The magic of markets

“Capitalism is prey to excesses, self-evidently, and it creates, or leaves unattended, a host of problems that decent societies must address by other means. Even so, the prevailing culture of suspicion and disappointment is at odds with the facts. Mainly, what is missing is awe. Premodern scholars (Karl Marx is an exception) could scarcely have imagined the material advance that capitalism has delivered. Certainly Adam Smith never dreamed that his "invisible hand" would arrange things so well.

In the late 1980s, as Mikhail Gorbachev embarked on his perestroika program of economic reform, Soviet officials were sent abroad to see how things were done in the West. One visited London's main vegetable market. He asked how the market was organized, and how prices were set. He was told that the individual traders bought whatever quantities they wished, and set their own prices, and that these fluctuated throughout the day as the balance of supply and demand changed. At this, the Soviet visitor laughed. He said he understood that this was the official line--but, please, how did the market really set prices?

That, in fact, was the reaction of an intelligent man. It is fantastically improbable that markets work, at scale, as well as they do. It is astonishing that in an economy of America's size--to say nothing of the world economy as a whole--a limitless variety of goods and services is continuously offered at prices people are willing to pay, without persistent gluts or shortages, entirely without central direction. That the system also calls forth an endless flow of innovation and improvement is a miracle. The man from Moscow was right to be incredulous.”

Clive Crook, "Capitalism: The Movie", The Atlantic Monthly (March 2006).

http://www.theatlantic.com/doc/prem/200603/capitalism (requires subscription).

Clive Crook is the Financial Times' Washington columnist since April 2007. He was a senior editor of The Atlantic Monthly at the time this article was written.

To me, the operation of a market is more that magic: It is a miracle. The uncoordinated and voluntary actions of individuals spontaneously give rise to a constellation of relative prices that bring order and stability to the economy and allow for an efficient allocation of resources to produce those goods society wants the most. It is understandable that some people simply cannot believe that it works. But it does, and our prosperity depends on its functioning and on us to allow it to function.

Thanks to Larry Willmore and Jane Galt for the pointer ... and for the excerpt.