It is naught, it is naught, saith the buyer: but when he is gone his way, then he boasteth (Proverbs 20:14).
Every voluntary exchange involves buying and selling. The person who is called a buyer is a seller of money. He buys goods and services. The person who is called a seller is a buyer of money. He sells something of value to purchase money.
The practice described here by Solomon is familiar. In negotiating, both the buyer of goods and the buyer of money complain that the asking price is too high. It is not a good enough deal. “It is naught, it is naught.” Each hopes that the seller will drop his price. In the case of the buyer of money (seller of goods), he hopes that the buyer of goods (seller of money) will decide to take less for his money. Solomon knew that his listeners and readers would recognize this negotiating technique.
The technique rests on this institutional arrangement: the right to bid. We can see this in markets in which private property is secure (the window). We also see it in markets governed by politics (the stone).
In a society with a small retail market, where there are few rival options nearby, negotiation is basic to sales. In a highly developed economy, there is not much negotiation. We do not negotiate with a check-out clerk when we get to the front of the line at a supermarket. The clerk scans the bar code on the item’s package, and the computer adds it to the list of items we are buying. The negotiation rule here is clear: “Take it or leave it.” It is easy to leave it. Anyone can shop at a different store, or go online to check prices.
Sellers (buyers of money) bid against sellers. Buyers (sellers of money) bid against buyers. Out of this competitive bidding process — a gigantic auction system — come objective prices. There is little ignorance. Face-to-face negotiating is limited to zones of ignorance regarding prices and quality. The better the information about market prices, the narrower the range for price negotiating.
There is a third aspect of ownership in a free market: the legal right to bid. Buyers bid against buyers. Sellers bid against sellers. This is another way of saying that owners possess the legal right to disown their property. Farmers can legally disown their crops. Consumers can legally disown their money.
The farmers act as economic agents of the final consumers. All of the producers do.
In the days of Solomon, every buyer and every seller had an opportunity to announce: “It is naught, it is naught.” Haggling slowed down the speed of decision-making. In the modern economy, there is almost no haggling. This is because of the nature of the window: the free market’s auction system reduces ignorance regarding supply and demand.
The agricultural markets have long been the most developed of markets. This is especially true of the grains. Grains are easily judged in terms of quality and type. There are professionals who make these assessments.
The free market in agricultural products is international. It is gigantic. There are hundreds of millions of farmers and billions of consumers of food. Most of these farms are small. They are in villages in China and India. They sell little food outside their villages. About three million farms feed most of the world’s urban populations. In the United States, about 200,000 farms produce 80% of the agricultural output. These farmers have access to the World Wide Web. This means that price information is widespread. The food markets are international. Prices are established by competitive bidding to a fraction of any currency unit.
There is another important aspect of the grain markets: commodity futures trading. Speculators can enter these markets with a low payment of earnest money and make bids. Some of them bid to buy a large quantity of grain in the future at some price. They “go long.” Others bid to deliver a large quantity of grain in the future at some price. They “go short.” These speculators make a lot of money if they guess correctly about the future price of the particular grain. This opportunity for highly leveraged profits lures sophisticated forecasters into this market. The losses cull out the losers. The survivors are very good guessers.
This system of competitive bidding establishes preliminary prices for each of the grains. This price information is public. It is made available on the Web to farmers and wholesale grain buyers at no cost to them. Grain prices change, minute by minute. This means that there is a very narrow range for price negotiating. The ignorance factor is minimal. No one bothers to cry out, “It is naught, it is naught.” The answer is clear: “If you can buy it cheaper somewhere, you can make a fortune with arbitrage. Buy low in one market and sell high simultaneously in another.” In short, “Put your money where your mouth is.” This silences most people.
Under this system of decentralized international farming, efficient farmers are rewarded. Inefficient farmers leave the field (literally). In 1800, at least 90% of the American population lived on farms. Today, this is down to 2%. American grain agriculture is the most efficient on earth. It has been since the 1840’s: the reaper, the railroads, and the grasslands. About 30% of American farm income comes from exports.
The special-interest group tries to persuade the politicians to select a base year in which there was a high price for that crop. Why not a year in which the crop sold for less? The special-interest group has an answer: “It is naught, it is naught.”
(For the rest of my chapter, click the link.)