A Brief Treatise on Markets

I teach Principles of Microeconomics at a public university in Minnesota.  I follow the basic outline:  students study why people trade rather than doing everything themselves.  They study how prices and amounts exchanged are determined by the collective actions of people in a competitive market, not by anyone person.  Students study the overall nature of consumer demand and firm supply and they study how firm officials make decisions when facing differing levels of competition in their industry.

Overall, an underlying theme of my Principles of Microeconomics courses is that markets generally work well in coordinating economic activity – in directing resources to their most-valued use. In recent semesters, I began having students read a short essay written by Leonard Read in the 1940’s called “I, Pencil”. Mr. Read, writing from the point of view of an ordinary wooden pencil, discusses the intricate web of coordination activities that takes place to produce an ordinary pencil. He makes the point that economic activity is so complex that, as a practical matter, government activities meant to promote better coordination in a market often lead to less coordination and worse outcomes. 

In having students read this short essay, I try to help them appreciate that most people have no idea how to make the things they consume, yet they are able to acquire many valuable things in the marketplace, such as lunch or a gallon of milk, with modest effort.  More to the point, they can acquire these things with less effort than if they tried to make them themselves. 

Private markets are ways of coordinating the numerous activities that must be coordinated, ensuring jobs are completed, while not requiring final consumers to actually know how to produce the goods and services they use. People do not need to have to worry about learning how to produce things like the wooden shaft of a pencil, the metal that holds the eraser in place, the graphite with which they write, or the rubber that goes into the eraser. There is no mastermind that directs these activities. 

Instead, there is decentralized coordination of the activities, coordination that takes place in small increments, in which people complete tasks that they are most familiar with, leaving the unfamiliar to others.  The result, more often than not, is a well-ordered economy, higher standards of living, and wealth.