The Nature Of The Market

This paper examines some fundamental questions in political economy. Why do markets exist? Why do firms exist? Why do states exist? And how do markets, firms and states evolve and change? The paper considers that the existence and evolution of the market, the firm and the state adheres to some universal principle, and these vital issues might be clarified with a unified, but simple, theoretical framework.Wide-ranging human interactions, especially economic interactions and political interactions, were/are unfolding with various interaction or transaction structures being ruled by some laws. Transaction cost is the key factor determining what interaction or transaction structures will be chosen.For economic transactions, when transaction costs exceed a certain critical value, economic markets cannot emerge at all. When transaction costs are zero, economic markets render to be logical markets. Real markets can only exist between these two cases. Similarly, for political transactions, if transaction costs among any social members are zero or beyond critical maximum, then there would be a Utopia society or no-state world where everyone is an islet. Between the two extreme settings, real states in human history will emerge.In essence, the market, the firm and the state all are some kind of economic or political transaction structures. The change of transaction costs in the process of economic and political interaction will bring forth the change of organized forms of markets, firms and states. In line with the highness or lowness of transaction costs, we classify markets as no markets, sporadic markets, thin markets, thick markets and logical markets. The nature of the state depends on the basic properties of economic contracts and political contracts in societies. States in human history can be classified as no states, non-contractual states, semi-contractual states, anti-contractual states, contractual states and Utopia. Firms in economic or political areas are micro-organizations which embed within economic or political network system. In a word, the formation and evolution of economic markets and political markets in human being societies are based on the fundamental interaction between economic and political institution. And transaction cost and transaction structure are the pivotal concepts to understand the past, the present and the future of human societies.The political economy theory offered here has a great significance towards underdeveloped countries. The paper has explained why some countries are persistent in being poor and probed deeply into the mechanism of political institutions in backward countries and found a way to prosperousness.