Calls for markets to be regulated are common, but those who make them are not very clear about what they mean.
Definition of a Market
Markets exist to facilitate the exchange of goods and service between people, so that people can dispose of things they do not need and purchase things they do want. In a money economy a free exchange has three components.
- A potential seller makes an offer.
- A buyer accepts the offer.
- The buyer and seller complete the exchange. The seller delivers the goods or services he has offered over to the buyer. The buyer pays the seller the price he had agreed to pay.
The free exchange can take various forms,
- Services for money
- Goods for money
- Labour for money
- Future goods for money
- Future services for money.
Offers are the heart of a market. In a money economy, an "offer" has four elements.
- The offer specifies the quantity of goods or services being offered for sale.
- The offer describes the quality of the items being offered.
- The offer specifies the price the seller is willing to accept.
- The offer explains how and when the goods or services will be delivered to someone who accepts the offer.
An offer is quite benign. No one has to accept the offer. If everyone thinks it is a bad offer, the offer will just be ignored. Plenty of goods offered on EBay are never sold, because they are unrealistic offers. There is nothing in the scriptures suggesting that making unrealistic offers is morally wrong, although it probably is wasted effort.
An offer only becomes binding when accepted by another person. Once a buyer has accepted the offer, it becomes a binding contract. The Bible condemns those who fail to complete contracts that they have freely entered. Failure to complete the contract is theft.
The Bible also condemns false or deceptive offers. An incorrect specification of the goods or services being offered is morally wrong. A lie about the quality of the goods is fraud. Using false weights is the most obvious example of cheating customers by lying about quality or quantity of the goods being offered.
Do not have two differing weights in your bag-one heavy, one light. Do not have two differing measures in your house-one large, one small. You must have accurate and honest weights and measures, so that you may live long in the land the LORD your God is giving you (Deut 15:13-15).
Giving is an offer with a zero price.
You can have my shirt.
Yes it is free.
The person receiving the offer is free to accept or reject the gift.
A barter exchange is slightly different, but the basic process is similar to free exchange.. A barter exchange takes three forms.
- Service for service
- Service for goods
- Goods for Good.
The form of exchange is similar to the free market exchange
- Potential suppliers make an offer
- Two people agree to accept each others offer.
- The swap is completed. Both are better off than they were before they made the exchange, because they both end up with something they wanted more than what they had before.
The difficulty of finding a coincidence of needs make bartering less efficient. Finding a person who wants what I have and has what I want will be quite difficult. The assumption that barter is superior to trading for money is naive.
A market is a place where people can display and record offers. Putting a whole lot of offers together in once place simplifies life for potential buyers. They can look at all the offers and choose the one that is best for them.
In a few markets, buyers and sellers can make an offer. In stock exchange and other financial markets, both buys and sellers can make offers. A trade is completed when the buyer and seller agree on a price. Electronic trading allows a broad range of offers by buyers and sellers to be observed by a large number of observers.
A buyer can go into a car yard and make an offer for a car.
I will only give you a thousand dollars for that heap of junk.
In most markets, only the sellers can make offers and the buyers just accept or reject them. In a shopping mall, offers are made by displaying the good for sale and attaching a sticky label that records the price the vendor is willing to accept. Buyers inspect the quality of the goods and decide whether to buy them.
In a farmers market, produce being offered is put on display and the price that will be accepted is displayed. Buyers can accept or reject these offers.
Offers are the soul a market. If all offers to buy and sell disappear, a market becomes an empty shell
Payment and Delivery
The operators of market will specify the rules for payment and delivery after offers have been accepted. These will vary according to the type of market.
- Cash on delivery
- Twenty percent when the hammer falls and the balance within a week.
- No cheques
- Cash and credit card only.
- Free delivery within twenty kilometres
- Account balances settled at the end of the trading day.
If people do not like the rules applying in a market, they do need to participate in it. They are free to go to a different market or buy and sell or barter outside a market.
A market is just a place where a whole lot of people can display their offers. Once we understand this fact, it is obvious that statement about regulation of markets need a little more content, before making sense. Regulating marketing could mean a number of things.
Preventing markets from forming. This does not make sense, because bringing many offers together in one place helps buyers.
Limiting the types of offers that can be made. That does not make sense because an offer is benign. Nothing happens until an offer is accepted, so there is no point in preventing people from making offers, even if they are unrealistic.
Controlling the price range that can specified in offers. Some people would like to ban offers at low prices. Others would like to ban high prices. Both options seem to be pointless, as if prices are too high or too low, whatever that means, people will not accept the offers.
Preventing certain types of people from accepting offers. I suppose children could be prevented from agreeing to purchase cigarettes that are offered to them, but that is really the responsibility of parents. Some suggest that foolish people should be prevented from accepting offers that are unrealistic, but that might be very difficult to assess.
Preventing people making offers that are deceptive or fraudulent. This problem is already dealt with by laws against theft and fraud, so I am not sure that regulation is needed for this problem.
Enforcing delivery of offered products once the offer has been accepted by a buyer. Laws against theft and breach of contract already deal with the situation where exchanges are not completed, so what can more regulation do.
Markets benefit people by providing information about all the offers that are available. The law already deals with the problems that can arise in a market, so those who want more market regulation must be more precise about what they intend.
Offers are Everywhere
Offers are not limited to markets. Offers are every where. We make offers all the time.
- Do you want to join us for a drink after work?
- Do you want chicken for dinner?
- Would you like to marry me?
- Will you marry me?
Most offers are made to family, friends and family. The advantage of a market is that people can make offers to a broader range of people.
We are free to refuse and offer. The opposite of an offer is an order. We are not supposed to reject and order.
- Clean up that!
- Quick march!
- Type that document again!
- Stop at the lights!
Orders are appropriate in some situations, but we prefer offers to orders. People wanting to regulate markets are trying to replace offers with orders.
Markets and Morality
- Markets are not moral.
- Markets are not immoral.
- Markets are amoral.
Markets cannot think, choose, decide or act.
- People do all these things.
People participating in a market are never amoral.
- They can be moral
- They can be immoral
A market needs just one value from people to function: honesty. When someone makes an offer on a market, the key moral consideration is whether they are honest or dishonest. Are they lying or speaking the truth?
We all know this. We mostly just assume that people are honest. Provided the price is not too high, we run the risk and trust most offers. We reduce the risk by going Back to traders that have been honest in the past. When we find that someone is dishonest, we avoid them and tell our friends to do the same.
For a big purchase, we do other things to reduce the risk of being cheated by a dishonest person. When buying a car, we get it inspected by a motor mechanic. When buying a house, we get it inspected by a carpenter and we employ a lawyer to check the title is valid. This is normal.
Sellers that want to build a business that will last are forced to be honest. Bad news travels. If a business rips people off, its customers will disappear.
Making money in a free market by ripping people off is difficult. The rip-off artist cannot stay in the same community for long, but has to keep moving on to places where their dishonesty is not known. Modern communication makes this hard. In practice, it is easier to make money by making people better off.
A market only needs just one value to function. It does not need compassion, kindness, gentleness or love. So even if these values are missing from society, people can still buy and sell in safety, provided most traders remain honest.
Cheats and Crooks
In a fallen world, dishonest people will penetrate the free market. Sometimes the person selling the product will know more about its quality than the person thinking about buying it (economist call this asymmetric information). John may know that his car has a serious oil leak. If Bob knew about this problem, he might think that the car was not worth $5,000. He might have walked away from the deal. In a few situations, they buyer will know more about the market value of the goods than the seller (antique dealerz buying from little old ladies).
The Bible condemns those who use deceit to take advantage of other in markets. The worst case is the person who uses false weights to cheat people when they are buying or selling.
Do not have two differing weights in your bag-one heavy, one light. Do not have two differing measures in your house-one large, one small (Deut 25:13-14).
The LORD detests differing weights,
and dishonest scales do not please him (Prov 20:23).
Those who deliberately cheat in the free market lose the blessing of God.
Those who can prove that the seller has cheated them can demand restitution, because the seller is guilty of theft
A thief must certainly make restitution (Ex 22:3).
Unfortunately, in most situations, the buyer will have difficult proving that the other party took advantage of them.
The best protection against cheats and crooks is to be alert. The person who is doubtful about the quality of a product on sale in a market should get and expert to check it out. The wise person purchases from people they know to be trustworthy. We live in a sinful world, so innocent people will sometimes be ripped off. They will sometimes be able to get redress, but often they will be disappointed.
Good information provides protection to buyers. Many markets provide information about the reliability of the person who is selling goods. eBay publishes buyer and seller feedBack to expose people who are dishonest.
In most markets, all offers are made public. People can see what is being offered. Dishonesty can be observed by other people.
Don't buy that, it's over priced.
You can get that cheaper at Walmart.
Free markets tend to expose dishonesty, because they are public.
Faith in Markets
An economic commentator recently said,
We placed too much trust in the market.
This is now a common view, but the statement is really quite silly.
First of all "the market" does not exist. There is not one market, but millions of different markets. More important, markets cannot think, or act, or respond. We can observe people participating in markets and others organising markets, but markets itself is not personal. Therefore, the idea of trusting in "the market" does not make sense. Trusting in an entity that cannot think or act is foolish.
Those who trust in markets actually trust the people who buy and sell in markets. Some of these will be wise and some will be foolish. Only a naive person would trust everyone.
A more important problem with this view is that those who were trusting "the market" will now have to trust something else. Most are suggesting that the government regulate markets. They are replacing faith in "the market" with faith in the government, but trusting the government is as unwise as trusting "the market". Governments are not omniscient and they are not omnipotent. History demonstrates over and over again that governments stuff things up when they intervene in markets. The shift to faith in human government is dangerous.
God is the only one to trust. He is gracious, omniscient and omnipotent. He understands how the economy functions, so he is the only one worthy of trust. Those who are arguing about whether to trust in "the market" or trust in the government are missing the point. Only God is worthy of trust.
Free markets are good, because well-functioning markets allow people to exchange things they do not want for things that they need. This enables them to improve their situation in life.
In a world without markets every person has to produce everything that they need. If there is no way of exchanging goods and services, everyone has to be self sufficient (unless a generous person gives them something or they steal from someone else). Making everything that you need is very difficult, so a self-sufficient rarely moves above subsistence level. People spend so much time producing food and shelter, they did not have time to develop and make other products that they may want.
A free market changes everything, because it allows people to specialise and trade. One person specialises in growing grain. Another specialised in catching fish. A third person specialises in baking bread. Each one does what he is most skilled in doing. By focusing on one task, each person can increase their skills and find ways to do a task more efficiently.
The person who specialises can produce more than they need to survive. They can trade their surplus production with others to get all the things they want. Trading in a free market improves the situation of almost everyone, because specialisation makes everyone more productive.
I do not have a clue about how to make a computer or a flat screen TV. I could not make a decent automobile, if I worked on if for a hundred years. If I made my own clothes, I would look like a caveman. However, by specialising in tasks that I am skilled at doing, I can afford to buy all these things and many more.
Not a Zero Sum Game
What takes place in a market is not a zero sum game. In a zero sum and action that makes one person better off makes someone else worse off. Consider a family that has only one doll. If they take it off one child and give it to another, the situation of one child improved, but the other is worse off. In a zero sum situation, benefitting one person always harms another.
The functioning of a free market is totally different. A market is not a zero sum game, because every transaction that takes place in a market makes both parties to the transaction better off. If Bob sells his car to John for $5,000, the transaction improves the situation of both. This is hard to believe, but it happens because different people place different valuations on the same good or service (the technical name for this is subjective value). The transaction described above benefits John, because the car was of more use to him than the $5,000. Bob also benefits because he places a greater value on $5,000 than he does on the car.
The experience of Bob and John is not a rare example. They same thing is repeated in every transaction that takes place in a free market. A transaction cannot occur unless both parties benefit. If Bob thought his car was worth more than John was willing to pay, he would not sell it. If John felt that Bob was wanting too much for the car, he would refuse to buy it. This is the situation with every transaction in a free market. Both parties to the transaction have a right of veto. If either the buyer or the seller thinks, they are will not benefit from the transaction, they can simply walk away.
Best Method of Exchange
Every transaction in a free market provides a benefit to both parties. The reason is simple. If either the buyer or the seller thinks they will not benefit, the transaction will not proceed. This is quite amazing. A process that benefits every participant and harms no one really builds up the harmony in society. People who complain about free markets do not understand how markets work.
There are only four other ways that Bob could get John's car.
Love If Bob were John's son, he might give him the car for free. Love is very generous, but it does not stretch very far. It is generally limited to close friends and families.
Compassion John might feel sorry for Bob and decide to give him the car. Compassion reaches further than love, but is less generous.
Theft Bob could steal John's car. This gives Bob what he wants, but John loses. The Bible forbids theft, so this is not viable option.
Force Bob could persuade someone bigger and tougher than John to force him to hand over the car. This method has been common throughout history and can take various forms. Bob might simply thump John. He might get a gang of friends to intimidate John into signing over the car. Bob could persuade the government to confiscate the car from John and hand it over to him.
All four options have something important in common: they are zero sum. In each case Bob benefits, but John is worse off. In the first two options John freely chooses to be worse off, so that is acceptable. He still has the right of veto. If he decides not to show love or compassion he can keep the car. If he is forced to love, it ceases to be love and becomes force. If John is forced to show compassion, the transaction stops being option 2 and becomes option 4.
Option 3 and option 4 are compulsory zero sum options. They both make John worse off against his will. He suffers with no choice. Theft and force are not good methods for transferring goods from one person to another.
Love and compassion are noble, but they do not extend far. They cannot facilitate all the transfers of goods or services that are necessary for a well functioning society. Theft and force make some people worse off, so they are not a solution. Buying and selling in a free market is better. Trade is not as noble as love and compassion. Buying and selling in a free market are more noble than stealing or using force to get what you want.
I do not mind people criticising free markets, if they advocate love and compassion, especially if they choose to demonstrate love and sharing themselves. What I find is that most people criticising free markets claim to be acting out of love and compassion, but are actually advocates of force. This is quite deceptive. Critiquing markets because they do not meet the standards of love and compassion, but then proposing the use of force to remedy the situation is twisted logic.
Buying and selling in a free market are not as noble as love and compassion, but they are morally superior to theft and force. Those who want to regulate a market are advocates of force. The Bible teaches that force is justified to remedy theft, but it does not advocate forced compassion or love.
Many people say that economic power must be controlled. There is a lot of confusion behind this belief.
There is an assumption that political power is good and economic power is bad. This is just assumed never proven. The reality is that political power has done terrible evil throughout history. There is no reason why political power should be trusted.
Economic power is never defined. The common assumption is that size equates with economic power. That is not true. General Motors is huge, but its economic power is fleeting. GM cannot force a single person to purchase a car. I bought a Honda several years ago and GM was powerless to do anything about it. GM wanted me to buy one of their cars, but I defied them. I defeated the Goliath of the auto industry all on my own.
In the last few months, General Motors have fallen by half and they have been powerless to prevent this. So much for economic power.
General Motors has done better with political power than using economic power. When they went down to Washington with the rest of the Big Three, they got billions of dollars from other people.
This is generally true. Economic power generally proves to be unreal. What appears to be economic power is generally political power. Those with economic power have generally gained it by persuading the political powers to give them a privileged position. Those who are worried about economic power should be more precise about what they mean.
Buying and selling in free markets is better than theft and force, but not as good love and compassion. Free markets are better than theft and force, but they will not produce a perfect world. More love and compassion is what the world really needs.
More on Markets and Evil
More on Markets and Efficiency
More on Markets Add Value
More on Markets and Inequality.