A market is a forum where land, labor and production functions are exchanged for medium of exchange. A market determines prices which are the exchange ratios of medium of exchange to the land, labor and production functions exchanged. The ownership change can be immediate, which would be a spot market, or it could be at a later date which would be a forward market. The market forum provides the facilities for the exchange to take place and be settled. A market forum can have brokers who facilitate the exchanges by finding willing buyers and sellers. Brokers would provide this service for a fee. The market forum would also need to charge a fee for its services.
There are a variety of market participants. The major categories of participants follow:
Market participants have differing ways of earning medium of exchange. A merchant earns medium of exchange by purchasing items in the wholesale market, transporting and storing them for resale in the retail market. The merchant is paid for the labor involved in doing this and the cost for the initial investment required to buy stock, warehouses, retail space and working capital.
A manufacturer applies production functions to land using labor and transforms them into new forms of land, labor or production functions which are in sufficient demand to compensate in terms of medium of exchange for the purchase of the components.
A trader earns medium of exchange by examining markets for discrepancies in prices either over time or between markets. The actions of traders can help bring uniform pricing to a market. As the uniformity and transparency of prices improve, trading profits disappear. For trading to offer the prospect of large profits, traders either have to have information no one else has about the movement of prices (insider trading) or it becomes nothing more than gambling on random outcomes which, in the long term, is a losing proposition due to transaction costs.
Arbitrage transactions ensure that different markets for the same item have consistent pricing. These markets are usually in different locations, or could be, in the case of foreign exchange cross rate discrepancies. An arbitrager earns medium of exchange seeking discrepancies in market prices that are not due to actual costs such as transportation. By making trades in several markets an arbitrager brings the market prices into consistency over a wider area.
The use of forward markets is the technique used by farmers and manufacturers to ensure a more consistent level of return. Purchase of insurance for a fee is also used to protect against crop failures and other rare but foreseeable events that need to be averaged among a large group to be affordable to insure. Insurance is distinct from pure trading.
In a properly functioning market, trading would be considered a cost of doing business for a bank and would not be a profit center as there would be a slight negative return in the long run due to the costs of running the trading desk and the tendency, as markets become more transparent, for trading profits to disappear. This cost should be recovered through fees for maintaining an orderly market.
There are three major market categories which are further subdivided into numerous sub markets. A market is where the items exchanged are priced at the margin as not all items are exchanged but only those that are available during the exchange period. The broad market categories are:
The characteristics of an efficient market are:
An organized market usually functions through an exchange or is a well defined place where buyer and seller can meet and transact business. Currently only parts of the land market such as stocks and bonds operate in a reasonably transparent manner. Labor markets are generally not efficient as evidenced by long periods of high unemployment and unknown transaction prices. If labor markets function efficiently then there would be little unemployment as wages and skill categories would shift as demand varies. This does not mean labor would receive the price it wants or, for that matter, that the employer would receive the price they wanted but this is true of all transactions.
Production function markets are even more opaque than labor markets. At this writing the author is not aware of any organized production function market.
Traders and gamblers have a point of view that is opposite of investors, consumers and producers. They seek volatility and large swings in prices that they can exploit. In an evenly rotating economy, there would be vanishing small price differentials to exploit. Production would be providing goods and services at maximum levels and consumers would be served with the goods and services they most desired and could afford. Change would occur due to innovation but at best this is a slow incremental process that results in a steady increase in the standard of living. The increase in standard of living could be realized in more leisure time or better quality or larger quantity of items available.
An organized labor exchange matches employees with employers based on qualifications and location. Employees live at a specific location and must get to the employment location. Employees have qualifications which are gained by education, training and experience. The qualifications must be classified in a manner which allows employees and employers to be able to match employment needs with employee availability. A miss-match will require employers to switch production functions or add a training education production function to their process. Either will change the economic calculation and potential profit of the process.
Natural persons would register on the market as employees by going to an institution that can verify the location of the natural person. A municipal library or a human resource professional registered by the labor exchange could provide this service. Once the natural person is registered, the natural person's qualifications would also be registered on the exchange. This would be by qualifiers registered by the labor exchange.
Qualifiers could be schools, colleges, universities, training providers, guilds, labor unions, government licensing agencies and professional associations. The labor exchange would categorize the labor qualifications and make available for employers of labor the definitions of the qualifications and the organization that accredited the qualifiers. A natural person would also gain qualifications by being in paid employment under a qualification that is recognized by the exchange. The exchange would have gradations of quality that would command different hourly rates. The hourly rates would be based on the rate the employee can complete the task specified in the qualification. Experience has shown that people can perform a task successfully, but not necessarily in the same amount of time as others qualified to perform the same task.
Potential employers would go on the labor exchange, review the available qualifications, and place a bid for the schedule of hours they need by qualification. Potential employees, who in most cases have multiple qualifications, would ask for a labor rate and post a schedule of hours they are available to work.
The exchange would follow its policy of matching employers and employees for each trading day. The exchange would notify both entities of the clearing rates and other details. The exchange would also hold in trust the wages posted by the employer when it made its bid, distributing the wages to the employees' accounts according to the employees' legal and budget filings after successful completion of the labor. The labor exchange would hold a verifiable history of the employees' work record. This would provide a reasonable verification for employers that the employee was qualified to perform the labor and the level of experience.
The exchange would also post in summary form the bid, ask and selling prices for each labor qualification so that estimators, employers and employees would have actual market labor rates at specific locations. Over time it would be expected that employees would review these rates, seeking to obtain qualifications in the areas that pay the highest labor rates. Employers would use the rates to determine if production processes should be altered to use qualifications in plentiful supply at lower labor rates.
The United States Bureau of Labor Statistics (BLS) uses the Standard Occupational Classification (SOC) to classify occupations and the North American Industry Classification System (NAICS) to classify industries. Combined they are used in the preparation of the statistics they publish about employment and unemployment. These combined classifications need to be supplemented with some additional information to make for an efficient labor exchange classification system. The supplemental information regards skill level, authority, occupation market and insurance.
Skill level is the proficiency of an employee in the occupation in which he or she is engaged. Proficiency grades can be classified as follows:
Persons move into the management occupations when they have a specific budget and specific actions that they can make without the direct approval of someone else. These actions are specified by policy guidelines with expenditure limits enacted by the organization. Their actions are reviewed on a periodic basis by their managers or board of directors for conformance to budget and policy. To be a manager and not an individual contributor, two or more people must be directly managed. A rule of thumb is that about eight direct reports is the maximum number of people a manager can manage effectively. Four management levels allow for a single directly managed organization or plant of no more than 4,096 people, of which 512 or about 13 percent are managers. The four management levels are as follows:
Insurance provided by an insurance company gives further assurance that an employee is qualified. The labor exchange should offer to track insurance as part of a labor qualification. Insurance can be divided into the following.
The employment market can be divided into two broad types. They are:
Land that is to be listed on the land exchange is broadly defined and can include surveyed real property, bar coded items, items defined by a commodity specification, documents, plans, machinery with serial numbers traceable to a manufacturer's specification, etc. The land exchange would supply a classification system to its users. A listed transportable item would be free on board (F.O.B) at a location specified by the seller. Transportation from the seller's location would be the responsiblity of the buyer. The seller would list items with asking price, qualified specification, and location. Persons who wish to purchase an item would bid for the item. The exchange would handle the actual transaction, clearing the market according to a defined procedure. Summary historical data on items by location and actual selling as well as bid and ask would be provided by the exchange. Financial instruments are already listed on well established exchanges.
The production function exchange is where owners of a defined production process, including bill of material and labor schedule by qualification, would be listed. A classification system would be provided by the exchange. Owners of the production process would list the price to purchase and use the process. Those who wished to use the process would buy the process which can then be used as a guide to bid for the necessary quantities of land and labor. The exchange would set up policies that would provide for different methods of clearing the production function market. One method might be that the process is available only at a specified time interval, allowing purchasers to bid for the process based on limited availability, but with the assurance that there would not be an undefined group of competitors in existence.
The production function exchange would primarily be used by entrepreneurs seeking to discover processes they could exploit.
Markets are crucial for a smoothly functioning economy because they provide information necessary for the efficient allocation of resources. There are three major market categories: land, labor and production functions. Traders and arbitragers help keep prices consistent in markets, but by themselves are not profitable due to transaction costs. The producers are the fundamental core of the economy for without them there would be nothing to consume.
Copyright 2014-2019 Richard A. Cornell, PE