Markets WILL Prevail – Even if we don’t want them to.
“If we once again guide the market’s invisible hand with a higher principle, our markets will recover, our economy will once again thrive and America will once again lead the world in this new century as it did in the last…” Part of President Obama’s speech on February 25, 2009 cites a principle some economists (and some history buffs) know well. What Obama is attempting reference to, is Adam Smith’s “Invisible Hand.”In a current context, most understand this idea to be the notion that the government must influence the market covertly to stabilize the market through direct government intervention and monetary policy. I.e. Bail outs, tax credits, and anything else you can come up with that the government can legislate to control the market in whatever manner is necessary. The problem is that the interpretation of the principle couldn’t be further from the truth. The invisible hand is actually the hand that influences equilibrium price, created by the effects of supply and demand on the market.
A few clarifications.
Demand: Demand is pretty obvious. Demand deals specifically with the willingness of consumers to purchase a good at any given price. The higher the price, the lower the quantity demanded. The lower the price, the higher the quantity demanded.
Supply: The first most common economic fallacy is the presumption that Supply is directly related to the quantity of a good in a market. IT IS NOT. “Supply” is the producer’s version of demand. It reflects the producer’s willingness to sell a particular quantity of a good at a particular price. The higher the price a good sells for, the more willing the producer is to sell. The lower the price a good sells for, the less inclined a producer is to sell.
So, supply is the willingness of a company to sell X amount of product at Y price, and demand is the willingness of a consumer to purchase X amount of a product at Y price. Where those two curves cross on a graph, is what we call “Equilibrium price.” Equilibrium Price is the point at which consumers willingness to buy matches a producers willingness to sell. Markets, by their nature, will always balance price and quantity at this equilibrium price. Why? While a producer certainly wants to sell their goods at a higher price, consumers always want to buy their goods at a lower price. Markets work on voluntary exchange, so as a consumer I may want to purchase a new Nissan GT-R for $5.00, there is no producer in their right mind that would want to sell me that car for that price. On the converse, Nissan may want to sell me that GT-R for $500,000 but no consumer in their right mind would pay that price for that car. Ultimately, consumer wants and producer wants balance themselves at an equilibrium price (that isn’t necessarily a mid-point.) This is Adam Smith’s “Invisible Hand.” “When we enter into an exchange, we are only interested in our own well being, and producers are seeking their own. Both are pushed by that invisible hand to an equilibrium position.”
The thing is, it doesn’t mean that it will make everyone happy.
The effects of government control is a topic for a future date, but note the effect of rent price controls in New York City and Cairo, Egypt. Both government imposed rent ceilings caused a massive increase in demand and accordingly, the price actually INCREASED. A black market for rent subleasing came to exist, as those lessees who were lucky enough to rent an apartment maintained their lease at the ceiling price, and subsequently subleased their apartments out at a higher rate. Demand at that ceiling price was huge, but producers weren’t willing to sell as many units at that price (and so converted some to commercial property, or simply did not lease them.) This is what’s called the Law of Unintended Consequences.
The same thing happens with the illegalization of a particular good. The market doesn’t simply disappear when we make it illegal, or attempt to control price, it simply alters the supply and demand (primarily supply) and alters equilibrium price, almost always increasing it. Illegal narcotics for example, if legalized, would likely find a lower equilibrium price, as there are fewer risks for suppliers to grow, produce and market the product.
Fact is, markets will exist whether we want them to or not. Its part of human nature to trade and exchange, and voluntary exchange is the basis upon which all human beings communicate and socialize. Be it legal or illegal, controlled or uncontrolled, the market will still exist. The only difference is that we make the sale of a good at that equilibrium price black, or white. Illegal narcotics, medical procedures (abortion anyone?), all will have a market no matter how moral or immoral we think they are, and no matter how much we like or dislike that market. It will still exist no matter how much government gets involved.
Now, with a little tearing apart of our President’s speech, I have to ask… “What invisible hand are you talking about?” With a $1,000,000,000,000 price tag (Looks different when you write out all the zeros, no?), the bailouts certainly weren’t invisible. If we presume a population of 300 million US citizens, that equates to about $23,333 per person.
While a fantastic speech writer, it’s obvious to me that our current president fits the mold of what John Jay warned in the Federalist Papers #64. “Brilliant appearances often mislead as well as dazzle.” Barack Obama is a bullshitter. He clearly has no idea what he referenced in his own speech. I’d give him the credit of intellect, but if that’s the case, it would put him on an ideological par with Adolf Hitler. I think he lacks the intent and truly believes that what he is doing is right. Hitler knew it wasn’t. The more and more I hear Obama’s speeches, the more and more he sounds like a more articulate G.W. Bush.
