Saturday, August 23, 2008

Free Market, Though Imperfect, Is Self-Correcting

The superiority of free markets to government regulation is not based upon a magical ability of businesses or even markets to operate flawlessly or at optimal efficiency at all times. Businesses often make huge mistakes, and we have known for centuries that markets are constantly fluctuating, even wildly. Recently the tech bubble and now the housing bubble show that even entire segments of the market get so out of whack that we all wind up suffering painful corrections.

Markets, though, correct. Because they are ultimately tied to basic forces such as supply and demand, customer desires, and of course competition, they are anchored to real forces within the economy as a whole. No matter how out of whack they get, the long-term trend is always going to be in the right direction. More economic growth, satisfying customer demands, better quality at lower prices, and increased productivity and efficiency.

Markets work well—not perfectly, but well—because they are not engineered from the top-down. They are chaotic. They encourage experimentation. They allow mistakes. In markets, even the mighty can fall.

~David Strom "Is the Free Market Perfect?"


At 8/23/2008 11:20 AM, Blogger spencer said...

I just changed my opinion about you.

The biggest problem I have with the entire group of GMU bloggers is that they constantly argue that markets are perfect and really seem to believe it.

It is like what Churchill said about democracy, it is not perfect but is the best thing we have ever tried. That is the way I feel about our modern mixed economy.

At 8/23/2008 3:33 PM, Anonymous Anonymous said...

I'm not sure what would distinguish a perfect market from an imperfect one.

At 8/23/2008 5:25 PM, Blogger juandos said...

A market correction in action?

Investors Looking To Leave Russia?

On Friday, Russia's central bank announced that its foreign currency reserves — a key part of its economic stability and an indicator of foreign investor support — had plunged $16.4 billion in the most recent week, to $581.1 billion (see chart).

Until Russia's move into Georgia, there seemingly had been only massive capital inflows, thanks mainly to the rising price of oil, which makes up 20% of Russia's gross domestic product.

Now, it seems, investors are fed up with the rampant militaristic nationalism, red tape, corruption and anti-investor sentiment in Vladimir Putin's Russia. Some have decided to head for the door and take their money with them.

Last week's decline was the largest since Russia's 1998 currency crisis, which led to a collapse of the ruble and rampant triple-digit inflation. So far this time, there's no major visible impact on Russia's economy. But if the flow of money leaving Russia turns into a flood, it could send Russia's markets into a tailspin, creating massive problems for Prime Minister Putin and his handpicked president, Dmitri Medvedev.(there's more)

At 8/23/2008 11:47 PM, Blogger OBloodyHell said...

> In markets, even the mighty can fall.

Enron, Apple, IBM. The latter two are only in business because they refocused and got another portion of their business to support them in the meantime. IBM no longer defines the standard for computers. Apple doesn't completely own the operating system market solely because of one idiot leading their development people, Jean Louis Gassee.

Microsoft, Netscape. The latter lost by misunderstanding that Bill Gates plays to kill. They thought they could all "get along"... The former won by that, but almost lost control of the market by missing the significance of the internet browser as a form of computer interface, until it was almost too late. And they had to flat-out cheat in order to win.

At 8/25/2008 12:55 AM, Blogger OBloodyHell said...

> The biggest problem I have with the entire group of GMU bloggers is that they constantly argue that markets are perfect and really seem to believe it.

Right. And you're right about the Churchill position as a reflection of what we really think: "As perfect as things can be".

Not seeing your point, spencer.

Are you agreeing with it or arguing against it?

At 9/17/2008 6:21 AM, Blogger Colm O'Connor said...

This comment has been removed by the author.

At 9/17/2008 6:22 AM, Blogger Colm O'Connor said...

> They allow mistakes. In markets,
>even the mighty can fall.

yes, but when has that ever *not* been the case?

the mighty always fall eventually. in markets as in everything else.


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