Here's an odd confusion: everybody says that the free market is good—except it often fails. Competition benefits all—unless it is cut-throat. The free flow of capital creates jobs—except when it flows the wrong way. Flexible prices are a good deal—as long as you don't include the price of labor. Efficiency gives us prosperity—as long as it's not down-sizing. Capitalism creates wealth—unless it is "unbridled."
Then there's free trade. If Californians trade fruit with Floridians, that's good for both. But if they trade fruit with Peruvians, that's bad for the balance of trade. If they buy cars from somebody in Tennessee, that makes jobs. But if they buy cars from somebody in Japan, that exports jobs. If they pay lower prices for computers, that makes Silicon Valley rich. But if they pay lower prices for sweaters, that makes Malaysians poor.
Or what about money? If the government prints more of it, that's fiscal policy. If you print more of it, that's counterfeiting. The dollar is as good as gold, except it takes ten times as many to buy the same gold as it used to. Anyway, gold is a useless relic, except central banks keep it in vaults as if it were money.
People who wonder about thinking in general, really wonder about economic thinking. Is it something invented by politicians to confuse us, or a strange distortion of ordinary thought? If you don't get it, is that a mistake in thinking, or a mistake in explanation? Will clearing up the confusion improve your mind, or overload it?
To clear up any confusion, you need to take action. If you wait for the confusion to clear itself, you just wait. The method is to make observations and reason about them. In this case, you need to discover what a market is, and what market failure might be, and what trading really is. One way is to visit the flea market.
All over the country, drive-in theaters and vacant lots fill up on weekends with people who load stuff into the car and drive to the flea market in hopes of making a little money by trading. They rent a space, spread out what they've got, and see if anybody wants to buy it. Crowds of shoppers pay to get in and wander around looking at all the stuff. If they see something they like, they discuss a price.
The attraction is freedom. The flea market is a free market, where people trade as they please, get whatever they can get, and use their own judgment. They find it fun. They find that honest dealing rewards them, and being reasonable pays off.
Here's a real vignette from a flea market. A big old fern is on sale in its vase. The owner, after all those years of tender care, is determined to get ten dollars for the fern. A shopper hefts it up, turns it this way and that, and says, "I'll give you two bucks."
"Two dollars! That fern is worth over ten dollars!"
"Fern? Oh, I'll throw away the fern. I'm interested in the vase."
It is market failure. The owner refuses further dealing. She knows that the fern is worth ten dollars. The shopper knows that the fern is worthless, but the vase is worth two dollars. Both think that prices are set by deciding what they should be, instead of by making trades and finding out what they are. She is sure that somebody will want the fern. He is sure that nobody will want the fern, but somebody will want the vase.
How would we regulate this flea market to prevent the horror of market failure? We would need a should committee, empowered to decide what prices ought to be. Then, if offers differed, that would be market failure, and could be corrected on the spot. Of course, if we forced people to pay more than they wanted to, then they would not return next week, and the flea market would fold. And if we forced sellers to take less than they wanted, then they would not return next week, and the flea market would fold. So the should committee would need to be clever. Its success would depend on how close it came to the prices reached by individual discussions. In other words, failure would prove it a bad idea; and success would prove it unnecessary.
In the absence of a should committee, what happened in the real fern case? After a time, the vase shopper came back. "I see the fern is still here," he said. "Was anybody interested?"
"No, but a couple of people admired the vase."
"Well, I'll raise my offer to five bucks."
"Sold! I don't really want to haul that damn fern home again."
These traders made a discovery: a market is not only a place, but a process. The process is one in which you decide by trading what the value of things is—not what the value should be, but what it is. The fern seller wanted ten dollars, but had decided that even two dollars was more valuable to her than the fern. So five dollars turned out to be a bonus. The buyer wanted to pay two dollars, but had decided that the vase was worth even the ten dollars demanded. So five dollars turned out to be a bargain.
The process of making the trade turned two differing subjective valuations into one objective valuation. In the circumstances of that day, the fern was useful for showing off the vase, which was worth five dollars.
What if the buyer had found five vases he liked instead of one? That is, what if the supply of vases were greater, but the demand the same? His bargaining might have been sharper, and his final price lower. That is the law of supply and demand. When supply goes up more than demand, objective prices fall. When demand goes up more than supply, objective prices rise.
After such a successful trade, these traders would not be in favor of a should committee for the flea market. Unfortunately, they may still favor a should committee for the stock market, for the commodity market, for the capital market, and for the supermarket. If so, they are making two mental mistakes: they are substituting should for is; and they are neglecting to think about the issue. They are being mentally subjective, and mentally passive.
The most basic mistake is mental passivity. To see how a principle that applies to the flea market also applies to the supermarket takes some thought. You trade money for groceries all right, but where does the bargaining come in? Well, do you buy everything on the shelves, or do you choose? Notice that if not very many people choose some item, it suddenly appears with a sign over it: SALE.
On the other hand, if everybody wants some other item, you find it all gone, and later you find it back on the shelf at a higher price. If you don't think about it, you call that Capitalist exploitation. If you do think about it, you hope the higher price will mean a better supply. The same thing happens when the orange crop in California freezes. You want to pay a higher price, because there are fewer oranges, and you want some.
To see how the same principles set the price of stocks, the interest on your mortgage, and the exchange rate of the yen, takes work. To see how interfering with the capital market interferes with your life takes more work. To figure what to do about it takes even more work.
And not just in economics. To figure how to educate your kids takes thought. To guard against flood and earthquake takes thought. To choose the right hair stylist takes thought.
Since nobody wants to do all this mental work, should committees proliferate. Governments at all levels set up should committees to watch out for education, for public morals, for commercial behavior. They are called "commissions," "boards," "associations," and "departments." They are given an alphabet soup of names. By now, they have us hemmed in on all sides. You cannot build a house without consulting a should committee. You cannot make alterations to your property without agreement from a should committee You cannot start or close a business without approval from a should committee. You cannot hire or fire workers until a should committee has its say.
In my town, a should committee decided that trees are desirable, so homeowners may not on their property cut down trees that are more than nine inches around. In your town, there are should committees worrying about what you watch on television, what your kids do after school, and what kind of sites you visit on the web.
The theory of the should committee is that somebody has to do the thinking you refuse to do, and since preferences are subjective, my should is as good as your should.
If you give it some thought, you may decide that should committees are the opposite of freedom. Freedom is the absence of coercion. Should committees have coercion as their purpose. They are sometimes presented as merely advisory, but since the advice is given to lawmakers, coercion is still the purpose.
If you decide that you have lost freedom by passivity and subjectivity, you may wonder how to regain it. You may want to correct mental mistakes. The questions to ask are: is mental passivity curable, and can subjectivity be changed to objectivity? This book answers yes to both questions, and discusses how to regain freedom.
People who admit to mental passivity call it laziness, and ascribe it to mental incapacity. If they thought of passivity as habit rather than inability, that lazy attitude might change. They might try forming some new habits that would change the incapacity into skill.
People who admit to subjective mental habits claim that those habits work. When they examine how the habits work, the answer is: badly. If everyone’s thinking is theirs alone, then nobody can benefit by sharing thoughts, dividing labor, or learning from others. The feeling of desperate isolation that makes many people miserable comes straight from their subjective mental habits.
In the fern case, the market was a process in which personal desires were modified into an actual price—a place where subjective valuations became objective value. The market is an enemy of isolation, and a friend of cooperation. It penalizes whim, and rewards reason. That's why the market is hated by those who prefer whims to reality.
Since a market is a process in which values are determined and commerce made possible, then a free market is a process in which prices are freely determined and trades made freely possible. Thinking about the market starts with comparing a market to a free market. If there are differences, which is better? This book argues that the market is the free market, or else it is a pretend market put on for show.
When you trade your effort for money, and then trade that money for goods, you are using the market to trade effort for goods. Since you are immersed in the market, you need to grasp how it works. Most people complain that they do not grasp how markets work, and they prove it by voting against markets. So discussing markets is an effective way to demonstrate mental mistakes. This book will use that method.
If you are making no mental mistakes, but are still confused by the market, by life, and by reality, then your mind is inherently unable to deal with things. You must endure life as best you can. However, if confusion is caused by mental mistakes, then correcting the mistakes will clear the confusion, and reveal the power of your mind to deal with life.
Thanks to the discoveries of philosopher Ayn Rand, mental mistakes can be detected and corrected. You can read about the effective way for a mind to operate, and compare the operation of your mind. Then you can correct any errors in method, and learn to think with precision about the market and about everything else. That is the promise of this book.