Saturday, June 11, 2011

Markets don't solve problems, people do.

What if there is no perfect solution? A lot of people certainly believe there are such things for the problems that arise from the complexities of life. I personally believe a great deal of the desire for there to be a deity comes from the yearning that their be perfect solutions. The entire concept of the Kingdom of God on earth comes with the belief that it will usher in perfection.

I, however, tend to think there are no perfect solutions. I believe there are only human solutions and human solutions will tend toward imperfection since humans themselves are imperfect. What exist are choices between imperfect solutions. Market liberals, such as myself, do NOT advocate markets because they promise perfection, though we do advocate markets.

And I know some fellow travelers who do seem to operate under the illusion that “markets” can solve every possible problem. You hear it with terms like “the market will take care of it.”

But markets don’t take care of anything. Markets can’t solve problems because markets are not sentient beings. They don’t understand problems; they can’t consider solutions. They have no brain. In one sense they do not even exist.

Markets are institutional arrangements that exist to help the true problem solvers to do their job. Those problem solvers are people. Some of the problems they solve are small ones, while others are astoundingly complex and massive.

As an institutional arrangement markets provide some very important components for problem solving. First, they offer incentives to problem solvers. Second, depoliticized markets offer problem solvers freedom to pursue solutions. Third, the market institution conveys knowledge to the problem solvers. It tells them where problems—profit opportunities—exist. It tells them what resources are available, it tells them what problems people want solved most urgently, it tells them whether they are succeeding or failing. It gives them information as to whether or not the cost of the solution is greater than the cost of the problem. A solution that imposes more costs than the problem it solves makes life worse, not better. Markets encourage cooperation in ways not otherwise possible. Markets limit the harm of failed solutions while maximizing the benefits of successful ones. And, they reward problem solvers when they get it right.

Consider these in detail. Markets offer profits to problem solvers, or entrepreneurs, who discover unfilled needs and fill them. The need could be as simple as providing donuts to people who want them, or as complex as producing a medicine or new kind of computer chip. If the problem solver is correct he will earn a profit. If he is wrong he will lose his investment.

To earn that profit he has to find a combination of resources that are worth less than the value of the solution he has created. And he can’t determine the value of the product he produces. He can set a price, but only willing buyers determine the actual value. If he sets his price above the value the consumers place on the same product it goes unsold. He has to give them what they value, at the price they value or he has not sale, absent political manipulation to force choices on unwilling buyers and/or sellers. If his price is too high his solution earns him too little to succeed. He used some labor and other resources to produce his solution. All those things had costs. If their costs exceeds the value he can earn by offering his solution to others he will lose his investment. He may have produced a product that works, but it was one that consumed more value that it created, making everyone worse off. It was a mistake, but one corrected when it fails to earn a profit.

To produce this solution he works with multiple people, many of whom he never meets. He may buy coal from miners, transportation from truckers, computer chips from China, software from India, workers from the United States, in order to sell a product in Europe. Each link in that vast cooperative chain is operating independently under the same motives as the others, the pursuit of self-interest. But to satisfy their self-interest they have to exchange with others and make them better off as well. Every day billions of people cooperate with one another in order to increase human satisfaction as a whole.

Consider the knowledge role of prices and profits. A price conveys knowledge to producers and consumers. A high price for a good tells consumers it is become scarcer. It gives consumers incentives to avoid the product. The higher profits, that come with the higher prices, tells producers they need to find a way to produce more of the “solution” that they are selling. It may mean they have to discover entirely new ways of producing their solution because old methods are now consuming more in value than they produce. The high price discourages consumption, which is the short-term solution. The higher profits encourage greater production of the good or service, which is the long-term solution.

None of this implies that markets are perfect. They are not. There is no such thing as perfect competition, there never has been, and never will be. Markets don’t reach equilibrium either. Production doesn’t exactly match demand—ever. What happens in the institutional system that we call markets is a process, not an end state. It is a means of shifting resources, always responding to the constant changing state of affairs. Resource availability is constantly shifting. New problems arise and need solutions. Old solutions are no longer worth more than they cost. New solutions make tried and true ancient solutions completely unnecessary.

What we call the market is constantly in flux and constantly evolving. It has a tendency toward equilibrium but it never reaches it. It merely points us in the directions that make the most sense at any one point in time. It can’t reach a static point because humans are never themselves static creatures, but in constant flux.

What makes markets a better method for problem solving is that is has the institutional arrangement that encourages solutions. It can’t promise us solutions. Those are up to our fellow human beings to create. It just gives everyone the incentives to seek solutions, the rewards if they find them, the knowledge they require to pursue solutions, and the freedom to seek answers.

No comments:

Post a Comment