I am a proponent of free markets for the things that markets are good at. Markets are great at pricing things whose future attributes are relatively predictable by the market players, and that don’t require a decision-making time horizon greater than the market trade horizon. For example, markets are great at pricing stocks, because companies are ongoing entities and the market can judge performance over time (both past and possible future) to do the pricing. Furthermore, it’s not critical to society (or wasn’t prior to the current mess!) that any one company continue to exist.

When it comes to something like oil, however, I believe markets are a really bad mechanism. The time horizon for market pricing is far, far shorter than the lifespan of the world’s oil supply. So pricing becomes based at best on marginal cost to produce, rather than on anything relative to the actual value to society. For example, according to the book “The Omnivore’s Dilemma,” about 1/3 of the world’s population only gets fed because we have genetically modified corn that requires special petroleum-based fertilizer. I would suggest that the market price of oil (to the extent that it’s a market and not simply OPEC’s arbitrarily-set price) doesn’t include any component that has to do with the future of the world’s food supply. Most (all?) market players just don’t know enough about the full supply chain of which oil is a part to price it properly.

This, in my mind, is where Government comes in. I consider the role of government to adjust the playing field so prices and practices result in what’s best for overall society long-term. Government is the only entity that can change things around to align the individual incentives (“how do I get rich?”) with the community incentives (“how do we do what’s best for us as a society?”)

Sadly, I’m not sure there’s anyone in Government who thinks that way. As far as I can tell, most politicians in Congress believe their job is to grab as much of the common pie as possible for their constituents, rather than representing their constituents in determining how to spend our community-wide fund on projects to benefit the entire community.

What problems are markets the answer to?

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