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Minyan Mailbag: Reading Market Forces


Does the market act selflessly or selfishly?

Dear Mr. Practical,

I very much appreciate your writings on the Minyanville site. Referring to
your last piece on February 6, I would like to ask you two questions. First, what do you mean when talking about "market forces"? In the article you wrote: "market forces were not allowed to balance the economy when they wanted to", "forced debt into the system when the system didn´t really want it" and "the market eventually will do what it has to do."

Second, how do you know what the market wants and how do you know that the market acts in the interest of society as a whole?

Minyan Lars


The market is the sum of all individuals and institutions borrowing and investing with their own money based on what they perceive to be the best possible return for risk. Over time and price this is the best form of allocating capital and resources for any constrained system. And, in fact, the market does not act exogenously for the benefit of society, but acts selfishly which, taken in its entirety, does benefit society by creating maximum productivity in a trade-oriented economy/culture.

This process, based on personal capital and preference, eliminates imbalances almost immediately as they begin to accumulate. For example, at the top of any economic cycle imbalances begin to occur. Inefficient business exists and borrows scarce capital at the expense of efficient business. The "market," seeking its own self-interest, begins to curtail, lending to inefficient and risky business. This culls over-capacity and ensures maximum productivity.

My comment directly addresses this. Every time the market, or those millions of participants who are lending at their own risk, decides to reduce risk based on personal preference, it has been the response by the Fed to lower rates and encourage the market to speculate (speculation is the last vestige of allocating the most risky unit per return).

Of course in the real world there are all types of influences like politics and corruption. The role of government should be to minimize corruption while unfettering the market's ability to maximize productivity.

You could argue socialists have the opposite philosophical opinion, but are disingenuous in making an argument. They play the "social responsibility," "charity," "we are all in one boat" card in implementing controls that go past controlling corruption and begin directly affecting capital allocation decisions. It is a capitalist's contention that over long periods of time it benefits even the poor to allocate capital properly in a resource-constrained world.

This has nothing to do with regulation. Regulation is necessary to minimize corruption, which can come from the private sector but is just as likely to come from the public sector. It also is a matter of degree. Of course we all have social responsibilities, but it is my contention that rewarding those who are foolish with their money is not one of them. Freezing interest rates has its costs and the more we burden our general economy or society for the benefit of a few, the more we will realize that.

- Mr. Practical
No positions in stocks mentioned.
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