It is naught, it is naught, saith the buyer: but when he is gone his way, then he boasteth (Proverbs 20:14).
This chapter deals with the same issue that Chapter 13 did and Chapter 15 did: government intervention into the economy to keep commodity prices from falling. Such a policy favors existing producers at the expense of consumers.
Politicians dare not admit to voters what they are really doing — supporting existing producers — and why: campaign contributions. Remember: the beneficiaries of special-interest legislation are self-interested to a fault. The victims — customers who are voters — may never have heard of the policy, nor would they be interested if they did hear about it. The political system is asymmetric. The beneficiaries of political pressure have better information and greater motivation to rig the system in their favor than the voters do. The beneficiaries are highly focused. They persuade politicians to re-direct the taxpayers’ money in their direction. The voters do not follow the money. The politicians and the special-interest groups understand this.
There are several groups of owners, as always.
One group owns money, which is the most marketable commodity. Economists classify these people under the classification of consumers. They are sellers of money and buyers of goods to consume.
Another group is made up of owners of natural resources — in this case, commodities. Economists classify natural resources under the general category of land.
There are other owners. They own commodities, but only temporarily. They are intermediaries in between landowners and final consumers. They are producers. They purchase raw materials, labor services, and buy or rent capital in order to transform raw materials into final products. Producers are not final consumers. They are buyers, but they are also sellers. They buy in order to make a profit: buy low, sell high. They can be classified under the category of customers.
There may be a fourth group: retailers. They buy goods that contain restructured commodities. They sell these to consumers. They own these commodities temporarily.
There is a fifth group: owners of forecasts regarding the future. They may be able to sell this information. They may choose to give it away. Until this subjective information affects actual bids in the marketplace, it is irrelevant to the pricing system. But whenever these people put their money where their forecasts are, by buying or selling commodity futures contracts, they become speculators. Their bids affect prices at the margin: up or down.
Because owners have the right to own, they also have the right to disown what they own. They can legally sell. They can legally make an exchange. This brings us to the window.
Consumers compete against consumers. Producers compete against producers. Raw materials owners compete against raw materials owners. Owners of capital compete against owners of capital. Commodity futures speculators compete against each other: “longs” vs. “shorts.” Out of this bidding process comes an array of prices. The economic order in a free market system is based on a series of auctions. The same rule of exchange governs all of them: “High bid wins.”
The average person knows what an auction is. He understands why the high bid wins: to decide who buys it without creating dissension. He understands that bidders compete against bidders. But a free market economist has a major educational task: to persuade the general public that the orderliness and fairness of an auction is a legitimate model for the entire economy. The principle of open bidding produces an equally orderly and equally fair economy. The ability to make this application of logic — from a local auction to an international auction — is a limited resource. This is demonstrated by over two centuries of resistance to the idea of free trade, which is most famously argued in Adam Smith’s Wealth of Nations (1776).
The average person can easily understand and readily approve of the allocation principle of “high bid wins” at an auction. One of the tasks I have set for myself in writing this book is to help readers make the conceptual transition from “high bid wins” at a local auction to “high bid wins” for every transaction. This is more easily said than done.
In the auction markets (plural) for commodities, the principle of “high bid wins” benefits those buyers and sellers who come to an agreement on a price. There are multiple sub-markets in this and every other market. The initial market is established between commodity owners and producers. The second phase of the market is established between producers and middlemen: retailers. The final stage is the transaction between retailers and consumers. At every step, the rule is “high bid wins.”
This principle of distribution annoys those who do not make the highest bid. Sometimes this annoys them so much that they form a political action group that campaigns for legislation that restricts the use of “high bid wins.” People who ran out of money before the auction was over demand that the state impose legal price ceilings. But high bids come on both sides of a transaction. Sometimes those sellers of commodities who were forced to take too low a price, and who dropped out of the auction in order to avoid a loss, see an opportunity. They may be able to persuade the government to make lower bids illegal. This leads us to this chapter’s stone.
(For the rest of the chapter, click the link.)