Markets exist ubiquitously, but the markets in rich countries are substantially different from those in poor countries. The markets exist anywhere even in poor countries, and the markets in those countries are called “spontaneous or self-enforcing markets”. In rich countries, the markets are the main source of prosperity and are called “prosperous markets”. If markets may bring about economic prosperity, why are the ubiquitous markets in poor countries unable to do so? Even though markets are ubiquitous in the world, why are rich countries so rare? How can a country have not only ubiquitous markets but also prosperity-bringing markets, or prosperous markets? How are prosperous markets created in each country? These questions are important to both advanced and developing countries as well as both capitalist and communist countries. In this essay, we attempt firstly to examine two different markets and their relationship with economic prosperity, and secondly suggest the role of government for augmenting prosperous markets.

1.  Introduction

While markets exist ubiquitously, the ‘markets’ in rich countries are substantially different from those in poor countries. Rich countries make the best use of the markets, and thus the markets are the main source of prosperity in those countries. Such markets are called “prosperous markets.” On the other hand, while the markets also exist anywhere even in poor countries, the markets in those countries are spontaneous and unable to serve as a source of prosperity. So, these markets are called “spontaneous or self-enforcing markets.” As generally recognized, ‘if markets may bring about economic prosperity,’ why are the ubiquitous markets in poor countries unable to do so? Even though markets are ubiquitous in the world, why are rich countries so rare? How can a country have not only ubiquitous markets but also prosperity-bringing markets, or prosperous markets? How are prosperous markets created in each country? These questions are important to both advanced and developing countries as well as both capitalist and communist countries.

The late Mancur Olson asserted that the countries or societies having market-augmenting government tend to grow most rapidly. In other words, a government which is best in securing individual property rights and enforcing contracts will contribute to obtain the substantial gains from market transaction by increasing the number of markets, or augmenting markets. Not all the countries in the world have such a government that is faithful to this fundamental role We can raise the following questions:

2.  Self-Enforcing Markets

Markets exist everywhere in the world, and their types are various. In other words, markets are ubiquitous and various not only in rich countries but also in poor countries. Some types of markets - e.g. countryside markets, markets for selling basic commodities, or even small corner shops or drugstores - emerge spontaneously in any regions and countries, and their emergence is often irrepressible. Such types of markets include (1) spontaneous markets, (2) irrepressible markets, and (3) informal sectors, like black or illegal markets and underground markets. This type of markets are called “self-enforcing markets (SEM)”.

As we examined, the spontaneous markets, irrepressible markets, and informal sector or markets belong typically to the ‘self-enforcing markets’. However, as the economy in every country develops and prospers, more complicated or sophisticated type of markets such as capital and insurance markets are ‘artificially’ created by governments. These markets emerge only when a society (state or government) provide and establish the long-term institutional arrangements that are necessary to fulfill complicated transactions. These markets are called “governmentally contrived markets”. This term was first coined by M. Olson in Power and Prosperity (2000, p. 174). The socially or governmentally contrived markets based on institutional arrangements exist not in any countries but only in the richest countries. The profound importance of ‘socially or governmentally contrived markets’ is often overlooked among both the richest countries and even the economists.

3.  Rights-Intensive Productions and Institution-Enforcing Trades

Why are most countries having ubiquitous market are not rich but still poor? In other words, although most of the countries in the world have ubiquitous markets, why are most countries still poor? This puzzle may not be fully explained by the conventional concepts such as (i) self- enforcing markets, (ii) self-enforcing or on-the-spot trades, (iii) self-protected and labor-intensive production. To explain this puzzle, we need to rely on new concepts of market, trade, and production.

To explain the puzzle, several new concepts and understandings of market, trade, and production are needed. First, the concept of ‘governmentally contrived market’ is required instead of self- enforcing markets. Second, the gains from trade realized only in socially or governmentally contrived markets should be understood. Third, concepts of institution-enforcing trades, or not-self- enforcing markets, and individual rights-intensive productions are needed. Finally, the enormous gains from the individual rights-intensive productions should be understood. These new concepts are useful tools to understand and explain the puzzle faced with many countries which have ubiquitous markets but are still poor. Most poor countries with ubiquitous markets have no such market, trade and production as socially or governmentally contrived market, institution-enforcing or not-self-enforcing trade, and individual rights-intensive production. These are found only in rich countries. 

A Tale of Two Markets summarized 

4.  Governmentally Contrived Markets

The market-augmenting government coined by M. Olson refers to a strong and inhibited government (SIG). A market-augmenting government consists of two elements. Firstly, governments should be strong enough to guarantee secure and well-defined property rights and contract enforcement rights to the people. Only strong governments may guarantee secure and well- defined property rights and contract enforcement rights, while weak governments are unable to do so. As a result, only strong governments may successfully accomplish economic prosperity, while weak governments definitely fail to do so. Secondly, the strong governments should inhibit excessive governmental intervention and must constrain so as to not deprive or damage individual rights. It is very difficult to satisfy both of the elements simultaneously, because strong governments often participate in various types of predation or harmful intervention in the market. For example, if there is a powerful dictator in a country, the condition of strong government is satisfied. However, if the dictator exercises predation and oppression, the condition of inhibited government is not satisfied. For this reason, there are only few rich countries satisfying both of the conditions in the world. Therefore, to be a rich country, a strong and inhibited government is necessary. Olson called such a government a “market-augmenting government”(MAG). Olson even stated that “we can’t have a government that augments markets unless we have a government that is both strong and inhibited.”

5.  Individual Rights and Two General Conditions for Economic Prosperity

In a market economy, individual rights are a fundamental source of economic prosperity. In a market economy, only when individuals and firms have a broad and secure set of individual rights to property and contract enforcement, various types of complex productions (e.g. rights- intensive production or contract-intensive production) are possible, and thus larger gains from trade are attainable.

In short, in a market economy, (i) only when individuals and firms have a broad and secure set of individual rights, various types of complex productions are carried out and thus enormous gains from trades are realized; (ii) only when the rights to property and contract enforcement are secure and well-established, complex or not-self-protected productions are possible; and (iii) only in an environment where the individual rights are broad and secure, gains from trade may obtain larger than gains from trade in primitive societies.

Despite the ubiquity of the markets which are believed to bring about economic prosperity, why do most of the countries in the world still have a slow economic growth rate or be in a low- income level? Although markets are ubiquitous, why are some countries still poor? Then, how could the countries in the world have the markets that are supposed to bring about rapid economic growth and continuous economic prosperity? What conditions are required for a market economy to create economic prosperity?

Olson proposes that there are only two general conditions which are necessary for a market economy to bring about economic prosperity. First, secure and well-defined individual rights are essential. Individual rights are not a luxury good that only rich countries may provide. Namely, individual rights are necessary for obtaining maximum output from rights-intensive and contract- intensive productions. Individual rights are also essential for obtaining large gains from the complex trades. Finally, individual rights are vital to achieving the maximum production level For these reasons, individual rights are essential for (i) obtaining enormous gains from not-self-enforcing or complex trades, (ii) obtaining large gains from property-intensive and contract-intensive productions, and (iii) achieving the maximum output level. Therefore, secure and well-defined individual rights are the first necessary condition for economic prosperity. Moreover, individual rights are the result given by ‘governmental contrivance’, not by nature, and are well-established only in the richest countries.

The second general condition for a market economy to accomplish economic prosperity is that there should not be any type of predation: the absence of predation of any kind. For example, there should be neither (i) the predation taking place in the process of “the war of each against all” under a Hobbesian anarchy state, nor (ii) the predation taking place when a dictator (autocrat) or other governments extorts individual’s rights through the confiscation of private property or refusal of contract fulfillment. These types of predations will not exist if individual rights are well- established and secured. In modern societies, these primitive and undemocratic predations do almost not exist. However, other types of predations may take place, and are actually taking place quite often, even in societies where individual rights are best secured. For example, there are (i) predation by lobbying and (ii) predation by organizing cartel or collusion in modern and democratic societies.

Then, are the two general conditions sufficient for economic prosperity? With regard to this question, Olson (2000) asserted that “these two conditions, if fully met, are nonetheless sufficient to bring prosperity to a society”. The two general conditions are sufficient for a certain country not only to have ubiquitous and self-enforcing markets, but also to have complex markets which bring about large gains from not-self-enforcing trades (that is, markets necessary for economic prosperity). Therefore, as long as the two general conditions are satisfied, any countries may have not only ubiquitous and self-enforcing markets, but also complex markets (‘prosperous markets’). In the end, even though the two general conditions would not secure a perfect market, ideal allocation of resources or equitable distribution of income, only if the two general conditions are satisfied altogether, any countries may have not only ubiquitous markets but also prosperous markets. Hence, the two general conditions are sufficient to bring economic prosperity.

Simply, this implies that since the Second World War, none of the countries that satisfied the two general conditions has failed to accomplish economic prosperity. Historically, all the countries which have accomplished rapid economic success since the Second World War share a common point that they have satisfied the two general conditions although they have various imperfections in the markets and institutions. Therefore, on the basis of this historical evidence, we can now come to answer the following important question. How can a country have not only the ubiquitous markets, but also the complex or sophisticated markets that bring prosperous economy? The answer is that “only if a country satisfies the two general conditions, the country can have both types of markets.” In other words, only if the two general conditions are to be satisfied, any countries can have not only the ubiquitous markets but also the sophisticated markets that lead eventually to economic prosperity.

Then, in what countries or societies are the two general conditions most likely to be satisfied? It is mostly probable that the two conditions are satisfied in countries with stable and individual rights-respecting democracies. Individual rights-respecting democratic countries refer to the countries (societies) where decision making is made to best represent the encompassing interests of the majority people rather than the special interests of the minority.