Increasingly, it is “the market” that shapes our social destiny and financial choices, but what is a market and more specifically, what is our market?
An ever present concept
The freest market is the one that exists conceptually in relation to every voluntary human transaction or exchange. When the neighbor kid offers to mow your yard for $30 or $40 and you agree – you’ve created a market for exchanging cash and services. By publishing this website, I’ve provided an info-tainment product offered at no fee to you. In the broader online market, the price for content is typically set around “free.”
So whether the exchange is one on one or part of a larger clearing house like the internet is for information, all voluntary trades can be classified as market activities. In theory, the aggregate of these voluntary choices is “The Free Market,” but in reality many exchanges and economic choices are not entirely consensual or free to fail.
The Market in Practice
In more common terms, “The Market” is a series of political and private institutions designed to rapidly make economic choices on an international scale.
While Wall Street is the center of activity, it is actually the Treasury and the Federal Reserve that operate as the origin point for this market. As money is created, it flows from the public institutions into private banks that in turn lend the money out for a profit. As the bailouts have demonstrated, these loans will be allowed to fail – although there are plenty of other ways for money to enter society at large, none of them would be quite so profitable for the entrenched interests who already have enough wealth and influence to insure that they get what they want.
Typically, the majority of a bank’s loans are issued to state and local governments, large corporations, or for residential mortgages. From there, smaller businesses can acquire currency by providing products & services to those entities, and labor can acquire currency by working directly for someone else who is in the loop. In short, this is how money trickles down from the rich and occasionally makes it in to the hands of the working poor.
State of the Market
The biggest banks not only have the most influence over the Federal Reserve, they also have an infinitely implicit guarantee of profitability. While they are theoretically paid to make large economic choices in a market-like way, the removal of their risk distorts the choices they’ll ultimately make. This moral hazard is the status quo and its hard to believe it is an accident or an honest attempt at maximizing efficiency.
When the markets go down as they have over the last few weeks, what is actually happening is that those who are voluntarily invested in the system are walking away and looking for something a little less rigged. Inevitably, when the next emergency bailout or “market support” is announced, the “markets” will appear to do better but only in that they are even less functional as markets.
This is a crisis of legitimacy, and the cure is part of the cycle that devalues our market’s market-like functions. A few patches and bandaids is not “reform,” rebuilding from the ashes of a failed system will be the only true reform.
Until then, good luck…