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The concept of a market
November 17, 2015
The principle that financial markets accurately reflect the underlying value of traded stocks has been widely accepted in the investment world since the 1960s. It is predicated on the assumption that investors make buy or sell decisions based on a rational view: that is, they consider all the relevant information, and markets allocate capital to companies efficiently.
More recently, however, the rational view has been under attack from adherents of behavioural finance who suggest that stock markets do not reflect economic fundamentals as well as people think. More specifically, they maintain, there are instances when stock market valuations can and do make significant and lasting deviations from the companies’ intrinsic value.
Why are we talking about the share market when we operate in the social sector? The answer is simple. We can learn from it.
We hear a lot of talk and words like market economy, deregulation, marketisation etc. and once these were confined only to the corporate word. We would not dare believe they would be talked about in the context of aged care and disability support. Yet, 2015 it is and we hear talk about all these things. There is a view or belief that if one creates the correct environment for a market to develop then one will and when that arises, market forces will take over and things will be OK. Will they?
The issue is compounded when one attempts to understand the characteristics of a market economy. This varies quite considerably but we have tried to look across a multitude of literature and summarise what they seem to imply.
1. There is an element of private ownership. That is, something can be traded and as a consequence someone gets something in exchange for (usually) money.
2. Choice. People are free to produce, sell and purchase goods and services in a free market. Their only constraint is the price they are willing to buy or sell for, and the amount of capital they have.
3. Motive of Self-interest. The market is driven by people trying to sell their goods or services at the highest/best price whilst at the same time paying the least for the goods and services they need. Although the motive is selfish, it works to the benefit of the economy over the long run.
4. Competition. The forces of competitive pressure keeps prices moderate, and ensure that goods and services are provided most efficiently. There must be competition for the market to operate.
5. System of Markets and Prices. The critical element here is access to information. In an efficient market, buyers and sellers have equal access, and the same information upon which to base their decisions. Prices vary depending on the laws of supply and demand.
6. Limited Government. The role of government is simply to ensure that the markets are open and working. It also makes sure that everyone does have equal access to the markets.
The above are only a summary of the generally accepted views about the market economy. For those of us in the social sector, we tend to see a hybrid market model which has some elements, but not all. If the market for example for the NDIS is to work (be effective), there will need to be real information, choice and competition. The issue is that they all (and other things) need to be there for it to occur. We hear lots of talk about the shift in funding from the organisation to the individual which is laudable and should lead to greater choice. However, it cannot operate in isolation. For example, the change in itself provides the opportunity for choice to arise but only if there is competition. Government (in the case of the NDIS) sets and controls the prices so they don’t depend entirely on supply and demand. Are people adequately informed and does everyone have equal access to it?
Certainly it is too early to tell and judge but what is known is that we are now in an era where we in the social sector can no longer afford to believe that the ‘’market talk’’ isn’t about us.