 Hey Kevin here! Welcome back to Invisible Hands, the series that takes the mystery out of economics. Hey Fiona, here's a riddle. Okay. It's something that everyone participates in every day, but few people really understand. We get almost everything we need from it, but it's not a thing or a place. Can you guess what it is? Um, ghosts? No, guess again. I know! You're talking about markets! Ah, hi Professor. Hold on, markets? You're telling me that markets aren't a place. Well, okay, markets are also a place, but in economics, they're a process. That's confusing. Yeah, kind of is. Uh, Professor, help us out here. Uh, alright. Markets of the name we use to describe the complex network of voluntary exchanges between individuals in an economy. Every time you buy, sell or trade with someone else, exchanging value for value, you're participating in the market. So I can be part of the market even if I never leave the house? Yes, but there's a lot more to markets than just buying and selling. Markets not only help increase the wealth in a society, they also transmit tons of important information about what people value, and they even promote trust and cooperation. Really? Markets sound super. Supermarkets. It's like a, it's like a pun. Come on. No? No. Anyway, in order to understand how markets work, you first gotta understand a few things about them. That's right, five things to be exact. Voluntary exchange, gains from trade, specialization, division of labor, and emergent order. That sounds like a lot, again. Don't worry, it's all related, and once you understand the basics, everything will make sense. Let's start with voluntary exchange. That's really just another way of saying trade, which we define as the act of freely and willingly exchanging goods or services. No money. Yeah, or money in return. Well, that's simple enough, but why does it matter if trade is voluntary? Remember how we talked about subjective value? Oh geez, how could I forget? Voluntary exchange matters because it's the only way we know how much the individual people involved actually value the goods or services they're trying to get. What do you mean? Well, as long as people are free to say yes or no based on their own preferences, we know that when two people agree to trade with each other, both parties expect to benefit from the exchange. Otherwise, they wouldn't make the deal in the first place. Yeah. Oh, duh. So when people agree to trade, you're saying that they choose to trade because both sides believe it will make them better off. That's exactly right. Trade moves resources from folks who value them less to those who value them more. So even when no goods or services are being produced, people can actually get wealthier just by trading with each other. Yeah, like when you bought that pickle and pineapple pizza, you got the weird dinner that you wanted and the pizzeria got the money that they wanted. It's a win-win. Yes, that's true for individuals and it's true for societies as a whole. Because society is made up of individuals, right? Yes, but it gets even better. Trade encourages people to build trust and cooperate with each other. Some economists consider voluntary exchange to be the cornerstone of civil society. There's even evidence that trade between nations helps to prevent war. That's what you meant by gains from trade. Absolutely. Cool. But what happens if we force people to trade with each other? We'll talk about this more in another video, but unfortunately we don't get all the benefits I just mentioned. Why not? If we force people to trade with each other, their real values are being ignored. Forced exchange can actually make people worse off. Imagine how you'd feel if there was a new rule that said you had to buy the professor's paintings. Oh, gross. My paintings are wonderful and that rule would benefit me greatly. Yeah, but would Fiona be any better off? No. When we force people to buy goods or services they don't want or prevent them from getting the things they do, we're actually making people poorer. It also means we're not really cooperating with each other or building trust. When people try to plan or control the market, they're doing so at the expense of individual differences. And that's really important. I can see that. I certainly don't want anybody telling me what I'm supposed to like. And there's even more to it than that. You see, we all have different skills, talents, and interests as individuals. We're all good at some things and not so good at doing other stuff. Like how I'm great at math, but really bad at cooking. And remembering to water the plants. Exactly. Or like how the professor is good at economics, but terrible at painting. Hey, I don't really have much control of my arms here. But all this diversity means that we're all way better off if we specialize in the things we're good at and trade with people who are good at the stuff we can't do. That's right. With specialization and cooperation through trade, we can create greater wealth than we can ever hope to achieve working in isolation. And the bigger the group we can trade with, the greater the wealth we can generate for all. So you're saying I should get a job doing math, but hire a chef? As someone who has eaten your cooking. Please. Aw. Don't feel bad. Kevin can't do math. I've graded his papers. What's really important to understand here is that the division of labor makes us all wealthier and better off. It also allows us to create significantly more complex and complicated things. Like something as simple as a peanut butter and jelly sandwich, it would take tons of people with different skills to grind the flour, grow the fruit, pick the peanuts, and actually make all the stuff that goes into it. Yes. When people specialize in doing the tests they're best at and trade with other people for all the things they can't produce as efficiently, our society ends up with increasingly better and more valuable goods and services made at increasingly lower costs. We all win. Plus remember more trade means more trust and cooperation with other people and That means more friends. It sure does. Yeah. A lot of people think that markets are just about competition. And while competition is always a reality in a world where resources are scarce and wants are unlimited, free markets are actually enormous networks of people cooperating with each other voluntarily. How so? In an important sense, competition and cooperation are two sides of the same coin. In the market, people compete over ways to serve others in order to be more successful as entrepreneurs, business owners, employees. The way to personal success in the market comes from finding out a create value for other people. So competition in a free market economy is actually competition over who can serve other people the best. That's right. But you know what's even more amazing? Endless salad and breadsticks? Well, yeah. But no, all of this happens without anyone actually planning, designing, or controlling the actions of people participating in the market. And yet order spontaneously emerges all the same. Markets form, goods and services are produced, people get stuff they want and need in exchange for the things or money they value less. And it all happens because of individuals making their own plans and acting for their own self-interest. It's a logical order that emerges from individual human action and isn't due to any kind of deliberate planning or design. That is pretty incredible. It makes sense though. The same thing happens with language, right? Yeah, there's no one person or even a group of people in charge of all human language. And yet over thousands of years, individual people working in their own interests created a complex and highly structured communication system that works pretty good. Pretty well. Oh, yeah. Pretty well. I guess you can also see emergent order in all other aspects of culture, like art, music, gating customs, even the internet. Definitely. And for each of these examples, there's no mastermind at all. It's a common misconception that for order to exist in human society, there has to be a central planner making decisions for everybody. In fact, history shows that attempts to centrally plan society result in chaos. Yeah, one key insight from the economist F.A. Hayek is that complex social orders are emergent and actually can't be centrally designed or controlled. He referred to the notion that the economy must be centrally planned as the fatal conceit. Fatal? It's just a metaphor. But ideas do have consequences. Understanding the spontaneous order that comes from voluntary exchange is one of the most important insights we can learn from the economic way of thinking. Yeah, adopting the right ideas can help us create a society that works well for everyone. You know, knowing that all these amazing things can happen when individuals are free to create, dream, and make stuff on their own, and cooperate with other people to make a better world. It really is kind of beautiful. Yeah, it is. I'd cry, but I don't have any tear ducts. So what's your dream? What's the one thing you want to be known for? And do you understand the market process better after watching this video? If you have questions or just want to know more, check out courses.feed.org for tons of additional information. And we'll see you next time.