In Market We Trust

The main take away from my Silicon Valley trip is the understanding of “market“. I know, the recent financial crisis can be used as a way to argue the other way, I am still talking about the relative older style of market (like the flea market, and fish market), not the financial innovation stuff.

Hotwire and Priceline

Websites like Hotwire.com and Priceline.com (how I found it) let me think more about how to use the market to allocate resource more efficiently. Without services like Hotwire, hotel suffers from empty rooms, and visitors suffers from high price. They are the bridge to allow those unsold rooms to be evaluated and priced – the price is lower than retail price, which is very likely to be the fair market value of the “unsolde” rooms.

“Market allow any tradable item to be evaluated and priced.”

Rental Contract

Another interesting thing is the rental contract I saw in my friend’s house. When their last lease period is going to expire, the landlord gives them a list of renew price. It is something like this (I mocked up the numbers)

1 month – $1710

2 months – $1700

3 months – $1670

4 months – $1640

5 months – $1610

6 months – $1690 <– Attention! Price raises!

7 months – $1710

8 months – $1720

9 months – $1840

10 months – $1700

11 months – $1640

12 months – $1600

The idea is, it is not the longer you lease, the cheaper it is. It is obvious that the 9 months lease is the most expensive lease. My guess is, it is the time most of the tenant in this area planned to move out (based on the existing contract and prediction), or the season where many graduate are moving in. The price of the house is decided preciously in a bid-offer fashion, not by some ideology (the longer you rent, the cheaper it is)

That is a vivid lesson for me to understand the market.

Market

A market is the PLACE for buyers and sellers to trade.

Its function include pricing – market finds out the fair market value of any tradable item every minute.

The liquidity of the market is important. Liquidity means a seller can always sell something if they are willing to decrease the price a little bit above the fair market value, or the buyer can always buy something if they are willing to offer a little bit higher price than the fair market value.

“The essential characteristic of a liquid market is that there are ready and willing buyers and sellers at all times” – Wikipedia on Market Liquidity.

The market rule is only the price and item – for the same item, it is just the price.

The only way to decrease the price of an item is to increase supply.

The God of Market

It seems I need to spend more time to understand how the God of Market works, and its role in price discovery, and resource allocation.

China is a market economy, but in daily life, it is still not very market driven.

6 thoughts on “In Market We Trust

  1. jqian

    No, China is not really a market economy. China is a policy economy. But on the surface, they want to paint it as a market economy as a disguise.

    The most expensive assets in China’s market is housing and land, which is firmly controlled by the local governments everywhere, and the central government is providing free money to fuel the boom. Trillions of RMB is being pumped into the economy, mostly to fuel housing and land deals, that directly and indirectly feed income to the local governments. A vicious cycle like that is a typical symptom of a policy economy. Well, a policy economy may work for a long while until it finally collapse. When it get to the time to collapse, the end result will be very horrible. Why? policy economy overwrites all the self-adjusting nature of a market economy so that economy lose the capability to self correct.

    When real estate economy collapse, everything else will collapse because this will be a network chain reaction. But we all know that real estate’s bubble will eventually collapse, we just don’t know exactly when.

  2. jqian

    The market idea and concept you learn from USA does not apply to the market in China simply because Chinese market is a faked market economy on the outside but a hidden policy economy on the inside. Having said that, I do admit that on a very local and small scale, there is limited free market element that’s working. But these small sub-sections of free market rely on a vast sections of market that’s not free. Therefore, business potential will be limited. For example, GOOGLE’s business plan wouldn’t work very well in China due to exactly this sort of conflicts. China is having a lot of websites, but they all operate in an environment that is not pro-market. They can compete for some profit, but it’s very very hard for them to innovate like their peers in the US. Until there is big reform in China, Chinese business will forever remain as a follower, not an innovator.

  3. xge

    Yeah, the god of market. But the problem is, we don’t believe in god.

    I’ve seen too many examples of not respecting the law of market in policing making and in people’s reasoning.

    When housing price is too high, we blame developers and try to make their life difficult by limiting loans to them and put a tighter control on land use. The result is fewer developers and fewer housing supply and not surprisingly higher price.

    When train ticket is hard to get, the first thing comes to our mind is to reduce the price.

    When getting a good doctor too hard, our first reaction is to lower the price thus making good doctors even fewer and over prescription even more rampant

    We did all this in the good name of taking care of the poor and ensure justice. It almost like we are king of people who have a big heart but a small brain.

  4. Jian Shuo Wang

    @jqian, although I tend to agree with your description of the current market status of China, I would argue that even in a more like planned economy, the market rules also governs. The conflicts between a planned government and the market law is, the market law eventually governs, leaving the people trying to go against it there, looking really bad.

  5. jqian

    @JS,

    What I was trying to say is that the pure market supply vs. demand mechanism only works partially in China. Until there is a significant reform in the current system, pure market mechanism only has 50% – 60% effectiveness. It faces challenges from the political or policy will of the government. If government wants to suppress some supplies or demands, it can effectively do so for an extended period of time regardless the innate market demand or supply condition. Yes, eventually, the real market needs will have to crush the wills of certain policy makers, but it can be a very time consuming process, often decades. Business owners and investors will probably stay on the pure market side, but the policy makers will often stay on the opposite side. When the political will is too strong, business owner may reach a false impression that market economics doesn’t work in China. And they claim that “China makes everything different”. However, when a policy acts against the market mechanism for too long, the eventual setbacks can be painful. China is a typical case study that for a long period of time, it has been practicing a semi-capitalism, not a real capitalism. I would say that semi capitalism will not work in the long term.

  6. Jian Shuo Wang

    @jqian, fair enough. I would agree. The keep learning for me, is to run my own business in a way more like the market-governed way, not policy governed. Although we cannot change the big environment individually, and immediately (collectively, and given enough time, we can!), we can start to do some little experiment in what we can control, and learn whether it works or not.

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