Myths About Markets | Basic Economics by Thomas Sowell | Ch. 24
We are now in the home stretch of this wonderful book. In the seventh part of this book, where we take a look at miscellaneous economic issues not yet touched on, in this 24th chapter, we’ll be looking at some myths about markets that many may have, and thus use against the arguments Sowell is presenting here. Like in a debate, this is where Sowell will be taking time to address counter arguments and issues in economics.
If you haven’t read my previous summaries and thoughts on this book, please click here. Otherwise, let’s get going!
Sowell says this in the very opening of this chapter:
Perhaps the biggest myth about markets comes from the name itself. We tend to think of a market as a thing when in fact it is people engaging in economic transactions
The above is the reason why markets are in contrast to governments, since governments are centrally planned while the market is made up of millions of individual and unique moving parts called people. But because we can make the mistake of thinking of the market as a centralized force, policies and laws are often created to limit the market, which in reality limits the freedom of individuals within the market rather than helping people in any respect.
While myths about markets abound more than what will be addressed in this chapter, here are some of the most important to talk about.
There are a few myths associated with prices, from the role prices play to why they differ and how they are created.
For example, an often misunderstood aspect of the role of prices is to believe that they are somehow used to keep goods and services from people who need them, somehow putting such things behind a sort of paywall. Terms like “exploitation” or other political rhetoric are used by even well-meaning people to attempt to get around prices through centralized planning. The 20th century, with all the rise in socialist and communist economies, has proven to us that this isn’t possible without destroying hundreds of millions of lives.
The most important thing to understand in rebuttal to the above is that prices are like wages, in that the compensation given to those who work is included in the cost to transact. If the price being paid is too high, then you should be able to find one that is lower. This is because the success or failure of a business is predicated on whether you can find the lowest price possible to offer your customers, lest you be undercut by another business. Thus, if there is no lower price, it’s not really necessary to point at people for exploitation. Rather, it’s more indicative that the current price is the way it is because no business can yet find a cheaper way to produce the product.
Another misunderstanding or myth about markets is rooted in the idea that variation in the price of the same product shows how exploitive businesses are. But the cost to do business is unique to each business in any industry. From variation in real estate cost of different communities to cost of inventory related to local communities to even differences in customer satisfaction of services, each of these things weighs differently for every business. This affects the prices, which explains the variability.
In this way, we understand that saying something should be “reasonable” or “affordable” is really akin to trying to change reality to fit our own desires. But the cost to do business, from transportation to service, has nothing to do with whether we are willing to pay for a good or service. The price of something is not the same as the cost to create it. Rather, a price simply helps pay for that cost. Thus, these price myths about markets don’t actually square with the reality of costs, just asserts that one disagrees and is unwilling to pay it.
Similar myths about markets exist for brand names. People often think brand names are just ways to get customers to pay more for a certain product, or that brand names are not aligned with consumer interests.
The reality is that brand names communicate knowledge to customers, and force producers to own up to the brand they represent.
For example, if someone is on a road trip driving into a town they’ve never been to before, they are more likely to go to a gasoline station or a diner that they are familiar with. The McDonalds and Chevrons offer a customer immediate knowledge of the quality of product and service they can expect, despite not being in a familiar location. Similarly, we would rather purchase a Samsung phone or Toyota car, rather than no-name brands for each of those respective products and services, simply because those brands are better known for a specific kind of desired quality.
Even with the myth that “all brands are alike”, this is actually an indication of similarity of quality rather than anything negative. Certainly, few people can find the difference between a Pepsi or a Coca-Cola. But that shows us that they are similar in quality, and we would certainly rather drink those than some strange concoction with questionable smell and odor made by a local, dingy restaurant chef.
In reality, and historically, brands are the result of market forces. If it were more advantageous to hide behind a no-name label, then businesses would certainly do so. But when Henry Heinz put his name behind his food business, it flourished due to the reputation of the brand. And thus, though McDonalds uses machines to make its hamburgers and shakes and french fries, it also established policies of supervising its suppliers to make sure all of its products were up to quality inspection. This pressured its competitors to do similarly, and made the quality of every hamburger diner rise as a result.
The maintenance of quality for a brand is also paramount. Class action lawsuits abound every day, and if a brand is going to keep its reputation up and not be legitimately sued on the average day, keeping the face of its financial value high is key for the sustained legacy of that business. Thus, brand names are in reality a benefit to markets, not the soulless entities often portrayed in myths of markets.
In addressing the myths of markets, it’s important that we take a look at non-profits as well.
For-profit businesses are kept accountable through immediate profit-and-loss feedback from customers. Even if customers don’t fill out a survey about their satisfaction, they will display their attitudes towards a business by whether they continue to shop at or use the services of that business.
Such incentives and feedback mechanisms to keep up in quality of service does not really exist for non-profit organizations. In fact, those who run these organizations have a tendency to use the resources of those organizations to benefit themselves, many times at the expense of what those organizations are meant to do. The only limitations on these tendencies are the outside interests that fund these organizations. This is pretty ironic, as it shows that financial incentives are still the ultimate check on these organizations.
But large funding organizations don’t have the ability to keep non-profits in check, as they don’t often spend the resources necessary to do so. And though they receive some financing from clients at times, it isn’t the main bulk of their funding. Thus, there’s very little pressure on non-profit organizations to make sure the funding they receive is effectively helping with the cause they support.
In this way, the benefits coming out of non-profits effectively function like subsidized benefits from the government. A non-profit’s goods or services can cost more to produce than they are selling. But they will continue to run with them, since the beneficiaries can’t put any financial pressure on the organizations. The feedback loop to make the non-profits is thus broken, and therefore the tendency for the leaders in the organizations to divert funds in an unhelpful fashion is far greater.
This is an important point, as the scope of things which fall under the umbrella of “non-profit organizations” is vast. From charities and universities to religious institutions, there are a lot of entities which claim to be not-for-profit. This doesn’t mean that these entities don’t engage in the marketplace, of course. In fact, there is a lot of overlap between the activities of non-profits and for-profit businesses. In this way, non-profits have proven to be less effective in both social and financial matters. For example, non-profit universities often produce less diversity of thought, even though such would be beneficial to education. In a similar way, 1948 produced the first black chemistry professor in the United States, though hundreds of black American chemists worked for for-profit chemical companies for years before that.
The difference between for-profit and non-profit becomes even more stark when they compete on the exact same grounds. Here’s the quote from Sowell:
For example, the University of South Carolina “rarely netted as much as $100,000 per year” from its college bookstore but Barnes & Noble paid them $500,000 a year to rune the same book store. This implies that Barnes & Noble must have made even more money in order to pay the University of South Carolina more than the university ever made for itself from the same bookstore.
In these comparisons, it becomes obvious that, while it may seem nice or even moral to conduct business without profit in mind, reality shows us that non-profits are fated to be ill-equipped to do the very things they set out to do, while for-profit businesses are able to do this and more.
As Sowell addressed the problems with non-profits in this chapter on myths about markets, I suddenly realized something that has been bothering me for a while. Let me attempt to lay this out.
As a believer and follower of Christ, one of the things of primary concern to me (at least in terms of society as a whole) is the alleviation of poverty. If we are to take our spirituality and Scriptures seriously, then we need to recognize that helping the poor and broken of society is one of the primary callings Jesus Christ calls us to. And so, participating in charity and homeless shelters and things is one of the things that I do when I can, even if it’s just giving money for a cause.
As far as I know, and from my life experiences, most Christians, whether they are Catholic, Orthodox, or Protestant, feel similarly, with varying degrees of concern (but almost always the concern exists).
This is why one of the absolute strangest facts that exist is that there is a near direct correlation between how religious an area is, and how high on the scale of poverty that area is as well. In other words, the more religious a group of people in a nation tend to be, the more impoverished that nation tends to be as well. You can read about it here in this study or get a summary of it in this article, but there are many more like it.
Many religious people read something like that and immediately throw up their defenses and apologetics. They say things like, “Well, just because this is the case doesn’t mean the religion isn’t true,” or “my religion is not primarily about alleviating poverty, it’s about proper worship and understanding of God.” And certainly, it’s easy to take a look at places like the former Soviet Union and current day Venezuela and Zimbabwe and see that the absence of religion also exists in extraordinarily impoverished nations. These responses may be true in a logical or rational way, but they don’t answer the primary point being made very well.
But I think Thomas Sowell’s chapter on myths about markets answers the issue perfectly.
It’s not unexpected that any non-profit does not produce profit. After all, if the focus isn’t to produce a net positive financially, we shouldn’t expect them to try in the long run. And certainly, when we’re talking about giving or attending to the poor (i.e. those who cannot make a profit for themselves), there will probably be some sort of loss involved.
But since we don’t expect these churches (or other religious institutions) to make a profit, then when one exists, it will create a certain drain in the local economy. Thus, when a lot of them exist, in the absence of businesses that can make up for that loss, then poverty will be multiplied. And since non-profits tend to utilize money inefficiency, it would seem such a scenario would actually exponentiate the situation, creating an ever worsening condition.
It seems then, that in a macro sense, whether a society prospers has more to do with the balance of the number of successful for-profit businesses versus the number of other non-profit actors, including religious and governmental institutions. After all, as noted by previous chapters, a larger and more direct part of keeping a nation impoverished is corruption and lack of honest business interactions. Actually, it’s not a balance at all, but that the successful for-profit businesses needs to vastly outnumber the others, so as to alleviate the drain economically.
Thinking back on it, while it seemed revelatory at the time, it’s really quite rational. But then we must reckon with the actual conclusion to this line of understanding: The greatest way out of poverty for any society is not through non-profit work, religious institutions, or government intervention. It is the creation and sustainability of successful for-profit businesses.
This redefines helping the poor. Rather than giving money primarily for causes like giving food, shelter, or other physical necessities (all of which are still very important), time and financial investment should be made to educate those in poverty on starting, managing, and sustaining businesses. If such things are too difficult for some to learn immediately, then it’s education on how to get a job to support local businesses that are already successful.
However, such notions need also be for-profit. Rather than handing these educational tools to non-profits which are both unaccountable and inefficient, as well as unable to give feedback on whether their efforts are effective, businesses need to be created for this educational purpose. Such businesses would probably function like an App Store or Music Retail shop, where it not only educates the people who come to learn, but market and provide a platform for those same people to start a business, and taking a cut from those businesses.
The most effective of these, if they desire to be truly transparent and thus receive the greatest feedback, would be those that ‘open source’ their financials publicly, including the successful businesses which were created by them and operate on their platform. Then anyone and everyone can see whether they would want to participate in and learn from this business, or if it’s just a scam.
If all this sounds familiar, it should. It’s what all corporations, whether national or multinational, do. In fact, this kind of thing (where businesses educate those under them to be successful) has existed for a while, and it’s generally the next step when a small local business desires to begin expanding and franchising. It stands in direct contrast to our normal public school systems, which are government (or otherwise non-profit) sponsored, and which churn out, year after year, more and more people who have no idea what to do with their lives.
In other words, the solution to our problems isn’t a new technology, a new idea, or a new revelation. It’s been sitting in front of us the whole time, if we were willing to look for it. In the words of a teacher in the Bible:
What has been is what will be, and what has been done is what will be done, and there is nothing new under the sun.