Mises Wire

The Way Markets Allocate Goods Is Truly Amazing

The longer I taught economics to university students, the more I came to appreciate subtleties in markets grounded in secure private property rights. Indeed, as my awareness of these subtleties developed, a sense of awe arose. The subtleties go far beyond that typically drilled into freshmen and sophomores.

Setting the Stage

Let’s put everything in terms of a simple product like raspberries. Buyers and sellers have conflicting objectives. Buyers want low prices; sellers want high prices. 

Market prices reconcile these competing objectives. Market prices will continually be gravitating towards prices where all willing buyers can find willing sellers and all willing sellers can find willing buyers.

Secure property rights are key in obtaining these benefits of market exchange. Secure property rights prevent forcing sellers to sell at artificially low prices. Example: government price ceilings on rental housing undermine landlords’ property rights. Secure property rights also disallow forcing buyers to pay artificially high prices. Example: government-mandated minimum wages.

No coercion means buyer/seller exchange is at mutually agreeable prices. These prices are not as high as sellers prefer, nor as low as buyers prefer. Nevertheless, buyers and sellers simultaneously gain. Buyers don’t gain because sellers lose, nor do sellers gain because buyers lose.

Raspberry buyers and sellers’ opposing objectives have an important consequence. To wit, they make raspberries’ contribution to the community living standards as high as possible, even though it is the immediate objective of no one involved in the raspberry market!  How can that be, you say?

Unintentional Benefits

It’s because buyers wanting to pay low prices gravitate to raspberries’ lower cost producers. These producers will be able to — that is, not want to — sell at lower prices. Cost is a yardstick for opportunities given up. Giving up less to produce raspberries means the community can have more of other things. In supply and demand terms, buyers search for sellers on the lower portion of the supply schedule.

Sellers, wanting high prices, instinctively search for buyers willing to (not wanting to) pay higher prices — that is, those who value raspberries more highly. In supply and demand terms, sellers search for buyers on the upper portion of the demand schedule. 

Any other arrangement of production tasks or consumption benefits lowers raspberries’ contribution to living standards. Again, this occurs as a consequence of market participants trying to enhance their own economic positions. How to describe this? How about: “Wow, that’s amazing!”

Adam Smith noticed this too, and in The Theory of Moral Sentiments (not to be confused with The Wealth of Nations), Adam Smith wrote:

Every individual... neither intends to promote the public interest, nor knows how much he is promoting it... he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.

Information Requirements

The amazing nature of these transaction is also illustrated by the ease with which one can obtain necessary information. A seller only need know his/her costs and the price of raspberries. A seller does not need to know the identity or costs of other sellers, nor does a seller need to know the identity of buyers. Likewise, a buyer only need know his/her maximum willingness to pay for raspberries relative to the price. 

Notwithstanding these trivial information requirements for buyers and sellers, the raspberry market will be filled with information about millions of buyers’ consumption values. The same holds for producer costs. That all this information is included in production/consumption decisions, despite individuals knowing virtually nothing, is surely deserving of another “Wow, that’s amazing!”

The notion that any group in say, the U.S. Department of Agriculture, could achieve this result via edicts is absurd. 

Is the Latter a Rephrasing of Leonard Read’s “I, Pencil?”

Some might argue that I am here only rephrasing the central  insight of Leonard Read's "I, Pencil." That's not quite true, although I am making a similar point. Read’s article surely stands as a profound economics essay. His argument was that the diversity of technological requirements for a product as simple as a pencil is so vast that they are beyond the comprehension of any individual. Nevertheless, all this technological expertise is brought to bear in a pencil’s production.

My point is that an unencumbered marketplace assigns production tasks to lower cost producers and consumption benefits to buyers who value the product most highly, even though the outcome is beyond the comprehension of any individual. If anything, my point augments Read’s insights in a way which also fits into a supply and demand framework.

The above is not unique to raspberries. It applies with equal force to the millions of other goods and services we produce and consume. Those choosing to ignore the “amazing marketplace” court societal disaster. Look no further than North Korea, Cuba, Venezuela, and the communist experiments of the previous century.

Final Comment

The Psalmist, King David, in the first four verses of Psalms 19 expresses his awe at the wonders of God when contemplating heavens. Surely, the wonders of a magnificent order can touch human affairs. When I quoted these verses to my students in support of the order found in “the amazing marketplace,” perhaps the biblically literate among them appreciated my awe of the marketplace.

What happens when markets are characterized by private property rights and the rule of law borders on beyond-the-imagination. Indeed, when understood, one develops a sense of awe for what can be accomplished with so little knowledge and effort on the part of each individual involved in a market. It’s an outcome that is impossible to be duplicated by any other method for providing for economic sustenance.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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