It seems like a good time get to know markets better. What are they, and how do they function?
What Is A Market?
When I tell people I am an economist, some ask me if I can advise them on how to invest in the stock market. My response is usually:
I have no idea, and you probably wouldn’t want my advice, as I too seek an expert for those matters!
I always thought it odd that I am asked this question, until I really started thinking about markets through the eyes of others.
When we hear the word “market” we either think of the stock market or a farmer’s market. Words evoke images in our minds, and markets as used by economists lead people to the wrong picture.
- Markets can’t be seen, felt, or touched.
- Unlike the supermarket, markets are not a physical place we go, park our car and shop for what we need.
- Markets are an institutional setting in which we trade with one another using prices.
Prices coordinate our activity with one another. There is no one person in charge. No one conjured up a market one day and said, “it will be.” Markets are a result of human action, not human design. They are emergent orders and arise through our inter-dependency on one another.
In fact, the term “market process” is a much better phrase to use when discussing markets, because it captures the dynamism of markets and their ongoing innovation, trade and exchange.
Markets Arise from How We Were Created
Will Rogers said,
We couldn’t live a day without depending on everybody.
He’s absolutely correct. That is how God created us. He could have created us to be self-sufficient. Instead, he created us to be dependent on one another, with creativity, initiative, and ingenuity to help meet each other’s needs.
Our anthropology drives us to serve one another. We were created uniquely with special gifts and talents (Matthew 25:14-30), and called into community to love and serve one another (Matthew 22:36-40).
If we were all the same, how could we serve one another? It would be very difficult if not impossible, because we would all share the same gifts and the same shortcomings.
Markets are one way of facilitating this service. We are brought together through our comparative advantage to serve each other. We provide others with goods and services we are good at producing, and purchase things we are not-so-good at producing. This is the market process.
The Market In Real Life
The market process coordinated by prices may sound simple, but it is vastly complex and widely misunderstood. Just ask someone who has lived in a country without well-functioning markets.
In his book Basic Economics, economist Thomas Sowell recounts a story told by author Michael Dobbs about former Soviet Premier Boris Yeltsin’s experience with the market process in the United States:
A turning point in Yeltsin’s intellectual development occurred during his first visit to the United States in September 1989, more specifically his first visit to an American supermarket, in Houston, Texas. The sight of aisle after aisle of shelves neatly stacked with every conceivable type of foodstuff and household item, each in a dozen varieties, both amazed and depressed him. For Yeltsin…this was infinitely more impressive than tourist attractions like the Statue of Liberty and the Lincoln Memorial. It was impressive precisely…A cornucopia of consumer goods beyond the imagination of most Soviets was within the reach of ordinary citizens without standing in line for hours.
Yeltsin knew that all the central planning in the world could not bring him the vast abundance he saw at an ordinary American grocery store. That’s because there is nothing ordinary or simple about the market process. Through the interaction of supply and demand we are able to feed and clothe millions of people, and also offer them twenty-five varieties of peanut butter.
No one person could do this on their own. Not the richest, most powerful person you can imagine has the power to harness our creativity and God-given ingenuity the way markets harness them. God wants us to thrive, and the market process is the best known way for us to obtain higher levels of flourishing on earth. As Christians, it is incumbent upon us to understand the market-process and help it do its job.
What is a market? How do you understand the market process?