Markets are everywhere and have a huge impact on individuals, cities, states, nations and the world. I have been studying the markets for over forty years and am continually surprised by much of the discussion surrounding the markets. The continuum extends from those who see markets as the solution to all of humanity’s problems to those who see markets as evil. In fact, markets are the result of the human condition that basic (not essential) necessities are greater than any person’s ability to produce those necessities. Thus, markets exist to trade between producers and consumers. This is a simplification but necessary for understanding the value and limits of markets. In addition, a discussion of certain characteristics of the markets provides insight and clarity.
Markets don’t care about right or wrong because these terms imply judgment and morality. At the most basic level, markets allocate, with some seeing the allocation as good, while others seeing the same allocation as bad. A simple explanation involves buyers and sellers. Buyers want oversupply and low prices (good for buyers but bad for sellers) while sellers want excess demand and high prices (good for sellers and bad for buyers). Ultimately, prices synthesize these two competing interests, and trade takes place.
Another important characteristic of markets is that they are time constrained. That is, any observed price (a market outcome) is a snapshot of a very defined situation involving a seller and a buyer. Just like film production, a collection of these snapshots (professions) presents a film through time. Thus, our perception of market activity is strongly influenced by what happened in the past, today’s news and future expectations.
Knowledge and information are the fuel that drives markets to often surprising places. Knowledge involves a resource built over time and used to provide context to situations and events, while information reflects current events and situations and is commonly referred to as data. Again, information and knowledge is incorporated in a limited period of time to reach an agreed transaction.
Humans continually oscillate between rational and emotional thought and this is one of the most interesting incorporations by the markets. Even with perfect information, economic theory can predict market outcomes (prices) which in the short run are very divergent (a lot of variance) due to conflicting knowledge and information.
The deal could be described as both beautiful and cruel, but neither description is factual. They are only a mechanism for allocating goods and services in an efficient and desirable way (for both parties) but without worrying about the impact on the human condition.
Steve Turner is professor of agricultural economics at Mississippi State University.