I am reading Pricing on Purpose (by Ronald J. Baker) which, even in the 60 pages I've read so far, has given me some great insights. In particular about the extent to which profit is a function of risk. I'd never thought of it this way before but once I contemplated it, it seemed completely natural.
The book is also bringing me face to face with the underpinnings of free market economy thought going right back to Adam Smiths Theory of Moral Sentiments. This from Rose & Milton Freedman is a typical example:
Adam Smith's flash of genius was his recognition that the prices that emerged from voluntary transactions between buyers & sellers - for short, in a free mark - could coordinate the activity of millions of people, each seeking his own interest, in such a way as to make everyone better off. It was a startling idea then, and it remains on today, that economic order can emerge as the unintended consequence of the actions of many people, each seeking his own interest. The price system works so well, so efficiently, that we are not aware of it most of the time. We never realise how well it functions until it is prevented from functioning, and even then we seldom recognise the source of the trouble. Prices perform three functions in organising economic activity: first they transmit information; second, they provide an incentive to adapt those methods of production that are least costly and thereby use available resources for the most highly valued purposes; third, they determine who gets how much of the product - the distribution of income. These three functions are closely interconnected." -- Rose & Milton Friedman, Free to Choose.
This line of thinking really resonates with me but I have a number of problems:
- I cannot conceive of how we get to a free market. Governments have dabbled with free market economics but only in a limited sense. These markets are not free (for example patents, price controls, and so on) and so are not a fair test of how a free market would actually operate.
- The fluidity of value placed on activities by the marketplace is poorly suited to humans who generally find it difficult to turn on a pivot. The market can (and does) say to workers "you are no longer efficient, necessary, or valuable." To a 55 year old worker saying "start again finding some value for yourself" is hard.
- We don't cost everything. Businesses can consume many things without cost that create significant 2nd & 3rd order effects that are not priced in.
- We don't know how to price some things. What is the value of a human life? Some of our un-free market mechanics appear to be attempts not to have to answer that question (the reality pokes through sometimes, e.g. the use of expensive new drugs that maybe extend quality of life to dying patients).
I don't make any claims to economic understanding so if any economists want to chip in with good starting points on tackling these problems.