The Subtlety and Complexity of the Market System
Most people have little interest in bidding for private jets or limited-edition luxury cars, nor are they particularly interested in the space technologies pursued by Elon Musk. Under a market system, individuals allocate their wealth according to what they personally consider most important.
In this way, people are free to direct their resources toward the goals, products, and experiences they value most, each according to their own preferences and priorities. Everyone, in a sense, is able to pursue what matters most to them.
Is this not, in many respects, a remarkably reasonable arrangement?
Author: GUDORDI | 2024-03-20
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)
The author remember that more than thirty years ago, I took a government official from mainland China on a visit to the trading floor of the Hong Kong Stock Exchange. At that time, fully electronic trading had not yet been implemented, and brokerage firms still employed floor traders. These traders moved hurriedly around the trading floor throughout the day to facilitate transactions, creating a lively and distinctive atmosphere.
Particularly during periods of major market volatility, the tension and intensity on the trading floor were fascinating to observe and remain memorable to this day.
On the day of our visit, a significant event had affected the market, making conditions on the trading floor appear somewhat chaotic. The official then asked:
“Why does it have to be so chaotic? How are stock prices actually determined? What are all these people doing in such a disorderly environment? Isn’t there supposed to be only one market price?”
Market Equilibrium Prices Are, After All, Only a Theoretical Concept
This mainland Chinese official held a doctorate in engineering, but he appeared to have a strong interest in economics and wanted to understand the principles behind the operation of the capitalist system. So I elaborated further.
As I recall, I replied roughly as follows:
“The market price described in textbooks as the point where supply and demand curves intersect exists primarily as a theoretical concept. In the real world, market prices reflect how market participants interpret information arriving from countless different sources. Because new information is constantly emerging, and because participants’ views and expectations are continually changing, the equilibrium price should be understood as a dynamic rather than a static concept.
Market prices must therefore be continuously updated. What these traders are busily doing is essentially trying to discover the equilibrium price described in textbooks—the price at which supply and demand are balanced.”
The fact that traders were constantly moving around and shouting bids and offers reflected an important market function, though it was understandably difficult for the official to grasp immediately. He therefore continued:
“Why make things so complicated? If the government simply set a price and everyone followed it, wouldn’t that avoid all this confusion and be far more efficient?”
This was a fascinating and important question. Since he seemed to have given the matter some thought, I expanded my explanation.
As I remember, I said something like this:
“In theory, that is possible. Economic theory contains the concept of an ‘omnipotent auctioneer’—a hypothetical figure who possesses and can process all information in the market, then determine the equilibrium price that balances supply and demand. If such an auctioneer existed, all pricing decisions could simply be left to him. This idea is closely associated with the theory of General Equilibrium.
According to the mathematical models underlying this theory, an economic system can simultaneously achieve equilibrium across multiple markets—including goods, factors of production, capital supply and demand, savings and investment, and the relationship between present and future consumption. This corresponds to what economists refer to as a Pareto optimum, or a Pareto-efficient state.”
The Appearance and Reality of the Market May Not Be the Same
From a logical standpoint, there is nothing inherently wrong with this perspective, and its mathematical implications are undeniably impressive. However, a more thought-provoking question remains: in the real world, can such an omnipotent auctioneer actually exist?
If such a figure is fundamentally impossible, then the theory serves only as a starting point for analysis. The next step is to understand why the omnipotent auctioneer cannot exist. The third step is to determine what choices and trade-offs are realistically available to us under the constraints of the real world.
Behind the seemingly chaotic behavior of traders, might there be something profoundly important that is not readily understood by the general public? This is a question worth considering.
In any case, the quotation cited at the beginning of this article suggests that the operation of the market system contains many complex elements. Its outward appearance and its underlying reality may not be the same. This is a subject to which I will return in the next article.