Misconceptions of Market Forces

market forces

The world around us is so incredibly complicated that we couldn’t possibly expect any single individual to understand all of it. Through the division of labor, we have people that devote significant amounts of time to mastering a single skill or understanding a topic within a field of study. Then we have others that act as a bridge between the experts and the layman, taking complicated subjects and conveying them in ways the average person can understand and digest in a small amount of time.

Unfortunately, nuance and the finer details are almost always lost in translation. When explaining economics, especially in defense of the free market and against government intervention, it is sometimes incorrectly conveyed as “the market can do no wrong” or “just wait and don’t worry, the market will find a way.”

Such high expectations and clear refutations of such a simplistic view push people away from the market and towards government intervention. When some free marketeers act like market forces are a supernatural “invisible hand” outside of humanity rather than a conglomeration of human action, they misunderstand the free market system.

Market Tendency

The natural sciences (like physics and chemistry) deal with physical objects that operate under definitive laws of reality. When these laws are understood and variables are known, the outcome can be perfectly predicted.

This is not the case when working with human beings. Assertions about how people act within the market are tendencies based on incentives. We cannot predict exactly how many people will make a certain choice, but we can predict trends.

We can say that an increase in price will tend to decrease the number of purchases, but even this is not true every single time. Price is a sign of quality. If an item (especially a house, a car, or electronics) appears to be of high quality and is incredibly cheap, some people will begin to wonder if there’s an unseen issue. But even then, some people will wonder this, not everyone. Each individual has a unique set of value judgements, meaning they may act differently from others.

Some wealthy buyers are looking for quality, and cost is rather unimportant (within reason). Sellers appealing to this demographic have an incentive to focus on quality, even if it means a higher price. Other buyers want a cheap price, even if it means a low quality product. Other sellers can appeal to this demographic through mass production of low-quality goods. And many buyers are somewhere in between, creating a demand for a decent product for a decent price.

This doesn’t mean that we can’t make any predictions about the market. Higher prices tend to lead to lower sales. Though this may not be true every single time, it is generally true, and that is an important piece of information.

Market Opportunity

There’s a joke among economists about market opportunity.

An economist walks down the sidewalk with his friend. His friend notices a twenty-dollar bill lying on the ground and points it out to the economist. The economist replies, “Impossible. If there was, someone would have picked it up.”

Market opportunities have an incentive to be pursued, and new opportunities arise. Money lying on the ground is an opportunity for profit, and as time passes, it is increasingly likely that someone will notice and pursue this opportunity. But, as stated earlier, this is a tendency. It is not impossible to find money lying on the ground. But for each second that passes, it is increasingly likely that someone will have picked it up.

Market Demand

Perhaps the biggest misunderstanding among certain free marketeers is the belief that the market will sort itself out if only we sit back and wait. In a certain context this is entirely true. During an economic recession, it is best for the government to sit back and wait for people within the market to reallocate resources.

But sometimes this is used in a more general context, operating under the assumption that if we as individuals sit back and do nothing, the market will do what we want. This is where this line of thinking has gone astray.

Market forces operate to satisfy demand. This demand is made up of each individual’s desires. In certain markets, especially in regards to politics, demands can compete with one another.

Media and news is a prime example. There is a market demand for news and media content, but of different varieties. Not everyone has a demand for the truth. Some people want comforting lies that reinforce their ideology. Some people demand media that advocates for socialism or fascism. Some people want their news to be entirely biased in favor of President Trump, and others want their news to only attack Trump.

There will only be truth and honesty in the media if there is a demand for it. If those that demand truth in media sit back and wait for the market to supply it, they will be disappointed. The market consists of each individual making their desires known. Sometimes a product is created without people even knowing they wanted it. But generally, producers are looking at market signals to figure out what demand they should be fulfilling.

It is up to the customer (in the media’s case, the audience) to uphold a demand for truth and a disincentive for bias and lies. This is not something that is automatically taken care of by a supernatural “market force.” Market forces consist of people making decisions. When a business makes a poor decision, this is not a failure of market forces. When buyers complain about that poor decision, that is a market force sending a signal to reverse that decision.

Market forces cannot be thought of as an abstract mystical process. It is a collection of individuals making decisions in favor of fulfilling their demands. One has to be an active participant in the market, not one that merely sits by and hopes that others will do the work.

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Nathan A. Kreider is author of the Misconceptions column for Being Libertarian, and has written for the Austrian Economics Center, the Foundation for Economic Education, and the Liberalists. He also occasionally publishes a blog and video content, including short book reviews, which can be found on his website, nkreider.com. He can be contacted by email via [email protected]