I propose a problem for anyone who likes the market and thinks it’s good at solving problems, which includes me.
Since there’s a “What is Wealth?” thread, I should probably define what I mean by the titular statement:
By ‘wealth’, I mean whatever money represents. In particular, I mean the accumulation of money and the power it affords.
By ‘market’, I mean an economic network for the exchange of goods and services, using money as a medium.
By ‘player’, I mean an individual in the market, i.e. someone who exchanges goods and services.
Basically, there seems to be a problem whereby the accumulation of wealth makes people’s choices about what to prioritize less and less dictated by value, and therefor less likely to make the market efficient. It is fairly obvious that, as a person’s wealth increases, their valuation of money decreases. For instance, it would cost significantly more to have a rich person open a door for you than a poor person. And a rich person would pay more for the same services, being more likely, for instance, to buy a glass of wine at an expensive restaurant, though the bottle would go for significantly less at a liquor store. The problem results because a market requires scarcity to price things effectively. In the case of large accumulations of wealth, there is less scarcity to encourage efficient pricing, and so they are less efficient market players.
The problem can be addressed in a couple ways.
-We could deny that the pricing becomes inefficient, and say that because these people are wealthy, their comfort is actually more valuable, so when, for instance, they buy a four dollar soda, it is actually worth that much to them to have a drink of soda. However, this only works if those who are wealthy are people who earned their wealth (i.e. did not inherit or win it), which is not the case in any real market. Additionally, the lack of scarcity still seems to be a theoretical problem, which this reponse doesn’t address.
-Instead, we could accept that this criticism is accurate, but maintain that the market is still efficient for other reasons. The reason could be that on average, the influence of the very rich cancels out. That would make sense if the actions of wealthy people are truly not in line with value at all, because then their actions would be random; even if their actions weren’t entirely random, it is plausible that where they diverge from random, they do so towards real value. However, this is probably false, and at best unverified. There’s no reason that wealthy people’s decisions couldn’t trend towards something frivolous, and looking at where the super rich spend their money, it seems to be the case.
Another explanation is that there simply aren’t enough, or wealthy enough, rich people to influence the market on a large scale, and the inefficient influence they have is overwhelmed by the efficient influence of the majority of players. This again seems to be an empirical matter, and for similar reasons to the above (the frivolity of purchasing in the US), I think it is probably false.
In any event, both these reasons are contingent, and thus subject to varying effectiveness. If wealth becomes highly concentrated, both forces to which I appealed (cancellation over all rich people, and a small total rich influence on the market) have less of an effect. So even if they are true now, the criticism is a continuing worry, and something that needs to be monitored to ensure continued market efficiency.