Market Mechanism

The market mechanism must allow such adjustments and reallocations of economic inputs, which are not painless to market participants. The awesome complexity and dynamism of a market economy, however, require laws, rules, and norms, based on transparency and openness that encourage and facilitate economic interchange and that at the same time take into account the fact that, because market participants are human and thus not perfect, some degree of governmental intervention in the “free” market is also required. Such rights enable the value judgments of market participants to be converted through the legally protected market mechanism into prices of goods and services and financial instruments. For the market mechanism to work effectively, the rule of law must include laws, rules, and norms that encourage and facilitate the provision of timely and accurate information to the public to allow market price adjustments. Market-determined prices, which effectively facilitate the clearing of markets, substitute for the decisions of public authorities in a centrally planned, command economy. It is the market mechanism “hardware, “supported by the rule of law “software,” that converts the changing values of market participants into market signals (that is, prices) that direct economic activity. Without this “software,” the “hardware” will not work; the market mechanism will not function and governmental intervention in the economy will lack necessary accountability and will likely be arbitrary and unfair. The financial system of a market economy is the “central nervous system” through which the market mechanism operates. The infrastructure of the financial system must be supported by a comprehensive legal and regulatory framework that provides for a stable medium of exchange, creditworthy financial institutions, fair and honest capital markets, and efficient payments, clearance, and settlement systems. A comprehensive legal and regulatory framework must support their