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Nonmarket

    Nonmarket Concept

    The expression nonmarket (or non-market) is increasingly found in the title abstract and text of articles chapters and papers in the management organization strategy social-issues political-science and sociology literatures The ABI/Inform Global source located 726 such uses of both expressions in early August 2008 compared with 31 in 1991 and 247 in 2002 Uses Rationals and Applications

    First Uses

    Its first recorded use was in AO Hirschman’s 1958 book The Strategy of Economic Development (p. 63) and he later defined “exit and voice as market and nonmarket forces that is, economic and political mechanisms” in his well-known book Exit Voice and Loyalty (1970: 19) where he quoted a 1963 article by Kenneth Arrow which referred to “nonmarket social institutions” (p. 947) Both Hirschman and Arrow confirmed being the originators of this expression (Boddewyn 2003: 321) Frequent Association with Government In the management economic and political-science literatures nonmarket is overwhelmingly associated with government and other non-economic institutions as in economist Baron’s (2003: 2; 1995: 47) often quoted definition in the strategic-management field:
    The nonmarket environment includes the social political and legal arrangements that structure interactions outside of, but in conjunction with markets and private agreements The nonmarket environment encompasses those interactions between the firm and individuals interest groups government entities and the public that are intermediated not by markets but by public and private institutions Public institutions differ from markets because of characteristics such as majority rule due process broad enfranchisement collective action and publicness Activities in the nonmarket environment may be voluntary as when the firm cooperates with government officials or involuntary such as when government regulates an activity or an activist group organizes a boycott of a firm’s product
    However other researchers have related nonmarket to the other societal institutions of community and culture as well as to command economics traditional exchange and non-profit organizations (See below) Rationale For Its Coining Nonmarket as well as its antecedents “non-economic” and “social” reflects the long search for a term that would encompass what is “not market” after this major economic institution had become the dominant exchange mechanism in modern capitalistic economies Nonmarket as the Antonym of Market Nonmarket’s antonym “market” itself is a complex concept which Boyer (1997: 62-66) variously categorized as:
  • a contract (that is, a deal)
  • a physical place (eg a farmer’s market)
  • a geographical area where sellers compete for buyers regarding a particular good (eg the US market for beef)
  • a mechanism for aligning supply and demand for goods and services through prices
  • an economic system where competition is dominant and results in the immediate as well as intertemporal coordination and equilibration of many independent demands and supplies (for guns butter travel services etc)
  • any exchange whereby social actors compete for scarce resources (including power status legitimacy justice and love) and ultimately reach some agreement (as in “the market for ideas”)
  • The following definition of market is adapted from Hollingsworth Schmitter and Streeck (1994: 5) and is related to Boyer’s fourth and fifth meanings of "market":
    Markets are arenas in which individual or corporate actors holding separate property rights in different resources voluntarily engage in free legally enforceable contractual buying and selling exchanges with prices providing information for the allocation of goods and services

    Association with a capitalistic economic system

    Most definitions and uses of “nonmarket” and “market” assume a capitalistic economic system characterized by private property in the means of production and where markets provide a social space for voluntary contracts and competitive rivalry (Hollingsworth et al 1994: 3). Economic markets tend to be very proprietary in that the costs and benefits of exchanges are more closely restricted to the parties directly involved in them – that is, people by and large get only what they pay for and they pay for what they get – while political and other non-economic (eg social and cultural) exchange arenas are characterized by much greater spillovers and weaker links between costs and benefits so that a wider universe of parties other than those directly involved in exchanges bear costs and enjoy benefits (Hayes 1981: 133; Tollison 1982: 85-89) Other Applications of "nonmarket" Nonmarket has also been applied to:
  • command (or centrally-planned) economies where the State owns the economic factors of production and is the firm by having internalized private external and internal markets which no longer exist outside of “black markets” (Daniels Radebaugh & Sullivan 2007: 141-142)
  • traditional types of exchange systems (eg intra-family or intra-clan and between-group trade) dominated by social reciprocity which balances out the giving and receiving of goods in the short and long runs in contrast to the market system where prices result from bargaining for economic advantage (Smelser 1963: 87)
  • the non-profit sector (Lohmann 1989) Internal hierarchies (or “private bureaucracies”) within the business firm that has internalized external markets on account of the latter’s higher uncertainty and transaction costs (Williamson 1991 1999)
  • Underlying Societal Transformations Most modern societies chose to separate what came to be called the economy from other subsystems and they adopted a “market” way of running it. What would later be labeled the nonmarket referred to other macro institutions (ie the state community and culture) their organizations and actors that interchange and often conflict with interdependent market onesother types of institutions and organizations to function efficiently and effectively as well as repair their failures Boddewyn (2003) interpreted them as “four perspectives on nonmarket” which the following sections analyze in terms of:
    1. their level of analysis (macro or micro)
    2. the contested subordination of market institutions to nonmarket ones
    3. the degree to which nonmarket factors are endogenized or exogenized in market models
    4. the enactibility of the nonmarket environment

    Four Conceptual Perspectives on Nonmarket

    Nonmarket at the Societal Level

    society is made up of subsystems – economic political social and cultural – each with its own institutions and organizations In modern capitalistic societies the economic subsystem is mainly enacted through market institutions and organizations (firms) In this context nonmarket refers to exogenous non-economic subsystems institutions and organizations-political social and cultural6 and to their distinct functioning and interacting with market ones – including the issue of which one predominates over the others through both market and nonmarket modes of exchange (money power zeal inclusion/exclusion trust moral commitment etc) At both extremes of this relationship one has either an overly constrained market system dominated by other societal institutions or a “market society” ruled by market actors values and processes Both extremes represent failures of effective integration between market and nonmarket societal subsystems Nonmarket at the Firm Level Micro-economists interpret nonmarket to refer to institutions that are “not market in nature” – that is, not related to the pursuit of efficiency through complete information unbounded rationality in relating ends and means cost-benefit tradeoffs in choosing solutions material incentives (eg prices reflecting supply and demand) used to reconcile divergent personal interests and competition among actors pursuing such interests This pursuit of efficiency depends on the existence of such institutions as private property and free contracting but once the market system is set in motion by society it operates autonomously in isolation from other societal subsystems In micro-economic analyses nonmarket factors either amount to “givens” (eg property laws) are treated as “allocationally neutral” because applying to all firms in a particular industry (eg corporate tax rates) or are ignored because “nontradeable” (eg reputation) Failure results from the lack of perfect competition in markets3 Nonmarket at the Organizational Level In reaction to this “economic-science imperialism” (Buckley & Casson 1993) other social sciences identified and promoted political social and cultural (including moral and ethical) factors as necessary complements to economic ones Their inclusion would help achieve individual and organizational effectiveness1 in exchanges through personalized relations as well as internalized rules norms and customs For sociologists (eg Granovetter 1985 1992)nonmarket refers to endogenized social political and cultural factors that permeate economic exchanges and are often necessary to achieve individual organizational and interorganizational effectiveness which is not possible when economic action is “under-socialized” Such factors allow many exchanges to take place even when pricing is difficult money is inappropriate markets are not available property rights are unclear and insecure and the pursuit of self-interest is insufficient to guarantee orderly transactions free of malfeasance and opportunism In other words many micro exchanges are not purely dyadic rational self-interested and impersonal since cooperation is common among exchanging parties who frequently conform to rules norms and customs thereby developing a “socialized rationality” on account of “the social embeddedness of economic action” Besides firm actors have moral obligations to consider the “appropriateness” of their actions Failure is related to the use of “over-socialized” collusion fraud and free-riding in social relations

    Nonmarket as Corrective Merchamisms

    For political scientists (eg Hirschman 1970)nonmarket refers to the power-based correctives – mainly political “voice” – used to improve all organizations – economic political social and cultural – when competition among them fails to repair their decline or decay That is, under any economic social or political system all individuals and organizations are permanently subject to lapses from efficient rational law-abiding virtuous or otherwise functional behavior Society’s welfare is optimized only when all organizations – those of the market state civil society and culture – compete among themselves although inefficient or ineffective organizations may remain insensitive to competition because they can tap other resources (organizational slack public funding reciprocity nationalistic preferences etc) to survive even in the face of decline If competition does not lead to the “exit” of inefficient or ineffective organizations then political “voice” (petitioning mobilizing opinion protesting etc) is needed to change objectionable states of affairs As such nonmarket is related to the use of power (including force) with actors using their property and sovereignty4 rights to exert influence over others who deploy the same rights to resist such attempts Market “exit” and nonmarket “voice” are used by all organizations and repair is enactable though both mechanisms even though institutional failure remains constant

    Nonmarket Association with Failures

    All four definitions of nonmarket deal with the failure of either societal integration efficiency-oriented pure competition under- or over-socialized economic action and institutional competition Since all organizations are failing ones one should not assume that “nonmarket” governments civil society and cultural organizations stand unfailingly ready to correct the shortcomings of “market” institutions and organizations

    General Definition

    Based on these four partial definitions Boddewyn (2003) proposed the following general one: Nonmarket refers to internal and external organizing and correcting factors that provide order to market and other types of institutions and economic political social and cultural organizations so that they may function efficiently and effectively as well as repair their failuresConcept of ‘Nonmarket’” Business and Society 42(3) September 2003: 297-327NOTES
  • Effectiveness is a complex notion that has been defined in terms of:
    1. a conjunction of interests between a focal organization and those external ones affected by it (Scott 1995: 349)
    2. these joined interests being related to worthy ends and appropriate means (Scott 1995: 356; see also Pfeffer & Salancik 1978: 34)
  • Loyalty refers to “that special attachment to an organization” (Hirschman 1970: 77) that “holds exit at bay and activates voice” (p. 78) “in the hope or, rather reasoned expectation that improvement or reform can be achieved ‘from within’” (p. 79) Voice is related to protest opposition and even the use of force (see below)
  • The markets for factors of production as well as for intermediate and final products are fraught with “natural failures” (eg resource rareness uncertainty opportunism and first-mover monopoly) as well as with “artificial/structural imperfections” (mainly business collusion and government intervention)
  • Governments are “sovereign” because they have a monopoly over the use of force although there are constitutional limits to it. However as Bell (1995: 607) put it: “Some rights to resources adhere to individuals on the basis of ascribed characteristics – these are rights of persons are not subject to voluntary alienation is the case with property rights” As such at least in modern liberal regimes all people and organizations located in society’s subsystems are also “sovereign” and derive power and legitimacy from their citizenship and the above “rights of persons”
  • On the basis of social-systems theory Parsons and Smelser (1856) have identified the resources which all societies must provide through specialized institutions in order to survive and preferable grow:
    1. wealth supplied by an economy
    2. coercion exercised through the power used by the state and its governments for "law and order"
    3. integration (related to "community" and "civil society") to deal with interunit conflict resolution and cooperation
    4. respect (self-respect and the respect of others) embedded in values and the principal source of meaning reputation and legitimacy for individuals and organizations
    Various types of economic political social and cultural systems can be used to provide these resources of welath coercion interation and respect For example in developed countries the market system democracy social inclusion and such values as the desirability of change are preferred while the absence or poor condition of such societal institutions is thought to amount to "failures"Baron DP (1995) “Integrated Strategy: Market and Nonmarket Components” California Management Review 37(2): 47-65
    Bell D. (1995) “The Structure of Rights in the Context of Private Property” Journal of Socio-Economics 24(4): 607-622
    Boddewyn JJ (2003) “Understanding and Advancing the Concept of ‘Nonmarket’” Business & Society 42(3): 297-327
    Boyer R. (1997) “The Variety and Unequal Performance of Really Existing Markets: Farewell to Doctor Pangloss?” In JR Hollingsworth and R. Boyer (eds) Contemporary : The Embeddedness of Institutions New : Cambridge University Press: 59-93
    Buckley PJ & Casson M. (1993) “Economics as an Imperialist Social Science” Human Relations 46(9): 1035-1052
    Daniels JD Radebaugh LH and DP Sullivan (2007) International Business: Environments and Operations Upper Saddle River NJ: Pearson Prentice-Hall
    Granovetter M. (1985) “Economic Action and Social Structure: The Problem of Embeddedness” American Journal of Sociology 91(3): 481-510
    Granovetter M. (1992) “Economic Institutions as Social Constructions: A Framework for Analysis” Acta Sociologica 35(1): 3-11
    Hayes MT (1981) Lobbyists and Legislators: A Theory of Political Markets New Brunswick NJ: Rutgers University Press
    Hirschman AO (1958) The Strategy of Economic Development New Haven CT: Yale University Press
    Hirschman AO (1970) Exit Voice and : Responses to Decline in Firms Organizations and States Cambridge MA: Harvard University Press
    Hollingsworth JR Schmitter PC and W. Streeck (eds) (1994) Governing Capitalist Economies New : Oxford University Press
    Kindleberger Ch. P. (1970) American Business Abroad New Haven CT: Yale University Press
    Kuttner R. (1998) Everything for Sale: The Virtues and Limits of Markets New : Knopf
    Lohmann RA (1989) “And Lettuce is Nonanimal: Toward a Positive Economics of Voluntary Action” Nonprofit and Voluntary Sector Quarterly 18(4): 367-383
    Parsons T. and NJ Smelser (1956) Economy and : A Study of the Integration of Economic and Social Theory New : Free Press
    Pfeffer J., and GR Salancik (1978) The External Control of Organizations New : Harper & Row
    Scott WR (1995) Institutions and Organizations Thousand Oaks CA: Sage
    Smelser NJ (1963) The Sociology of Economic Life Englewood Cliff NJ: Prentice Hall
    Tollison RD (1982) “Rent Seeking: A Survey” Kylos 35(3): 575-602
    Williamson OE (1991) “Comparative Economic Organizations: The Analysis of Discrete Structural Alternatives” Administrative Science Quarterly 36(2): 269-296
    Williamson OE (1999) “Public and Private Bureaucracies: A Transaction Cost Economics Perspective” Journal of Law Economics and Organization 15(4): 306-342