Have Faith in Markets

As a former floor trader, I am a student of markets.  There are markets in everything.  When I started studying for my MBA at Chicago, Professor Kevin Murphy gave us our opening lecture.  I don’t remember too much of it, but I remember this.  He said, “There are markets in everything.  Marriage is a market.   People laughed or gasped.  “Think about it he said.   There is a supply curve and a demand curve.  Everyone has their price for marriage.”

One true thing about markets.  Price is the most important thing.  High prices will quelch demand, and cause market participants to look for alternatives.  High prices are an indication of restricted supply, or a good that everyone wants.  Lower prices will increase the amount of quantity delivered.  Low prices are also an indication that there is little demand for the good.

I saw a couple of things today reinforce that.  China tried to bully and corner the market on rare earth.  They failed.  It took a little time, but markets reacted and rare earth prices have plummeted.

My friend from Chicago Ventures Ezra Galston wrote a bit on his blog today about how he views markets at seed.  He likes to find markets that are broken which can be fixed with a startup.  Since there are markets in everything and the costs to start a company keep going down, there are more and more opportunities to use markets to fix things.

The key to solving a problem with a market based solution is to pay very close attention to your supply and demand curves.  Which is which is not often readily apparent.  I have invested in companies that have failed to create a market, and companies that have been able to get them going.

Once a market takes hold, generally there are network effects and the business becomes really sticky.   The customers of the market would have a more difficult life without it and gladly pay a little to use it.

One of the reasons I pay very close attention to Bitcoin/Blockchain is because it might be able to be applied into many situations where markets have trouble transacting.  Having an electronic closed loop could increase trust and transparency, and allow a market to develop.

One danger I see in America these days is people have lost faith in markets.  Much if it is reflected in anger at bankers, but I think Bernie Sanders, Hillary Clinton and other socialist Democrats have zero faith in a free market to solve problems.  They are wrong.  Markets allocate capital and solve problems better than any government program.