What Do Markets Do?

Individuals benefit from trade -- but so does "society" in the sense that scarce resources are used in ways that benefit people - and they are used more "efficiently" (given our definition of this term we discussed earlier) than if we did not have markets.

Markets exist whenever and wherever people trade with each other.  Markets arose spontaneously as people discovered for themselves the benefit of trade.

Markets ration scarce goods and services to the highest bidder.  Markets are ever-changing, spontaneous processes of cooperation.  Millions of different people, with very diverse interests, skills, knowledge and goals all contribute to the production of any given good.  These people cooperate with each other (most often without even meeting) by simply acting to increase their own well-being.  This cooperation produces an order (the plans of producers and consumers are usually fulfilled) because markets provide people the information and the incentives they need to produce this order.

We live in a world of ignorance and uncertainty.  The bidding process by consumers for final goods and services conveys information to suppliers as to where resources should be utilized.

Prices and profits and losses are the signals which suppliers use in order to decide where resources should be utilized and gives each individual supplier information about their comparative advantage; how they should specialize.  In other words, monetary prices and profits (and losses) provide the means for economic calculation - the ability to "calculate" profits (and losses) - this tells suppliers if they are using resources where consumers want them (i.e., are being efficient) or if suppliers are making mistakes. Consumers are able to convey their tastes and preferences for one good over another simply by buying or not buying a good at a specific price (i.e., their actions reveal their preferences and then prices and profits reflect those preferences).

This economic calculation (only possible with money) is the fundamental beauty (and efficiency) of markets, and is responsible for the allocation of scarce resources to the end of making consumers’ living standards much higher than otherwise (i.e., it is wealth enhancing - even if someone defines wealth in terms of more leisure time).

Economic planners (those who try to allocate resources without the aid of market prices and profits (and losses)) have failed time and time again. Hence, we see long lines, massive shortages and surpluses, and even total devastation of those economies that do not rely on markets to allocate or ration scarce resources.

The bottom line is that the choice must be made as to how a scarce resource, say a parcel of land, should be used.  The rules of the game are important here.  When private property rights (and I would add strict liability laws) are upheld, and people have the ability to exchange these rights, then that parcel of land will go to the highest bidder.  And the highest bidder is willing and able to pay the highest price because the final consumer is willing to pay him/her a relatively high price for the output of that land -- which will then enable that bidder to make a relatively high return on his/her investment in the land.  If consumers want more fast food restaurants (and are willing to put their money into hamburgers and French fries), then that is what that land will be used for.

  Markets are information generating processes of cooperation and coordination. 

And, in markets, consumers rule !!