The Misunderstood Free Markets – Part II
By Wes Keene | March 28, 2010 | In Category: Economy
This is the second is a series of articles looking at common misunderstandings about the free market system. In this segment we’ll examine the relationship of the buyer and the seller.
We’re all buyers and sellers at various points in time. Since free markets rely on competition to work, it’s understood that multiple sellers of comparable products will generally exist. It’s also fair to assume that multiple buyers with varying needs will exist. The basic premise of the buyer/seller relationship is that the buyer has something they want less than the product or service a seller has. If the grocer charges $2.00 for bread, and I really need to eat, my $2.00 becomes less valuable than the loaf of bread so I make the trade. You can think of every single trade between parties in the free market this way. With this in mind, the phrase “that’s gotten too expensive” really means “my money is now worth more to me than that product”.
As buyers we’re provided a chance to shop anywhere we like, so we generally get a wide variety of products and prices. These prices tend to always be at the lowest possible level because sellers will try and compete with each other. If an existing company’s prices are “too high”, a would-be competitor will see that money is being “left on the table” because that would-be competitor believes he could provide the same product or service at a lower price. The new competitor is encouraged to enter the market because he knows buyers will want to buy from him, at his reduced price. Of course, that’s just theory. In reality we don’t have perfectly low prices, because companies have operating expenses and also have an obligation to their owners to make a profit.
There exists a concept in pricing called “perfect competition“. Under this theory (that doesn’t exist in the real world), every seller makes just enough profit to exist, with absolutely no extra profit. In the real world, no market is “perfect” and companies do make more profit than strictly required, but the theory is true to the extent that prices are generally pushed downwards. Some politicians would like us to live under “perfect competition”, but it simply doesn’t permit any innovation. If our primary concern is to ensure that every just barely breaks even, then who will have any capital to create new products?
In our jobs we act as sellers of services. For those in small businesses, we are selling services directly to a buyer. If you have an employer, you’re still selling to a direct buyer, just in a more structured, long-term arrangement. Companies don’t have any built-in desire to hurt employees anymore than you, as a buyer, have built-in desire to hurt the grocery store you buy from, or the gas station where you fill up. Just the opposite is true; Training employees is expensive and no one wants to lose their investment.
As a seller of your own services, you are naturally looking to “increase sales” constantly. In small business that’s pretty straightforward to explain; you try and take on new customers. You do it as an employee though, too, by marketing yourself through your resume and networking. If a new job with better pay and better benefits comes along, it establishes a new market rate for your services. If your current employer isn’t willing to pay the new rate, they do without your services and you move on to your new job.
To put this relationship in context, we shouldn’t bash a company for having high prices (except that you can and should choose not to do business with that company, if you feel that way). To bash them is to bash yourself for wanting a good paycheck. Almost no one would opt to receive less pay than the market will bear (at least not permanently), and likewise, no company would choose to make less money than it potentially could.
When we continue with part three in the series, we’ll take on some specific common misconceptions heard in the media and elsewhere.
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