Market Failure - What market failure?

The market is a mechanism, with price as one of its major tools, in order to ‘clear’ or allocate scarce resources.

In centrally planned economies a political elite fulfill the role that price would in order to determine the allocation of the resources.

In a market lead economy price fulfils this role.

The problem is that price (or value) is not always a perfect measure or instrument to send a signal to the participants to ‘clear’ or allocate all the resources effectively and efficiently.

In certain circumstances the market is therefore seen to or perceived to fail, however this is an error in logic, it is not the market that fails, but individual participants within that market that fail.  They fail because of the fact that information asymmetry prevails and not every participant has access to capital and resources at the right time in order to set or take the most efficient clearing price.  The problem is that is not necessarily the market that fails, but individual behaviours of participants in that market that puts a strain on the market and therefore forces it towards a new equilibrium point. 

This is what we recently and so spectacularly experienced as another deep recession.

The focus should be on developing better and more sophisticated tools (other than price alone) to grease and ease the wheels of the market allocation system.

Some would call these tools better regulation, however true libertarians believe in these two maxims of efficiency and effectiveness:

(1) Spontaneous Order

(2) Creative Destruction (Schumpeter)

theMarketSoul ©2009

Comments from a 'lay-economist' on the Credit Quake of 2008 - 2009

More debt cannot solve the current debt crisis!

All we are doing is buying time, (in essence restructuring the principal debt burden) and deluding ourselves that the fundamental problems have been solved. Which of course is not the case.




I think Paul Samuelson defined economics in one of his textbooks as “...the study of scarcity...”



Yes, the crisis was born out of the scarcity of liquid funds or assets, but a large contributor that became a key driver which exacerbated the crisis was regulatory driven, especially the misconstrued IASB (International Accounting Standards Board’s) IAS39 Financial Instruments: Recognition and Measurement standard.



Remember, money or monetary values (currency) only act as a proxy or crude measure for the ‘real economic’ measurement of value and output. At a basic level we have been experiencing a large equilibrium shift away from the traditional factors of production (land, labour, capital and technology & innovation) and the holders or owners of these factors of production, to a fairer distribution and access to these factors of production.



When the equilibrium cannot be maintained at a specific unsustainable level we experience some form of ‘discontinuity’, such as the current crises we are experiencing.



In the old Western oriented G8 or now G20 democracies (and one or two new monarchies throw in together with a quasi-communist regime for good measure), the old G8 leaders thought they were immune against the odd banking crisis . Recall here the Asian Crisis of 1997-1998, the Russian Financial Crisis of 1998, the Argentinean default of 1999; all minor disturbances in the developing economies which did not affect the West.



However, with ‘The Great Moderation’ (thank you Ben Bernanke for that one) so recently behind us, the Great Credit Quake of 2008 – 2009 suddenly meant that the entire G20 club and beyond were dragged into the quagmire.



Therefore, my belief or opinion is that we are still in the midst of a major equilibrium adjustment and the ‘step down’ or up from the previous level will continue to be uncomfortable for many years to come. Asset classes will continue to try to find their new sustainable equilibrium valuation levels, and the stoking of the fires by governments with sovereign debt will only continue to contribute to dragging on the crisis for longer.



Ultimately, the market mechanism did not fail, but a few key players within those markets failed spectacularly. Pumping more liquidity into the system will NOT heal the moral hazard created before and now supported by the current interventions.



Growth is rightly touted as one of the mechanisms by which we get ourselves out of this crisis, but I can see two other unpopular tools at our disposal, one being raising tax burdens generally and the other lesser of the two evils being inflation.



Shall we jump, or wait to be pushed?


The Market Soul © 2009

Confessions of a Behavioural Profit Mechanic

Observing the dung-beetle had me suddenly mesmerized by the thoughts of the impact of the annual organizational lying ritual.

Yes, you are correct in thinking; we have just been through the budgeting process.

Fascinating laboratory work for the typical pin stripe suited behavioral profit mechanics amongst us, with laptops and complex spreadsheets geared up for the task.

Doesn’t matter which large or medium sized organization you go into, observing this annual ritual is either a distinct pleasure (for the sadists among us) or a very drawn out, torturous agony inducing activity.

But it all boils down to exactly the same thing my dung-beetle friend has been up to:  Moving piles of c**p from one place to another.

So what is the value in continuing to entrench this annual ritual into our organizational man or woman’s psyche?

Especially in turbulent times!

The cynics amongst us argue that it keeps the been-counters occupied.  True, there must be some value in keeping those poor (pure) folk slaving away over their budget spreadsheet models late into the night.

But it is the Senior Management Team, the wise elders, whom I ultimately blame.  These are the dungeon masters who routinely get the instruments of torture out, mainly their sharp wit and senses of sarcasm and then put the product or business unit owners and managers, with their been-counters in tow, through this process.  If it was not for their (the wise elders) profound sense of loss of touch with reality, the poor folk who keep the management information beast alive, could be put to better use by adding significant value to the new science of business analytics and value added decision support.

I know the entrenched behaviours are all focused around the ‘rain dance’ of the bonus pot the wise elders so fervently guard.  Maybe we should rethink the way in which this annual ritual is observed?

theMarketSoul ©2009

A Quote of Note

"So let me fill my children's hearts, 
With heroes tales and hope it starts, 
A fire in them so deeds are done, 
With no vain sighs for moments gone."


Stuart Adamson (Big Country - Eiledon)

Everything I know about business

Everything I know about business I learned from the Dung-beetle!

This will be the title of my next series of articles. For when I grew up, we lived in a straw hut in Africa, with cow dung smeared on the floors to serve as insulation or to keep the snakes away; I can't quite remember anymore.

My children don't appreciate the sense of history and perspective that living in the 'civilised' world affords them, because for cultural entertainment, we had to watch the Dung-beetles mate. What start in life was that I ask you?

Anyway, I digress.

A lot of business life is like chasing, or at least wiping off the muck and dung that life throws at you. Dung smells and so does money! And a great deal of this mucky stuff is pretty sticky, therefore dealing with the mucky stuff can be made so much more tenable if we are able to deal with the dung in the way the Dung-beetle manages to deal with it.

These (muck scraping) thoughts will be developed further...

If you are interested in hearing more about it, please post a comment.

Thank you.

theMarketSoul (c)2009 & Idea Merchant
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Persuasion

This is my first attempt at a blog post 'on the go'.

It will be short and sweet. It is a note about persuasion and the art of keeping stakeholders on board. If anyone knows the secret, then please let me know.

I am searching for the elusive ingredients. And the stewing pot of persuasion.

theMarketSoul (c)2009
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Banana Wars are here

Yes, it is official, the Banana Republic state of the national fiscal debt crisis has lead to banana price wars being declared between the major supermarkets.

I picked up, quite deliberately and not by mistake, the biggest selling national tabloid newspaper on Friday 9 October 2009, due to its very sharp and insightful analysis of the recent Tory party conference.  I deftly navigated past the Page 3 detour, reading the opening and concluding paragraphs of the page 6 editorial (that investment in my legal taxation training back in my uni days has therefore paid off, learning how to read and digest case law files), and found myself being drawn further into the murkier depths of the newspaper.  I eventually after approximately 27 seconds hit page 30 and came across the Asda banana price declaration; down from a whopping 84p per kilo to only 38p per kilo!  Wow, I thought to myself, better rush out immediately, before they are all gone.

I persevered with the paper and after a further 36 seconds of intensive reading, hit the Tesco declaration on page 67 that a 1kg pack of bananas was only 35p, and that double club card points were now on offer.

Double wow I thought, I could spend at least 4p more on petrol to drive to the Tesco that is further away, in order to take advantage of the 3p saving on the bananas on offer.

We have been shopping at Aldi recently and yesterday the wife asked one of the students living with us at the moment to pick up a few essentials (fresh fruit and veg at Aldi).  And the best part was that I didn’t spend a penny on petrol to get there, as he picked up the stuff on his bicycle on the way back from school.

So, the ‘piece de resistance’ came this morning when my wife unwrapped the packet and declared that we had only spent 32p on a pack of bananas!!! 

Whoopeee I thought, we are on to a winner here!

The Ice Age is Cometh

Information Asymmetry is what drives the market. I alluded to this in an earlier blog posting (see Market Responsibility, Saturday, 18 October 2008). Yet I still hear the socialist agenda mention regularly that if it wasn’t for the recent government interventions to ‘save the market’, the market would have collapsed. I am sorry, but I just don’t buy this. Yes it is true that individual institutions in the market would have failed, but as a mechanism, the market would have wobbled and other participants would have picked up the distressed bits and pieces and carried on. True, there was a crisis of liquidity in the system, with severe knock on effects, but as a mechanism for allocating resources, effort and reward, I still believe the market would have survived, with or without the ‘nuclear’ option intervention we saw. The moral of this tale is that unfortunately the socialist elite now believe and make the rest of the market believe that they hold the moral high ground and can dictate the agenda for the next several years. Oh well and so the pendulum swings…

Which was entirely a side track to the real intention behind this posting.

‘The Ice Age is Cometh’ was an article headline in the Radio Times edition of 16 – 22 November 1974. I friend of mine came out with the rank smelling edition of the Radio Times of late 1974, that he discovered stuffed in the chimney breast of his new home. Stuffed in that chimney-breast to obviously keep the cold draughts out, as according to the subtitle the next 1,000 years could be very, very cold, with an advance of the polar ice caps and glaciers. Did I blink or something? I will challenge the BBC to dig out the programme aired in the week of 16 – 22 November 1974 on BBC 2, so that we can be reminded how quickly the agenda and the focus can shift, if we take our eye off the ball and let information asymmetry spin the agenda out of our control.

And I suppose we cannot deny the evidence currently in front of our eyes. Polar ice caps are retreating, which is true if you focus purely on an evidence based approach to trying to understand the wider system. But do make your observations and emotive arguments from within the system, or do you need to step outside that system in order to be more objective. And what about intuition? On a purely intuitive level I believe the earth of GAIA is a self correcting system but we do not have enough evidence to conclusively prove this assertion.

So, in the meantime, we swing one generation to the next, waiting for the ‘Information Assymetrists’ (yes my new made up word de jour) to set the agenda and the morals of the market.

As a soul in this market arena I just keep on being amazed, day in and day out. Please just give me the ability to take the long view…

theMarketSoul ©2009