Archive for the ‘Market’ Category

Corporations versus the Marketplace

December 22, 2007

It’s useful to compare the way things work within companies versus how things work in the marketplace.

  1. How people are paid:
    • Company: people are paid based on whether they do what they’re expected to do. In a company how much money you make depends on someone’s expectations of you.
    • Marketplace: people get paid based simply on what they do. In the market you don’t get paid any more money if you exceed your (or someone’s) expectations. Example: your local deli owner doesn’t make any more money if his sales at the year end beat his expectations.
  2. What happens to information:
    • Company: people have an incentive to hide information. Example: people don’t want to upset their bosses, so they don’t reveal problems; further, they avoid disagreeing with their boss.
    • Marketplace: businesses have an incentive to uncover valuable information and act on it. Example: a shoe store owner wants to know what kinds of sneaker kids will be buying this summer.

Ideally, inside a company employees would be paid based on what they do, not on someone’s expectations.

Companies should be looking for ways to provide their employees with the incentive to uncover and act on private information.

The Wisdom of Crowds by James Suroweicki

The law of supply and demand isn’t a law!

August 13, 2007

“One of the oldest principles of Traditional Economics is the law of supply and demand.  A basic prediction of this ‘law’ is that the counterbalancing forces of supply and demand will drive a market to an equilibrium price and quantity level.”

“For example, if a car company introduces a new model that suddenly becomes popular, the company will typically raise the price while demand exceeds supply, expand production, and then lower the price once demand has cooled off and supply has caught up.”  (Lesson learned: don’t buy something when it first comes out; wait a few months and you can get it at a lower price)

“If, however, we zoom into a more fine-grained level, we see that real-world markets are almost never at equilibrium, supply rarely equals demand, and markets rarely come into balance.  In fact, virtually all markets are built around the assumption of disequilibrium rather than equilibrium.  Most markets have stocks of inventory and order backlogs.”

“Your local car dealer has a parking lot full of vehicles that are slower selling and an order backlog of ‘hot’ vehicles that customers are waiting for.”

“The law of supply and demand isn’t a law after all (at least not in any scientific sense); rather, it is more appropriately the rough approximation of supply and demand.”

— The Origin of Wealth by Eric D. Beinhocker

Example of Limited Government

July 27, 2007

 As of 1997 …

In today’s world big government seems pervasive.  We may well ask whether there exist any contemporary examples of societies that rely primarily on voluntary exchange through the market and in which government is limited.

Perhaps the best example is Hong Kong.  It is less than 400 square miles in size with a population of roughly 4.5 million people.  The density of population is almost unbelievable — 14 times as many people per square mile as Japan, 185 times as many as in the United States.  Yet they enjoy one of the highest standards of living in all of Asia — second only to Japan and perhaps Singapore.

Hong Kong has no tariffs or other restraints on international trade.  It has no government direction of economic activity, no minimum wage laws, no fixing of prices.  The residents are free to buy from whom they want, sell to whom they want, to invest however they want, to hire whom they want, to work for whom they want.

The role of government is limited.  It enforces law and order, provides a means for formulating the rules of conduct, adjudicates disputes, facilitates transportation and communication, and supervises the issuance of currency.

Government spending remains the lowest in the world as a fraction of the income of the people.  As a result, low taxes preserve incentives.  Businessmen reap the benefits of their success but also bear the costs of their mistakes.

— Free to Choose by  Milton Friedman