Why “Market Solutions”? Because “acting in accord with the independent judgments of a majority of competent persons” isn’t quite as snappy.

Posted on April 6, 2009

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With respect to many of society’s problems, challenges and disagreements, I am a great believer in market solutions and, at the same time, I hate the expression, “market solutions.” I hate the expression because it is a very misleading description of the underlying mechanism at work and often obscures what an effective “market solution” actually involves.

For example, there really is no such thing as “a” or “the” market to solve any particular social problem or challenge. There is no special and separate domain of life which in itself has some kind of special and exclusive power to identify the best solutions to specific problems. Furthermore, there is no specific group of persons, buying and selling some particular good and service, who have a special and unquestioned power to order their own affairs or the affairs of society (sorry, Wall Street, not even you.).

Rather, talk of “market solutions” arises because of an accident of history. It just so happens that the specific social spaces where persons gathered to buy and sell goods and services also seemed to be the very locations where the greatest number of persons were able to exercise their independent judgments and also affect the outcome of their activities for the betterment of all. When one talks of a “market” solution, one is really referring only to this phenomenon, which is the result of the independent exercise of competent judgement, and its historical association with a feature of life we happen to call markets.

Fundamentally, the notion of a “market solution” begins with the assumption that most persons are sufficiently competent to make effective judgments. This means, more often than not, when presented with a choice, a person can be expected to identify the best option of those available. Once this is accepted, the next aspect of a market solution is a simple consequence of mathematics: assuming each person judges independently, the option identified by a simple majority of persons is most likely to be the best option of those available. Furthermore, the option identified by the independent judgments of a simple majority of all sufficiently competent persons is even more likely to identify the best option of those available.

Now, of course, there is more than one way to identify the majority of independent judgments of some group of sufficiently competent persons with respect to some issue and the method most associated with the expression “market solutions” is the price system. In this system, persons make independent judgments about the price at which they will exchange their goods and services and, over time, as people’s judgments evolve to reflect the different judgments communicated through the various prices at which different people are prepared to exchange goods and resources, those prices should come to reflect the majority opinion of most if not all competent persons and, for this reason, the best allocation of goods and services should arise over time as persons exchange them at the different prices. The greater the number of people involved in the price-setting, the greater the chance the best allocation of resources will be identified. On my view, all the evidence suggests, for the vast majority of day-to-day choices about the allocation of goods and services, this is the best system so far devised, however, this is not to say that the best version of this system has actually yet been implemented anywhere in the world, nor is it to say it is the best system for all choices about the allocation of all goods and services.

Using the price system to communicate information about the judgments of different persons is useful because it can create powerful incentives for persons to make effective judgements (e.g. competition and profit). Unfortunately, it can also, in some cases, create powerful incentives for persons to make ineffective judgments (e.g. competition and profit). It is important to emphasize that this is not a problem unique to the price system, although the specific kinds of incentives it creates may be unique. Any system employed to identify the majority of independent judgements will create different kinds of incentives for persons to make better or worse judgments. Moreover, it is a fact of human reasoning that there are many circumstances — whatever system is employed — in which persons for a variety of reasons will make ineffective judgments even if, on the whole, they are normally capable of making effective judgements (for example, when they are in a state of panic). There are even specific circumstances where most persons can be predicted always to make ineffective judgments (certain optical illusions, for example). In other words, no specific system for identifying the majority of independent competent judgments is perfect or can ever guarantee to identify the best result in every instance and this must be taken into consideration in the assessment of all outcomes as they arise.

On my view, the biggest obstacle to the identification of the best options is a tendency among humans to employ coercion to resolve disagreements and a tendency amongst many humans to renounce willingly their independent judgements in favor of the judgments of some minority. Coercion is a problem because there is no necessary connection between the ability to coerce and the ability to identify the best choices. The willingness of persons to renounce their own independent judgment and act in accord with some other person or group’s judgment is a problem because they will often do so for reasons which are unrelated to that person or group’s ability to identify the best outcomes and which also obscure the fact that even the most competent person or group is not always right. Needless to say both obstacles are inter-related and often work in tandem. 

So, when I say I favor market solutions, I mean that I favor empowering as many persons as possible to exercise their independent judgment and then acting on whatever way forward is identified by the majority of independent judgments, assuming the way forward can always be reevaluated as new information comes to light. A properly functioning price-system, on my view, can effectively facilitate this process with respect to the best allocation of most but not all of society’s goods and services. Determining which goods and services are not well-served by this system is a simple matter of trial and error. Of course, if we are to arrive at the best answers to this question, we must first ensure as many persons as possible can become sufficiently competent to exercise their judgments effectively and ensure all persons can exercise their judgments independently.

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