stable or liquid, etc. To fail to understand the formation of markets is to fail to understand the source of economic coordination. As a result, mainstream economics has little or no understanding of how the market order and economic coordination can be subverted or made unstable by policy.
It is clear from our work to date, however, that networks are the foundation or source of the market order. In this, our sixth and final report in this series (Networks & Platforms: The Economics of Order), we expand on that theme by returning briefly to the issue of networks and market demand and then by exploring how a) the quality of the network underpinning any given market is the product of the interplay between demand and supply, b) the network dynamic implies the interdependence of demand and supply, c) the interdependence of demand and supply via the network dynamic promotes economic coordination, d) price elasticity, price stability, liquidity, market thickness and, in fact, the notion of a “market price” itself are all products of the network dynamic, and e) economic profit, rent and transaction costs are driven by the network dynamic. We also introduce a new dynamic conception of equilibrium, articulate the process of market discovery, discuss the implications of equilibrium and disequilibrium systems, and determine the source of market stability and instability. Finally, we examine the dynamics of market instability or market breakdown.
The New Economics of Order