The Greatness of the Market in a Crisis


If you are glued to the evening news or the radio, you might believe that the whole nation is waiting in suspense to see how our leaders are going to deal with the economic challenges of our day: recession, inflation, unemployment, bank runs, etc. There are proposed laws, bills flying everywhere, candidates promising this and that, press conferences, debates, op-eds, talking heads, regulations, investigations, proposals, and policies.

Then there is the real world.

The real world is the market economy. It is making a trillion decisions every hour. The decisions are dramatic, decisive, and life changing. They deal with real stuff, not vapid promises. We see this in a crisis more than ever: the takeovers, production shifts, whole industries rising and falling, patterns of imports and exports reversing themselves, jobs changing, with tens of billions of dollars changing hands minute by minute.

Here is the pith of life. The rest of what people think matters is just white noise.

An interesting case is how production in some sectors is increasing in the midst of an economic slowdown. Cars, computers, and steel — important aspects of industrial production — actually experienced a marginal boost in June. Why might this be? The declining value of the dollar on international exchange has made imports more expensive, and made domestic production more appealing. This complex activity — a signal of bad economic times but a praiseworthy response to massive shifts in the investment environment — is driven by nothing less than loss avoidance strategies by entrepreneurs.

No one needed to issue a command to make sure this happened. There were no debates or polls. No regulator had to issue a press release. It happens because considerations of profit and loss provide the right signals to entrepreneurs. The entrepreneurs saw the new conditions and acted on them. And why? To do what they always do: try to stay out of loss-imposing lines of production and find profitable ones.

Another dimension of this is the industrial takeover. InBev SA of Belgium has taken over Anheuser-Busch in the hope that it can make the company profitable. This is partly a response to the falling dollar but also a handoff to a management team that might do a better job at doing what the company is supposed to be doing. Concerning the nativists who say that only Americans should own beer companies in America, consider that the foreigners are doing us a favor: taking over one line of production to free up domestic resources to help dig out of recession. Oh — and beer from Belgium is far superior to any Bud.

Earlier this year, the Royal Bank of Canada, from its US headquarters in North Carolina, swept in and took over First American Bank and nine other banks in Alabama, Florida, and Georgia. In bank after bank, they close on Friday and reopen on Monday with a completely new name and face. Nothing in politics happens this fast. It is all to the good for everyone, since it puts the banks on a more profitable path. Historically, by the way, Canadian banks are far more prudent than their US competition, so as a customer, I can only say: Hooray!

Again, the motivation is the same: loss avoidance and profit seeking, which is just another way of saying that these are efforts to make sure that society’s resources are used in the most efficient (least wasteful) way. A recession makes this approach all the more critical. But what is really impressive is the way in which markets respond to dramatic change. Resources move and shift in a manner that makes economizing part of the very structure of life itself.

Another example is oil. The prices at the pump reflect not only existing supply and demand conditions but also the best possible guesses about future conditions, discounted to the present. The prices reflect what producers believe to be profitable and they also serve to bring about the best possible conditions for economizing. Should prices go up or go down? We are fortunate that this doesn’t have to be decided by a government committee. It is a matter worked out by billions of real trades around the world within the global market framework. The response time to new information is mind-boggling. Prices soar for months and then suddenly plummet based on changing conditions. Everything is constantly in flux, with present prices representing the best possible guess concerning the least wasteful use of resources.

Every business in America right now is in the position of having to assess how it does business, what it pays its workers, how much to invest for the future, whether to cut back on some lines of production now, how and whether to advertise, when and how to raise prices in response to increased costs of doing business. Again, no one waits for an order from Washington. The orders are issued by balance sheets at the end of the day. A company must stay in the black or else shut its doors.

Consumers too participate in these large movements of resources. We see prices going up in all goods and services, but some more than others. We shift to substitutes, we consider more carefully what we buy, we think hard about alternative ways of stretching the value of declining dollars. In this way, we reward producers who best adapt to the changing environment, and best serve our needs.

Finally, consider the fate of mortgage lenders and homeowners. The markets became wise to the fact that loose credit led to a fantastic bubble and that trillions in traded mortgages might not be serviceable in an environment of downward price pressure. Companies that once were seen as valuable and liquid are suddenly seen as unstable and wasteful. Their stocks are shorted by sellers. Their price crashes. Reality is revealed.

This is not an attack. It is not a result of malign “rumor mongering.” It is not even regrettable from an economic point of view. Truth is a precondition for economic recovery. Bad investments need to be avoided. Good ones need to replace them. That is the very core of what all this economic activity is about. If the informed guesses of traders turn out to be wrong, there is a profitable opportunity for other traders to guess more accurately. To dampen this spirit is to do nothing but prop up illusions and perpetuate error.

What can the State contribute to this cause? It can get out of the way. It is not necessary to somehow demonstrate the superiority of markets over state planning. This is demonstrated every single second of every day. The politicians blather while the markets act with confidence and wisdom to achieve real results. The only positive contribution that politicians can make is to make the market a freer environment for resources to travel to their most profitable production lines.

People say that markets are not democratic. In fact, what we have here is the ultimate economic democracy, one in which all of us as individuals vote in the use of our time and resources, as William H. Peterson argues. We determine, through our buying and selling decisions, which lines of production succeed and which ones fail. But if the critics mean that markets are not politically democratic, they are precisely right, and it is a good thing too. The price system is a system of action, not words. It is decisive and takes responsibility. Where political democracy ignores those without power, market democracy collects and uses all available information for the benefit of everyone.

Markets are beautiful in good times, but especially impressive in bad. There is no better occasion than a crisis of this size and scale to marvel at how the institutions of private enterprise can cope better than any political leader, or all of them put together.

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