Sunday, June 17, 2018

The $1000 pencil case

Warning: don’t go to sermons for economics.

Last Sunday we were told that markets are fictions and impliedly operate on the principle of personal greed: Adam Smith’s invisible hand was cited in justification of the claim. It was explained that the invisible hand was everyone acting by their own greed to produce the common good.

Not so, of course.

1. The Market is the aggregation of all occasions of transactions between willing sellers and willing buyers, both with full relevant information. Thus is established a fair price for the exchange, with both sides happy. Competition between suppliers on the one hand and between purchasers on the other ensures that purchasers pay no more than necessary and suppliers receive no less than they require. In the aggregate this establishes a fair price for both parties and sees scarce resources applied to real need fairly (to the extent that markets work, for which we need laws, of course), and 'economically'.

2. The corollary of the market is that by each person pursuing their own interest (and therefore not the interest of the other party) they all together, in the aggregate, create the best outcome for the common good.

This is why we don’t have to pay $1000 for a pencil case, and cars don’t cost $1.50. Otherwise no one could buy pencil cases, and no one would make cars.

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