Efficiency is Human
This following statement frequently heard.
The market is efficient.
This statement is not true. Markets cannot think, assess, decide or
act, so they cannot decide what is efficient. Markets cannot be wise.
Efficiency is a human concept. Only people can be efficient. Some are
clever, others are highly skilled, but everyone is better off, if
producers want makes wise decisions. An economy becomes more productive as
wise producers find more efficient ways to do complex tasks.
Japanese auto makers found ways to make their production processes more
efficient, which enabled them to offers better cars at lower prices. This
wisdom and efficiency resides in the Japanese managers and engineers, not
in the market. Free markets provided a way for consumers to access their
efficiency and buy high-quality cars a low price.
Specialisation and Efficiency
Specialisation generally increases efficiency. When a person can
concentrate on one set of tasks, they the can learn to do them more
effectively. Specialisation benefits everyone, but people can only
specialise, if there is a way for other others to obtain what they have
produced (without using force or theft, and not relying on compassion).
Markets where goods and services can be offered for sale allow people to
specialise in the activities which they do best.
The people who designed my computer produced an efficient product. If
there were no markets and no specialisation, they would spend their days
cultivating crops and hunting game. They would be worse off and I would be
worse off too, because I could not make a computer in a thousand years.
Freedom to offer goods for sale on a market allows people to
specialise, but the person who chooses to specialise immediately comes
under pressure to operate efficiently. A person or business that decides
to produce goods to offer in any market immediately faces a compelling
dilemma. They must offer the goods for sale at price sufficient to cover
their production costs, but pushing their offer price to high will
dramatically reduce their sales.
The market producer must choose between higher prices and more sales.
This dilemma forces an ambitious business to reduce the costs of
production by finding ways to be more efficient. This allows them to
increase their income, without increasing prices and losing sales. Markets
Information and Efficiency
Producers and consumers need good information to make wise decisions.
Markets do not make decisions, but they are excellent conveyors of
information. To make sales, producers must share information to the market
about the products and prices they are offering. Consumers and producers
can use this information to enlighten their decisions.
Prices draw consumers towards the most efficient producer. If two
sellers are offering exactly the same a product, but one offering a much
lower price than the other, a wise consumer will accept the best offer.
The efficient producer will be encouraged to produce more. The offers of
inefficient or greedy producers will be rejected. They are not forced to
change, but they will feel the pressure, if the want to sell their
Prices provide producers with information about the value of the
resources they have used. This information flows right through the economy
from extraction of raw materials to the retailing of final goods. Wise
businesses respond to market information by adapting their production
processes to eliminate waste and increase efficiency.
Markets do not “work all things together for good”, but they do
convey some of the information that people need to make good decisions.
Market information will never be perfect and it will never be complete,
but the wisdom of consumers and producers would be severely constrained
Free markets are morally superior to theft and force. The reason is
that an exchange in a free market will only occur, if both parties think
that they will be better off after the transaction is completed. This is
good, but transactions must be agreed on the basis of what buyers and
sellers think and know at that time when time then the deal is finalised.
Mistakes are made because people have imperfect knowledge about the
future. When buying and selling, we have to act on what we know at that
time. We do not know what the future holds. If the future is different
from what we expected then a transaction may turn out to be a mistake. If
his brother arrives unexpectedly to stay for a couple of months, John
might wish he had kept the car. He might begin to think that he had made a
mistake in selling the car. Unexpected circumstances can turn good
decisions into mistakes.
People make more mistakes when they are under pressure, Esau sold his
birthright for a meal, when he was famished (Gen 25:29-31).This was a free
market. Jacob did not have to sell his stew (although he probably should
have had compassion for his brother). Esau freely sold his birthright,
because it would bring no benefit until way in the future, whereas his
hunger was there now. Short-term thinking places a higher value a meal in
the present than on a future blessing. Esau made a mistake, because hunger
clouded his judgment.
Mistakes also occur because people change their minds about what they
want. Bob bought John’s car because it was blue. After driving the car
for a month, he might get tired of blue and start thinking he would prefer
a red car. As his thoughts about colour change, he might look back on the
transaction later and think that he had made a mistake.
People make mistakes all the time when buying and selling, but if
markets are functioning freely, they can be corrected easily, albeit at a
cost. John can buy another car, if he chooses. If Bob decides that he
really must have a red car, he can sell his blue car and buy a red one. He
may lose some money in the process, but he is the only one who suffers for
People learn from their mistakes Bob will not want to make the same
mistake twice, so he will think more about colour, before buying another
Advocates for market regulation are really wanting to prevent people
from making mistakes. This is a noble ideal, but is impossible to apply in
practice. Regulators would need two forms of knowledge to prevent mistakes
when buying and selling.
They would need to know what everyone should want and need. Parents
may know what is good for their children, but a market regulator can never
know everything that other people need.
They would need perfect knowledge of the future.
Market regulation assumes the regulators have exceptional knowledge of
both human needs and perfect knowledge of the future. These godlike
regulators simply do not exist.
Political power amplifies the impact of mistakes. Ordinary people make
mistakes that affect themselves. They sometimes make mistakes that harm
their families. Politicians and regulators can make mistakes that damage
the entire economy and harm the whole of society.
The business cycle is caused by pervasive mistakes Ups and downs in
economic activity are the result of changes in human mood. There will
always be times of widespread exuberance and times of mass fear. Markets
reflect these moods, but do cause them.
Joseph explained to Pharaoh that the seven good years would be followed
by seven bad years. This is normal. During good years, people naively
assume they will continue forever. They live it up, when they should be
putting the surplus aside for the bad years that will inevitability
People decide how they will respond to changes in moods and season. We
should not blame markets for the mistakes of fickle and foolish of people.
The business cycle gets serious when governments amplify the mistakes
of ordinary people. The laws that govern the modern banking system are
flawed. This allows banks to exaggerate the business cycle by inflating
the currency during times of exuberance and contracting leverage in
response to fear.