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In a Mechanism of Exchange

In a mechanism of exchange, as in a market place, the value of things depends upon what individuals are willing to pay for them. Things have a value either because we desire them implicitly or desire them because they are useful to us over time. The more we desire them, the more dear they are to us and the more we are willing to sacrifice in exchange for them. We will sacrifice and surrender more until acquiring them becomes too costly and our desire becomes overshadowed by what we need to sacrifice. Then we either curtail our desire or wait for the price to drop. Somewhere below that level is the natural price of things, at each moment of time. In the aggregate, it then becomes the prevailing market value.

It takes only two to form an agreement and, thus, only two to arrive at an agreed upon price of exchange. It takes a third to make it competitive and to introduce the potential for a higher bid or lower offer. Not all trades need to be arrived at competitively. It is possible to conceive of two individuals whose knowledge of value in each trade is such that they always exchange at an optimum price. Each exchange, theoretically, could occur at a price that is neither too high nor too low and, thus, not encouraging to others to enter in with a better price. If one has the knowledge of all the circumstances at each moment of time surrounding a potential exchange, then it may be
possible to always exchange at a price that cannot be improved upon by a potential competitor. Realistically, this perfect knowledge is unlikely to be sustained over a period of time, but it serves to illustrate that at any period of time it is possible to exchange at an optimum price even in the absence of competition. However, of greater consequence is that, since none of us can individually sustain this perfect knowledge over time, it is not likely that we could intellectually arrive at that optimum or, in effect, real market value. It is a real market value if it cannot be improved upon and, given that this improvement upon is subjective in nature and as evaluated by others in the
aggregate, it is difficult to always arrive at it independently of others. Consequently, it is more likely that, in each trade between two individuals, there is room for a competitive offer from another that would narrow the gap between the prevailing price being bid and that being asked. In this manner, competition can be seen to work as a mechanism that affects each exchange at the limit in between where the prevailing bid and ask narrows into the price of each trade. Over time, it thus arrives at the price that is the most optimum under those conditions that are the reality then.

Through time, the reality that defines the then value of exchange also changes to suit the subjective and constantly shifting tastes and desires of demand, and the existing and changing ability to satisfy these demands. These changes, which result in constantly shifting market prices, are difficult to appraise without the entry of competitors eager and able to gain an advantage from the opportunities created by them. Thus, the advantage of a competitive exchange over one that is always decided upon by two individuals is that it allows other individuals to enter into the constantly shifting state of exchange and improve upon it to, in effect, contribute additional individual assessments of market conditions as they are then. The reward of this introduction of competitive assessments is that those assessments, which are most correct in relation to demand and how that demand can be most realistically and profitably satisfied, are those that will result in exchange. The price at which this exchange will take place is, consequently, that price that is most competitive and that cannot be improved upon, as assessed by all the participants involved and reduced from their individual decisions. Because it is the best possible price, or at least because it tends that way though it may not be perfect, it is also the most efficient price in relation to how things were then and to how the mind assessed them to be. An exchange is always a subjective human act judged by those individuals directly involved in it either by virtue of their demand or their ability to satisfy this demand; it is a price arrived at that is most relevant and correct then and there, to them. As in the case of our original two traders, because our knowledge is not always perfect, the competitive market environment tends to fill in those gaps that result from our failure to perceive all in our individual assessments. What we cannot see can be seen by another, as seen in another way or from a more advantageous perspective, and acted upon to correct our unintentional omission. That other, either through being more clever or better positioned, then contributes a price of exchange that is more advantageous and, thus, more an expression of real market value. Thus, without the need for superhuman intelligence, the competitive market is able to improve upon our individual shortcomings and arrive at a comparably efficient price at all times. Its constantly changing price then reflects the constantly changing aggregate of human decisions as these are made in response to their individual realities and to how these realities seek each other in agreement. The result is an agreed upon and correct state of exchange.

It may be human to err, but in competition, collectively, we tend to err less. The advantage of a market system participated in by many individuals is that it has the advantage of many minds contributing their best decisions, which then result in the prevailing exchange. If, after the last exchange had taken place, the next bid and ask are uncompetitive, there will be a vacuum that, if possible, will be filled in by another ready and able contributor to narrow the gap between buyer and seller. If it is advantageous to do so, if it is both practical and profitable, then either there will be a higher bid or lower ask; if it is disadvantageous, then there will be none who would enter such
exchange without loss. Whether a profit or loss is gained from an exchange is always determined by whether or not it is advantageous to close the gap between seller and buyer and thus to enter that transaction, at that time. The market only reflects the state of things as they are and the state of human assessments of these things at that moment of time. It does not punish or reward; what appears as punishment and reward to us is entirely the result of our action in relation to the state of things as they then are. Thus, if there is a particularly great risk in advancing a more competitive price, then the risk must be assessed in terms of the commensurate profitability or reward that can be expected from assuming it. Risk is a cost of exchange and competition in the market system is not a free gift; it comes at a cost. That cost must be assumed in each transaction and is the level of risk that each must be willing and able to assume. For assuming this risk, the reward is a profitable return from exchange. In a competitive market, success gravitates there.

It may or may not be true that for the market to be efficient, it must be perfectly competitive. As shown above, it is conceivable that there exists an efficient market where only two exchange in agreement. Uncoerced, they can always arrive at a price that is relevant to them at that time; without competition, that price would be efficient to them. If the market system is noncoercive, nonrestrictive or approachably so, then all who wish to and are able to may enter it freely and compete; if only two choose to attend, then it must be judged that there is no incentive, under the existing circumstances of exchange, for others to attend. Competition does not have to be enforced; it forms naturally. What has to be enforced is the freedom from coercion that would seek to prevent willing and able
participants from contributing to its exchange. When coerced, competition is restricted and the system works poorly. Perfect competition, then, need only exist as a potential insured by a freedom from coercion; as a prerequisite of market efficiency, it need only be perfect when the market strays from the best possible price. Then competitors must have the freedom to enter and fill the gap left by the prevailing exchange.

An efficient market system does not have to be an arena of many participants in perfect competition. That is a myth. On the contrary, it takes only two to agree on a price; a market is in fact most competitive where there are the least number of participants. Then, the trading environment is not crowded by competitors because there is no benefit from their being there; the prevailing price of exchange is optimum and cannot be improved upon; there is no advantage to be gained from it. A discrepancy in price creates its own competition; it does not have to be artificially maintained as a guard against market inefficiency; it needs only the freedom to be allowed to work as a
system of mutual agreements. In fact, ironically, it is economically inefficient to force participants into competition where such competition is not justified because the price is already optimum and is not attracting competitors. To force such competition is to waste assets and human labor that could have been used elsewhere more profitably and productively. It is the mark of an efficient market when the prevailing price of exchange does not stimulate competition; if it cannot be improved upon, then to force competitors improves on nothing. Then, to force such competition is to coerce the market to act in a way that is not optimum, to make it less efficient, and to commit an economic error. Such is the power of myth, that it allows us to coerce where coercion is unnecessary and to force individuals against those agreements that are natural to them and that do not coerce others. When free from myth, conscious human agreements are free to seek their greatest profitability and the system of exchange becomes most competitive.

So, for markets to be efficient, they do not have to be composed of many participants, but they do have to be free from coercion. A market in which exchange is restricted, because entry is prohibited or because the costs of exchange are too great, is a market in which will not be reflected the greatest price efficiency. When free from this coercion, whether or not the price then reflected is optimum will be determined by whether or not the conditions of exchange are then optimum. If there is undue risk, such as from theft or currency instability or from confiscatory measures, then the price will also reflect the concern for this risk; the price mark up will be higher as insurance compensating for this risk. Then, if the price so arrived at appears to be less than optimum, it is only a reflection of conditions as they then are; the market cannot be improved upon if the conditions of exchange are negative. Exchange by agreement, when free from coercion, only reflects the state of things as they are between individuals. It is the property of free markets that, when allowed to work efficiently, they always reflect things as they are; if these conditions are constructive and unrestrictive, then they reflect efficiently our human effort and productivity; if they are negative and coercive, plagued by undue risk and by disregard for the rights of the individual, then they reflect human inefficiency as forced from coerced labor. If we are not pleased with our results, the blame does not
rest with the exchange mechanism; a free market reflects only human agreements. The correction of those conditions lies in correcting what the market is reflecting and not in correcting the market itself. If, however, it is the market that is being hindered from its free function as a reflection of agreements, then it fails as an efficient tool of interhuman exchange and as a reflection of things as they are; individuals must be free to form agreements. Coerced, it expresses reality only darkly and the myth that forces it to work poorly then becomes the new reflection of our social reality. That myth is then the attempt to change the reality of our human condition by forcing that which describes it for us; it is a form of social camouflage which masks what the aggregate of our human agreements is telling us. Then, through our social error, the market ceases to be an efficient social tool. A market not free cannot be efficient.

In addition to the cost of risk, there is also a cost of entry into each market. If individuals, or their corporate extensions, wish to participate in a particular market, they must be prepared to pay that cost of entry. Simply, that cost might be a function of having to get oneself and one's product to market; this cost may not be great but it must be retrieved from the value received in exchange. Also, if the
price at which exchange is taking place is already efficient, then it may or may not be advantageous to seek to trade in the prevailing market environment; the market efficiency may precipitate for us loss, a cost. Finally, the risks to be faced in future production or price or market acceptance may be too great to make entry into such enterprise advantageous at this time, thus unprofitable. If an enterprise and exchange is judged to be unprofitable, since it would cause loss, it should be avoided.

After such adjustments, if it is still deemed to be profitable to approach a market exchange, there then may still be the cost of operation associated with tooling up for the decided upon production. After the optimum price had been achieved, there can still be a kind of margin of profitability in which prices may rise to a certain point above their theoretical or practical optimum without inviting competition. Competition would be held back because of the cost of tooling up production in order to participate in that market. Then, in that grey area above the most efficient price, is room for an enterprise to either enter the market and compete or to avoid the potential loss due to the cost of entry from tooling up. It is a situation which allows a price to be less than perfectly efficient, but it also is an area
into which entry requires a keen assessment of a difficult decision. Because of that difficulty, the already existing participants of exchange then are able to enjoy a certain price advantage which affords them a somewhat greater profitability. Is that greater price justified?

Provided that the above competitive edge had not been achieved as a result of coercion; that is, provided that there are no restrictions on free entry, nor subsidies afforded by the either direct or indirect support of non-market agreements, such as taxes, nor that these goods so produced are non-exchange goods, such as roads or licensed channels of communications; then the competitive edge so achieved is a result of market action rather than either coercive action or action resulting from social agreements. In the case of roads or other services provided on the basis of social rather than market agreements, then the principle of market competitiveness and price efficiency do not apply; prices charged are agreed upon by the social agreement that provides those services. In a competitive market system free from coercion, the price that results is a product of market decisions in response to economic conditions as they are. Thus, under those conditions, what materializes in the market environment is a reflection of those decisions that had most successfully assessed the market reality. If it is decided that it is beneficial to tool up and invest the necessary assets and human effort into a particular enterprise, then the yield from the sale of those goods or services in the prevailing price of exchange must justify the effort. If the price is so close to its optimum level as to discourage this investment, though it may not be exactly at that level, then it is a competitive edge that is gained from the state of conditions as they really are. It is then too expensive to enter into this competition carelessly and too wasteful for a company or individual to expend labor and assets if the results will only yield a loss. Consequently, the decision as to whether this price advantage is justified rests on whether or not that competitive advantage had been achieved through coercion or through free market agreements. If they had been arrived at free from coercion, then they best reflect the reality of those costs associated with that particular enterprise and exchange, and to force competition under those circumstances in order to close the gap from a less than optimum price would only result in wastefulness. As we will later see, waste of assets and human effort is a serious detriment to society as a whole.

Thus, where human agreements are free to operate, there are natural safeguards against overambition and overzealousness, or carelessness. They are checked by what is feasible and profitable and what is foolhardy and wasteful. Free from coercion, the prices that materialize in each exchange are those prices that best reflect the situation as it is assessed by those individuals affected by it and as that market reality is relevant to them. When allowed to operate freely, it follows of necessity that what will materialize will tend towards that which is most efficient and most profitable and tend away from that which is most costly and unprofitable. To force it to be otherwise is to invite a state of things that are other than as they are and to force loss and human waste. It is an irony of market exchange that efficiency and competitiveness cannot be forced; they are naturally invited where they are justified; to force them to be where they are not justified only invites that which works most directly against them. In a society of free individuals, agreements formed in exchange are efficient only if they are voluntary and in their personal, individual best interest.

Such are the natural human agreements as expressed in the mechanism of exchange.


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