6 - What Is a Good Market Theory?

Summary

This chapter discusses the six standards of a good market theory. A good market theory must be able to explain how humanity can cooperate in the extended order based on division of labor. It must explain how the reputation mechanism works in promoting human cooperation. A good market theory should be a theory about how the economy develops and changes, not only a theory about how the market reaches equilibrium and stability. Entrepreneurship is the soul of the market economy. Without entrepreneurs, a true orderly market is not possible, and neither is true progress. A good market theory must be able to explain economic fluctuations and business cycles. Economic fluctuations and business cycles are related to entrepreneurial decisions and innovations. A good market theory should be of rights-priority (putting rights above interests) rather than utilitarian (putting interests above rights). In terms of all these standards, neoclassical economics is not a good theory of the market.