What does it mean? Among other things, it means that when the need (the demand) for something arises, the market spontaneously figures out a solution (the supply) without the need for some controlling authority passing orders to get that need met.
Those who address the needs of people are sometimes referred to as entrepreneurs. These are the people who look around for unmet needs and figure out some way of meeting those needs.
The corner bicycle repair shop or the bakery is in a limited sense an entrepreneur. In these cases, the needs are quite evident and obvious, and so are the solutions. People need their bikes fixed and someone who knows how to fix them can go into the bike repair business. Nothing new has to be invented; just that the person has to be enterprising enough to get started and keep the customers satisfied at least as much the competitors do.
And then there are cutting-edge entrepreneurs. These respond to latent demand for some good or service. Latent demand refers to needs that are not even felt as a need until the supply occurs—and then the demand surfaces.
There was really no demand for smart phones until smart phones started showing up in the marketplace; and then everyone and his mother couldn’t live without one. (Amazingly, I am the only person I know who does not use a smart phone.)
Did you ever feel the need to use a micro-blogging platform like Twitter? Perhaps but only after Twitter came into existence. Before that, no one really wanted one.
When demand (latent or explicit) exists, markets figure out a solution. The solution consists of a set of suppliers, a range of goods, and a set of prices.
Who sets the prices? That depends on the market organization. If the market has only one supplier (a monopoly firm), the prices are set by the firm. But in markets that are served by a number of firms which compete with each other, the prices are set by no one and everyone.
Let’s just say that Samsung cannot price its TVs without regard to what competitors like LG and Sony are pricing their TVs. Burger King pays careful attention to what McDonalds’ prices are.
How much fast food, of what kind (the range of goods), will be supplied, and by whom (the sellers), and at what prices—are what the market discovers.
Order emerges without orders.
That is, firms enter or leave the business depending on their own calculations. Firms set their prices as they see fit. Customers decide what to buy and from whom. There’s freedom all around—firms can enter the market or leave, customers freely choose to buy or not buy, etc. In the long run, there are no shortages and there are no surpluses.
That’s the magic of markets.
What motivated this line of thinking? I came across an old email (from 2004) from a follower of Sri Sri Ravi Shankar, or SSRS as he is known around here. Like many others, she (AA for short) wrote that I should enroll in an “Art of Living” course because then I may realize how amazing SSRS is. The signature line in her email read:
~~ “Life is sacred. Celebrate life. Care for others and share whatever you have with those less fortunate than you. Broaden your vision for the whole world belongs to you.”—Sri Sri Ravi Shankar
Here is my reply, for the record.
I think you misread my opinion of SSRS. I do believe that he adds value to the lives of people as demonstrated by the fact that people willingly pay handsomely for what he has to offer. Commercial success is a fairly reliable indicator of value that a person or an institution adds.
As for my taking an AoL course, I will do so only after I am convinced that the course will offer me something that I value. As of now, I have only come across obvious platitudes and generic be-good admonitions that I myself can produce in astounding amounts if I were so motivated.
For instance, take the quote in your signature line. Is there anything there that is not obvious, hackneyed, trite, platitudinous—in short, is there something that a person of average intelligence and moral sense cannot have figured out by the age of 10?
Having said that, I am sure that there are people who need to be told what to me is basic plain common sense and are willing to pay to be told basic truths because they are perhaps too lazy to have pondered these matters themselves. It is what I would call “fast food enlightenment.” You drive up, check out the menu, order “Happy Meal #4,” pay your money, are handed a prepackaged meal, and drive off with it effortlessly.
I don’t think that fast food vendors are evil. They add real value by providing meals for people who are either incapable of preparing a healthier meal or are unable to find the time to do it right. For myself, I like to take the time to cook a decent meal for myself. I have taken the time to consider the world and marvel at it and arrived at my own conclusions that I believe cannot be packaged into simple verities for mass consumption.
Atanu Dey, Ph.D., is an economist. His blog “Atanu Dey on India’s Development” is at deeshaa.org. Connect on twitter @atanudey.