Mental Mistakes

Chapter 17
The Market Illusion

Markets thrive on disagreement. To see how, go to the flea market, and haggle. Since trade is voluntary, no trade takes place without a disagreement. In your opinion, that vase with the ugly fern in it is worth several dollars. In the seller's opinion, the vase is worth little, but the fern is valuable. In the process of haggling, your opinion does not change, and the seller's opinion does not change. But the vase may change hands.

The purpose of haggling is not to resolve a disagreement. You continue to prefer the vase to an amount of money. The seller continues to prefer the money. The thing that you must agree on for the trade to take place is reason. That is, you must each respect the other's opinion, with which you do not agree. Since you respect the seller's opinion, you raise your offer. Since she respects yours, she lowers her demand. It is not correct to say that you agree on a price. The price is more than you want to give, and less than she wants to get. You both accept the final price, out of respect for each other's rights.

Because you do agree on using reason, you can accept the outcome of a reasonable process, though you do not agree with that outcome. You have no illusion that you own the process, and control the outcome. You use the process as best you can, and accept the result as final. The price is objective, in that it results from an objective process voluntarily adopted as a way of making everyone better off.

Well, almost everyone. There are those who do not consider the price final, and do not accept it. "We were supposed to agree on a price," they say, "We didn't agree. I just had to pay. It wasn't fair. The market failed."

That is the market illusion: that trading does not provide a standard, but must conform to a standard.

You can see the reason for this illusion by asking what would provide a price standard if not voluntary trading. Passiveman "just knows" when a price is right and when it is wrong. Subjectiman knows what he wants the price to be. If they embark together on a hunt for some social standard, will they really look outward, or will they really look inward?

There is the "social utility" standard. Prices are correct when they provide the greatest utility to society "as a whole". Who makes this determination? A should committee. What if traders pay no attention? Laws are passed, resulting in prices which give no information about what traders do, but only about what committees want.

There is the "reasonable man" standard. Prices are correct when they conform to what a reasonable man would decide when all factors were known. This man must not be an interested party, actually involved in the trading, or he might be biased. That is, the decisions on trade are to be taken away from traders because they are traders.

There is the "government expert" standard. Subjective government hires an expert to decide scientifically when prices are correct. If those are not the prices wanted, it hires another expert.

What does the whole of society the most good is truth. Prices determined by trade are records of what people voluntarily do. They tell the truth. They provide a standard by which plans can be judged and economic calculations made. If you think that people will not do what you want them to do, then truthful prices are your only way of finding that out. If you are in charge of setting a policy which you hope will get traders to do what you want, then truthful prices are your only hope of finding that out.

Devotees of the market illusion like to point out how irrational traders are. The Hunt brothers try to monopolize silver, and drive the price up for no reason. Stock market speculators react to a company's lack of profit by bidding the price up. Another company announces a big profit, and the stock price goes down. Market bubbles are followed by market crashes. Traders must be made to function more rationally.

The hidden assumption in these complaints is that trading depends on agreement. Instead, it depends on disagreement—even contentious disagreement. It is not true that a stock price goes up because everyone irrationally agrees that it will. For every buyer, there must be a seller. If everyone in the market wanted to buy stock, and nobody wanted to sell, then all the trading in that stock would be completed. There would be no more trades. The known price would not be the current price. There would be no current price. To discover a current price, some trader would have to sell.

Where there is trading, there is disagreement. If some traders are "irrationally exuberant", others are "foolishly pessimistic". Or, stated without the subjective evaluations, some traders have high expectations, others have low expectations. The optimists think that the pessimists should ask less, since they are pessimistic. The pessimists think that the optimists should offer more, since they are optimistic. To make a trade, they do not change their minds and agree on a price. They discover a price that neither likes, but both will accept, out of respect for reason and rights. That is the market price. It does reflect all views, but it does not resolve disagreements.

An optimist may watch the price go up and up, until it is seen as "too high". That is, the optimist becomes a pessimist. The buyer becomes a seller. Was his decision now more reasonable than the earlier decisions of previous pessimists? By what standard would you measure it? If he explained to you his reasoning, and earlier pessimists explained to you their reasoning, you could decide which, in your opinion, is more reasonable. Or should some committee decide?

The reason we accept market prices is not that they meet some external standard of what prices should be. It is that accepting market prices respects individual rights, and presents a reasonable solution that makes trade possible.

Mental mistakes are, by definition, a deviation from reason. Passiveman assumes he is using reason, but does not recognize it in market prices. So he falls prey to the market illusion. Subjectiman assumes that reason means fulfilling a wish list, and wants to impose his wish list on the market. So he falls prey to the market illusion. Neither is capable of seeing how the market regulates itself, so they assume it must be regulated from outside. That is, neither is capable of self-regulation. Both feel an urgent need for external regulation.

Self-regulation is done by means of reason. If my reason fails me, I embark on a life-long search for something to keep my life on track. If I turn my attention to a market, my first thought is: what keeps it on track? If a price seems low, I figure the market is off track in one direction. If a price seems high, I figure the market is off track in the other direction. As my search for the magical method of staying on track becomes desperate, so does my search for the magical means to keep markets on track. My view that the market is "out of control" mirrors my view that I am out of control.

If my failure of reasoning is slight, then it colors my view of markets by making me view spectacular price rises as "bubbles", or "taking advantage". I accept most prices, but not all prices. If my failure of reasoning is massive, then I cannot imagine how a market could have any freedom without dissolving into chaos. I see no difference between a price and a tax.

In reasoning, you have to start somewhere. Since you are reasoning about reality, you start not with mystical insights, but with the evidence of your senses. If someone tells you to doubt the evidence of your senses, that is a fraud. It can mean only, "My senses are better than yours."

In reasoning about markets, you have to start somewhere. Since you are reasoning about voluntary exchanges, you start not with mystical ideas about what prices should be, but with the evidence of what they are. If someone tells you prices are irrational, that is a fraud. It can mean only, "My prices are better than yours."

There are people who do doubt the evidence their senses provide, and do doubt the evidence that prices provide. They know you have to start somewhere, but they choose a different where. A passive mind starts with whatever presents itself: reality is random. A subjective mind starts wherever it wants: reality is a wish list. A mind with some good habits, some passive habits, and some subjective habits, feels a conflict: reality is what it is, unless that makes it too complicated, or unless that is too cold and hard-hearted.

The market illusion seems obviously right to all those people, because it embodies a more fundamental illusion: that reason does not provide a standard, but must conform to a standard.

Reason starts with the ability to make comparisons—to examine differences on purpose. If there are greater and lesser differences, then objects of thought can be grouped together in ranges. If a range can be regarded as a unit, and called to mind by a word, then entire ranges can be compared. If there are greater and lesser differences between ranges, then ranges can be grouped together, and that group regarded as a unit. By this process, the mind can learn to hold all things in mind at once, and see the relationships among them.

As long as the foundation holds. The foundation is perceptual difference detection, which is the function of the senses. If reason cannot count on sense data, then the method does not work, and man is no better off than wild animals. After all, man cannot taste with his skin, like a shark can; or hear sonar sounds, like a dolphin can; or detect odors a mile away, like a dog can. It is not the quality of sense data that makes the difference, but the ability to compare it.

Because man cannot fly like birds, we have to make do with mechanical contraptions—which beat the fastest bird. Because man cannot run like antelopes, we have to make do with mechanical contraptions—which beat the fastest antelope. Because man's senses are limited, we have to compare the data and reason about it—which makes our data more useful than any animal's.

What would you say about a man who lived with his eyes closed against sight, his nose clipped against smell, his fingers padded against touch, and his ears plugged against sound? You would have to say that he lived in a self-made coma. Yet, what most people say about markets is that prices should be managed to make them fair. The foundation of the market, the data by which it proceeds, is to be mistrusted and concealed. The market is to exist in a self-made coma.

To a passive mind, that seems natural. The passive mind does not prevent differences from being detected, but it might as well: it neglects to compare the data, or sort the data out, or look for connections in the data. It lives in a self-made coma.

To a subjective mind, that seems unnatural, but necessary. It is the only alternative to chaos. The idea of a self-made coma is a secret attraction for subjectivity. It would finally get rid of the seething resentment, and the despairing isolation, and the helplessness. It would be a demand-free Nirvana.

Every uncorrected mental mistake is a denial of the efficacy of reason. To stay passive is to say that reason is too much trouble. To stay subjective is to say that reason gets in your way. Since the acceptance of price data is the acceptance of reason, it is not surprising that those who deny reason deny prices. The tragedy would be to respect reason and still deny prices. That would be not only a betrayal of voluntary trading, but a betrayal of voluntary living.

Man is not equipped to live life as a wild animal. Fang and claw are not human means of survival. Reason is. If the choice is to live by reason or by force, only reason is a human choice. To stay passive about reason is to choose life as a slave, subject to force. To stay subjective about reason is to choose life as a slave-master, enforcing demands.

Slave-masters discover that minds cannot be forced. Once you have ordered a slave to think this and not think that, then how do you check to see if he is obeying? Since minds cannot be forced, markets cannot be forced. If you manage prices so they are fair, what you have is not prices in a market, but rules in a prison. The market has gone elsewhere, underground.

Reason is the means by which free will is applied to living—the method of making thought effective. Voluntary trade is the means by which free will is applied to society—the method of dividing labor. Any denial of reason is a surrender to the jungle. Any denial of voluntary trade is a surrender to slavery.

These are not obscure notions, but plain facts. Therefore, market interventions are always "judicious", "temporary", and "limited". They are always a response to "market failure". They correct "distortions", and "inequalities". Subjective government makes excuses, because it knows it is doing harm.

Passive and subjective minds make excuses also, for the same reason. There is a better way: learn to change bad habits, and to correct mental mistakes. Test all thinking methods by comparing the goal to the results. If they differ, improve the method. Manage your mind like the trader manages his portfolio: regard all non-performing assets as liabilities, and get rid of them. Learn the methods of reason, and then accept the results of reason.

The methods of reason are logic, identification by essentials, and mental integration. These are the methods traders use to discover objective values in exchange. They are the methods active thinkers use to live happy and prosperous lives. They are the methods anyone can learn who wants to improve thinking, living, and trading.

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