MATT LEVINE: This, my friends, is how the market works. Now pay attention ...
'They provide incentives for very smart people to put a lot of time and effort and creativity into making prices correct, because correct prices are a valuable social good, and the people who make them correct can therefore make a lot of money'
Every month, the U.S. Department of Agriculture puts out a report that says how many soybeans there are. If there are more soybeans than people thought, soybeans will be worth less than people thought, and vice versa, because of supply and demand. If everyone thought that there were, like, 600 soybeans, and the USDA reports that there are in fact 500 soybeans, then the price of a soybean will rise: If it was $100 a minute before the report, it might be $110 a minute after. (I am simplifying here—these are not the actual prices or quantities of soybeans, and the report is more complicated than this—but who cares.)
This is good. At the new higher price, soybean farmers will want to grow more soybeans in order to make more money, and soybean users will cut back on their soybean use—switching to lima beans, say—to save money. The price signal conveyed by financial markets will direct resources toward their best use, and will make the world more efficient. And so the people who cre...
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.
Subscribe now to unlock this article.
Support BusinessLIVE’s award-winning journalism for R129 per month (digital access only).
There’s never been a more important time to support independent journalism in SA. Our subscription packages now offer an ad-free experience for readers.
Cancel anytime.
Questions? Email helpdesk@businesslive.co.za or call 0860 52 52 00. Got a subscription voucher? Redeem it now.