CHARACTERISTICS OF FREE MARKETS - CONT'D

Self-Organization

Free markets not only run on order, they create it. This is an oddity as much as it is a fact. However, it is not an unexpected fact. Let’s see why.

What’s in it for sellers

Sellers want an orderly state of affairs primarily for four reasons, which are pretty much commonsensical:

1. Goods and services need protecting against thieves. In a state of chaos, this is either not possible or too expensive.
2. Sellers want relatively stable money. If money is unstable, business calculations become very hard to do and may often lead to losses.
3. Sellers want customers. In a state of uprising or chaos, customers will choose safety over shopping.
4. Sellers know that they need to plan for the long term. Upheaval prevents this.
5. Sellers want to know what buyers want. This is not possible in disorganized situations.

There are many other reasons, but these are the primary ones. Sellers don’t want order because it is “the right thing to do” or because it is some sort of “societal good” or “societal benefit”. They want order because order increases profits. Yes, it is that simple.

Therefore, they behave in an orderly fashion. It is this behavior that creates a self-organization through standardization.

Standardization is simply a tacit agreement to do what others are already doing because it works. It is the ultimate self-justification process. It works.

What’s in it for buyers

Buyers also want an orderly state, but for other reasons.

1. Buyers want to shop for what they need; not to spend money on security. Order brings security.
2. Buyers want a clear pricing system. Nobody wants to overpay. Order brings organized pricing.
3. Buyers want to find what they need in the smallest number of locations (preferably one). Order concentrates sellers in one location
4. Buyers want to find what they are looking for. Order allows sellers to provide it.

There are many other reasons, but these are the primary ones. In the same manner as sellers, buyers could not care less about the theoretical benefits or ordered systems. Buyers want order because it helps them to fulfill their needs and wants. It is that simple.

 

Market efficiency

A side effect of those primary and selfish goals is that resources are brought to the place where they are bought, which is the same place where they are needed.

These resources are only brought in the amounts that can be sold, which is to say, in the amounts that are needed.

Only resources that can be sold are brought in, which is to say that only resources that are need are made available.

Resources are bought as soon as there is a demand. In other words, new resources are created all the time to satisfy new needs.

Resources are brought in at the lowest possible price dictated by supply and demand. This is to say that this supply is constantly competing with other products, which lowers its price.

In summary, we can now coin the practical definition of market efficiency:

A market is efficient when resources are brought in to where they are needed, if needed, when needed in the appropriate amounts and at the lowest price. All this is done automatically without the need for any design.

This incredibly complex system is dependent of incredibly complex processes, which cannot be designed. It requires intelligent agents working intelligently yet independently. The beauty of all of this is that these agents are dispersed and disorganized, which makes this system incredibly resilient to problems and perturbations.

Consider this. An earthquake hits a small town. Local food supplies are destroyed. Several food companies load trucks with food and drive to the town. Nobody told them to do so. They saw an opportunity for profit and they took it. Some used smaller trucks, some bigger ones. Some took side roads and some highways. Some trucks broke down but many made it. Problem solved, at a price, of course.

The advantage of this process is that many people tried different solutions to solve the same problem. Some worked and some did not. However, despite the failures, the problem was solved. If this would have been organized and concerted centrally, it is highly likely that all trucks of the same type and capacity would have been sent through the same roads, hence giving rise to a single point of failure. In those circumstances, all trucks would be vulnerable to the same problems. The problem may not have been solved.

Of course, all this resilience comes with a price. There is always a price. There is no free lunch. But even this price is flexible. Companies would want to make a sale. If the population would not have had money, they would probably extend some sort of credit. Businesses don’t care as long as they make a profit. If they need to wait, they will simply rise prices. Despite all of this, the problem got solved!

In a free market, all market participants want to make the maximum profit or to obtain the maximum benefits from goods or services. This means that all market participants are optimizing their choices all the time! No wonder free markets are optimized. All market participants have the same goal.

Criticisms

As expected and right on cue, there is always an array of critics. Almost all criticisms revolve around three ideas:

1. Markets are not as efficient as they could be. This is so because there are things that tend to increase prices (such as monopolies) and a better, theoretical model can always be found. They call these issues “suboptimal economic outcomes”.
2. Markets do not fulfill their “social need”, as defined by a political theory.
3. Free markets cannot exist without a government, because somebody must enforce the rules and spell out rights and obligations.

Let’s begin our answer by stating that, historically speaking, free markets have surpassed any other experiment in market control ever devised. In other words, the golden rule: free markets work and they work better than any other type of market.

As to the concept that free markets are not perfect, as in “theoretically perfect”, this is yet another academic imposition. The argument always goes more or less like this: free markets do not look like my shiny new theoretical model, therefore free markets are flawed. We have said this countless times. Free markets are not perfect and they do not purport to be. It is simply ridiculous to demand perfection. Free markets are optimized systems that provide the most needed resources to the most people at the lowest price, taking into consideration all real-world issues and limitations.

All these issues and limitations cannot be removed or managed without altering the whole dynamics of the free market. It is simply not possible to manipulate one portion of free markets and expect not to have much larger repercussions somewhere else. The free market is an ecosystem where businesses and customers co-exist and thrive. Sure, they are some dangers here and there, but even those dangers fulfill crucial roles. Only idiots and many economists can’t seem to be able to see them.

As to the notion that free markets do not fulfill a given “social need”, we are there with you. They don’t. Markets are not designed or self-organized to fulfill “social needs”. This is strictly a side effect. Furthermore, all these “social needs” are theoretical, subjective and artificial. Why should a real-life system fulfill them? Free markets do a spectacular job fulfilling what most people need, when they need it at a more than reasonable price. Asking for anything else is asking for utopia. Of course, this fact never stopped theoreticians and politicians… and we all know how well communist and socialist systems have been working, economically speaking. So, if you want a market system that fulfills your “social need” du-jour, feel free to create and implement one. Good luck with that!

The last notion is that markets need “rule enforcers”. This would apparently be so to enforce:

• Contracts. Not really, see the lesson Justice in the Austro Libertarian System
• The formation of labor unions. Not at all. Unions are simply organizations that can determine their own formation rules.
• Rights and obligations of corporations. Not at all, see the lesson Contracts Are The Key To Coexistence
• Who has standing to bring legal actions. None whatsoever, this was covered in the two lessons mentioned above.
• To define what constitutes an unacceptable conflict of interest. Not really. See same lessons.

And so on.   For each rule there is an equal and opposite Asbolute Austro-Libertarian system. These systems are equally (if not more) efficient solutions than anything designed by a centralized organization. It is quite simple, really. You can’t beat the accumulated wisdom of billions of market participants. Even suggesting something like that it is plain stupid, arrogant and ignorant.

Note: please see the Glossary if you are unfamiliar with certain words.

Continue to Introducing Mr Free Market - Part 4