Tuesday, February 16, 2010

Market Phobia

There seemed to be some confusion over my parting shot about why people fear the market last week. I was just trying to offer one of many conceivable explanations for why markets are viewed with fear and confusion by the general public. The fundamentalism analogy seemed apt at the time but for some reason appears to have been misconstrued as an attack on some. Allow me to try and clarify/elaborate on the point I was trying to make while I was running out.

Let's start with a thought experiment.

Say the supply of wheat suddenly declines dramatically and the price sky-rockets. Basic foodstuffs like bread vanish from the shelves triggering famine and starvation all over the world. We can predict with reasonable certainty that countless pundits will immediately take to the airwaves with declarations such as "the market has failed", "capitalism is dead", or something equally inane. They all need something to blame and the market is a ripe scapegoat largely incapable of defending itself.

Now say a passenger plane malfunctions mid-flight sending all its occupants crashing into the ocean. There are no survivors. Will those same critics then flock to the airwaves with condemnations about how "physics has failed" or how "aviation is dead"? Do they place blame on the gravitational pull of the earth? Of course not.

Why is the market singled out for condemnation?

I suspect because the vast majority of people are completely (albeit often rationally) ignorant of how basic economics (or really any science) works. They don't think of the market as a model showing the intersection of upward and downward slopping curves, or as mechanism for transmitting information about price and relative scarcity like economists do.

People have a natural compulsion to anthropomorphize "the market". They imbue a scientific framework with human characteristics to try and make sense of its formless, ambiguous, intangible complexity. Open the business section of any daily newspaper for countless examples of how people try to put faces on economic models with characterizations of how this market is "strong", or this market is "weak". When the price of bread, or oil or any other commodity jumps too high, or is not delivered in the quantity desired than people will say the market has "failed". When viewed through anthropomorhized lenses this failure is seen as an attack on they layman's way of life by some sort of malicious "market" bogeyman entity and non-economist critics with no basic understanding of the forces at work will flock from the woodwork with damning condemnations of the villainous market that wronged them.

In reality we know that the market itself is benign. It's not out to get us. It doesn't care about any of us. It can't. It's just a name economists came up with for the complex system of interactions between countless individuals, who themselves are all driven by natural forces, and who usually don't know or care about us either.

The market isn't an enemy. The market is amoral. There are markets for bubble gum and lollipops and there are markets for drugs and slaves. It's not "the market's" fault that there's a supply or a demand for drugs or slaves, nor that if the supply of either falls suddenly for some reason, ceteris paribus, the price will increase. The idea of this market-as-entity exists only in the popular imagination of non-economists. The market is no more to blame for a sudden fall in supply than the gravitational pull of the earth is when a plane falls suddenly.

Yet still, the perception that "the market" IS to blame still exists in the overwhelming majority of the electorate. As a result our anthropomorhizing psychology the market is looked at with fear and misunderstanding by many otherwise intelligent and reasonable people.

Now it's perfectly understandable to approach such an unforgiving, uncontrollable phenomena with fear. I'd be the first to admit that I'm afraid how forces beyond anyone's control can, at any moment, bring the flow of goods and services to a standstill, trigger shortages, high prices, famines, and all sorts of nasty effects. If anyone isn't frightened by that possibility they're probably lying. Nobody likes the feeling of not being able to control their own destiny. Contrary to what I'm afraid Sam thought I was saying when I invoked the religious fundamentalist analogy, I'm not saying that the reasons for this market phobia makes people stupid or gullible or whatever. It just makes them human.

The truth is no one, economists included, fully understand how markets behave. That lack of understanding and that lack of control combined with the fear it inspires can easily translate into misguided economic legislation like price controls, forced rationing, or full-blown central planning. Anyone with an iota of good sense or a background in economics and history could tell you that such attempts will probably fail and only exacerbate the problem. We can't allow our economic policy to be driven by fear of the market.

We may not ever have the control over the market that we would desire, but through our studies of economics we can at least come to better understand how incentives, scarcity and other natural forces shape the way markets emerge and behave.


  1. Hey Richard, that was a nice essay, but wouldn't it have been easier to write: "I'm sorry, I was wrong."

    (Just kidding.)