Wednesday, December 28, 2005

Three Roles of the Market

Frederic Sautet:
"If you were to summarize in three points what the fundamental roles of the market are; what would you say? Austrians have a comparative advantage in this exercise, as they are the only ones with a truly realistic and fully coherent market theory. There is actually too much to say and it is hard to summarize it all in three points – which is also why it is interesting to try.

In my view, the market’s three main roles are:

* A knowledge discovery process via entrepreneurial competition;
* A feedback process via the profit and loss system; and
* The result of the first two leads to an accountability role providing governance."
Notice that there is no mention of "allocate" or "ration" resources. The view of the market presented by these 3 fundamental roles is a view of the market as a dynamic process. Thinking of markets as allocating resources relies on a very static view of the market. These days I thinking it is much more important to think of the market as a dynamic proces.

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