The Free Market Principle of "High Bid Wins"
This was posted yesterday.
I'm slooooowly chipping away at Inherit the Earth.
1. A piece of land could be used for a farm or housing
2. The owner acts as an agent for eaters or dwellers
3. The owner leases the land to whoever bids highest (e.g. the farmer).
4. The farmer increases the supply of food, therefore reduces the cost of food.The farmer's role seems paradoxical - paying the highest price to reduce the costs for others. I think I've missed a step in my thinking - can you please clarify.
I wrote Inherit the Earth in 1987. It is posted here.
I used the example of a farmer because most people find it easier to understand the process of resource allocation when it is a piece of land. But it is imperative that the student not regard land as a unique asset in the market process. It is representative of a scarce economic resource, but it is not priced uniquely.
The first point is this: the scarce resource of land can be put to multiple uses. These uses are in competition with each other. That is to say, consumers who want a particular consumer good that uses land bid against each other so that the owner of the resource decides to use it in a way that pleases a particular consumer. There is an auction process among consumers to gain the benefits produced by a particular resource.
The second point is that the owner acts as an agent, either for eaters or dwellers. It can't be both at the same time. He acts as an economic agent. But he also acts in his own self-interest. This is the heart of the market process: everyone acts in his personal self-interest.
Third, the owner decides to lease the land to whoever bids the highest. In this case, it is the farmer.
Fourth, the farmer increases the supply of food, and this reduces the cost of food. Again, this is the heart of the market process.
The market process is a gigantic auction. It is governed by the supreme rule of every auction: high bid wins. I discuss this in the Scholar's Edition of Christian Economics. Read it here. What is true of the farmer is equally true of every producer in the market process. Every producer must bid the highest price in order to gain permanent or temporary control over a scarce economic resource. This maximizes the value for the owner of the resource. When a producer gains control over this resource, he must now be the highest bidder to any consumer whom he expects to purchase the finished product. The customer wants a good deal. He is the owner of money. In order to persuade him to part with his money, which is the most marketable resource, producers must bid the highest price for this money. How does the seller offer the highest bid? By offering the lowest money price per unit. Hence, we see the following sales pitches: "Have I got a deal for you!" "I can get it for you wholesale!" "Eliminate the middleman!" What is a low bid for a seller is a high bid for a buyer: more bang for his buck. In short, the principle of high bid wins governs every market transaction. The free market competitive system of open entry: the right to bid. This favors the customer. That is because he is in possession of the most marketable commodity: money. When you understand the principle of high bid wins, and you apply it systematically to every market transaction, you will understand the basics of the market process. All you need now is a clear understanding of this principle: supply and demand. In teaching economics, I probably should use images of a pair of parrots. Each parrot sits on a student's shoulder. One parrot keeps saying "supply and demand." The other keeps saying "high bid wins." These six words are the keys to understanding the market process. If you really understand them, all you need is the final rule: "There is no such thing as a free lunch."