The subtleties and complexities of the Free Market
In the real world, is it possible for this super auctioneer to exist? If it is impossible for him to exist at all, then the general equilibrium theory is only the beginning of the analysis.
Author: GUDORDI | 2024-03-20
The market price needs to be constantly updated. (Asian News Agency)
Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch its currency……Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.
──”The Economic Consequences of the Peace “, 1919, Keynes
( The Economic consequences of the Peace , John Maynard Keynes)
I remember that more than 30 years ago, the author once took a domestic official to visit the trading hall of the Hong Kong Stock Exchange. In that era, full electronic trading had not yet been implemented, and each brokerage house still had out-of-market traders. They were constantly walking around in a hurry in the trading hall to facilitate transactions. It was very atmospheric, especially when market conditions experienced major turmoil. The tension and environment of the lobby are interesting and nostalgic. There were some big events happening in the market that day, so the situation on the trading floor seemed a bit chaotic. At that time, domestic officials asked: “Why is there such chaos? How is the stock price determined? What are these people doing in such a chaotic environment? The market price is not Only one?”
Market equilibrium price is nothing more than a theory
This domestic official has a doctorate in engineering, but he seems to be very interested in economics and wants to understand the principles of the so-called capitalist system, so I told him a little more. I remember that I answered him like this: “The market price caused by the intersection of supply and demand curves as mentioned in books is only a concept in the theoretical world. In the real world, market prices reflect the responses of market participants from all directions. Interpretation of information from all sides. Since the market is constantly receiving new news and the views and opinions of participants are constantly changing, the equilibrium price should be a dynamic concept that needs to be constantly updated, and these traders are in a hurry. What I have been busy doing is trying to find the price equilibrium point under the balance of supply and demand as mentioned in the book.”
The traders walking around and shouting actually reflected an important function, which was obviously not something that officials could accept at once. So he continued to ask: “Why bother? If the government sets a price and everyone follows this price, wouldn’t it be able to avoid confusion and be much more effective?” This is a very interesting and important question. He seemed to have his own ideas, so I explained a little more at the time.
I remember that I probably said this: “Theoretically, it is possible. In economic theory, there is the concept of an omnipotent auctioneer. He can grasp and digest all the information in the market, and then determine the price that can balance supply and demand. The equilibrium price, therefore, is to hand over all issues to the super auctioneer. This is believed to be an important point of the “General Equilibrium Theory”. According to the mathematical model of this theory, the economic system can simultaneously balance products and prices. Production factors, capital supply and demand, savings and investment, future and present markets all reach equilibrium simultaneously, which is the so-called “Pareto Conditons” in economics.
Market appearance and connotation may be different
Logically there is no problem with the relevant viewpoints, and the mathematical reasoning is even more amazing. However, a more thoughtful question is, is it possible for this super auctioneer to exist in the real world? If it is impossible for him to exist at all, then this theory is only the beginning of the analysis. The second step is to find out what is the reason why the “Super Auctioneer” cannot exist? The third step is to find out what choices and trade-offs we can actually make under the constraints of real conditions?
Behind the chaotic behavior of traders, is there actually a very important side that is not understood by ordinary people? In any case, the famous quote quoted at the beginning of this article illustrates that the operation of the market system implies many complex components, and its appearance and connotation may be different. We’ll talk about that next time.
