Markets are everywhere and have a tremendous impact on individuals, towns, states, nations, and the world. I have studied markets for over forty years and am continually surprised by much of the discussion surrounding markets. The continuum reaches from those who view markets as the solution to all mankind’s problem to those who see markets as evil. In fact, markets are a result of the human condition whereby basic (and non-basic) necessities are bigger than any one person’s ability to produce these necessities. Thus, markets exist to trade between producers and consumers. This is a simplification but necessary to an understanding of the value and limits to markets. Furthermore, a discussion of some characteristics of markets lends insight and clarity.
Markets have no concern with good or bad as these terms imply judgment and morality. At the most basic level, markets allocate with some viewing the allocation as good, while others view the same allocation as bad. A simple explanation involves buyers and sellers. Buyers desire excess supply and low prices (good for buyers but bad for sellers) while sellers desire excess demand and high prices (good for sellers and bad for buyers.) Ultimately, prices synthesize these two competing interests and trades are made.
Another important characteristic of markets is they are constrained by time. That is, any observed price (a market result) is a snapshot of a very defined situation involving a seller and a buyer. Much like cinema production, a collection of these snapshots (trades) presents a movie through time. So our perception of market activity is heavily 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 implies 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, both information and knowledge are incorporated into a time constrained period to arrive an agreed transaction.
Humans are continually fluctuating between rational and emotional thinking and this is one of the most interesting incorporations by markets. Even with perfect information, economic theory might predict market results (prices) that in the short run are widely divergent (lots of variance) due to conflicting knowledge and information.
Market could be described as both beautiful and cruel but neither description is factual. They are simply one mechanism to allocate goods and services in an efficient and desirable (to both parties) way but with no concern about the impact on the human condition.
Steve Turner is a professor of Agricultural Economics at Mississippi State University.
