Economics 101

How Does the Market Work?

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Have you ever called the manager of your grocery store? Ever sent him or her an e-mail? Can you imagine having to do so every time you planned to go shopping, just to make sure the store stocked the goods you needed?

This rarely happens, if ever. But how can we go to the store and expect it to be full of stuff without telling the store owner ahead of time what we want?

In my previous post in this series, I discussed how the market is an everyday miracle that we have come to take for granted. I will now discuss how that system works in more detail.

The economy can be viewed in one of two ways: as a marching band, or as a skating rink. But how do these analogies work?

The Economy as A Marching Band

Order, straight lines, and common purpose all characterize a marching band. The “marching band school of thought” sees economic order as possible only if there is an order giver, or an economic “drum major.”

There are different parts to play in the economy, as there are in a marching band. People have different talents and abilities, just like the different instruments, but ultimately someone needs to lead this procession. This school of thought believes the government should fill the drum major role. Experts have the training and experience to manage the economy to its best end.

This is not the way an entire economy operates. An economy does not have one end, but millions.These experts lack several key elements that enable good decisions, including the knowledge and incentives to manage these multiple ends.

Scripture recognizes that different individuals will make different decisions based on their gifts, needs, and interests. For example, when God laid out the rules for Israel in the book of Deuteronomy, he was very specific in a few areas, but he left the societal rules open-ended. Jesus summed them up in one line, “Love your neighbor as yourself.” Nothing else is required but an understanding of what true love is. Each person is to find their own way to show that love. Jesus had little good to say about the rule-imposers of his day.

The Economy as A Skating Rink

The other analogy for economic order is a skating rink. Economist Dan Klein explains this well in a piece on this subject.

In a skating rink, we can assume that everyone wants to have fun skating. How people have fun skating is more of an open issue. People have different skating skills, and even different goals. Some people want to skate as fast as they can. Others wants to teach their four-year-old how to skate.

The skating rink looks like chaos to outside observers. Accidents look inevitable, yet they are rare. People have every reason to avoid accidents. But, unlike the drum major, each skater does not need to know what everyone else is doing. He or she just needs to pay attention to those around him to avoid mishaps.

Economists call this spontaneous order and it is how the world operates. It is how God intends us to operate. In the garden, he told Adam to tend and take care of the garden and to name the animals, but he left it to Adam to sort out the details. We are told to witness to the world, but not given details on how. Even how we worship is largely open-ended. We are given much latitude to find our own way on many issues.

We see this spontaneous, emergent order in many everyday places: an unlined parking lot where everyone parks properly and safely leaves entry and exit lanes, moving around in shopping malls, or setting up a spot at a crowded beach. In all these places people do their own thing and it goes pretty well.

What Holds Economic Order Together

How does this work in the economic order? How do people avoid economic collisions? In a word, prices. Prices are a natural result of private property.

Order emerges under the right conditions. When life and property are secure, we get prices and trade. Prices send information to people about what they can afford and what is valuable, allowing them to make informed choices. As economist F.A Hayek explains in “The Use of Knowledge In Society,” one of his most famous papers, prices are the communication system of economic order.

We do not need to know what is going on around the world. All we need to see are the prices of our various options to know how to best spend our budget and when and where to use our talents. Prices provide the feedback and incentives that no government can possibly replicate.

The next time you go grocery shopping, think about how you find what you need without having to always call the store manager ahead of time. I’ll bet he’s grateful for that.

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