The sharing economy
A familiar complaint is that free markets foster economic inequality. Close examination, though, reveals this complaint to be grossly oversimplified.
Consider, for example, how arbitrage and speculation decrease inequality. Indeed, the reduction in inequality by these market forces is so significant that we might appropriately call the market economy the “sharing economy.”
Suppose you're strolling down Broadway in New York City. You notice at Times Square that apples are selling for $2 apiece. A few minutes later, upon reaching Herald Square, you notice identical apples selling for $1 apiece.
You buy several boxes of apples in Herald Square and haul them up to Times Square. Your aim is to profit by buying apples at a low price and selling them at a higher price.
Your buying apples in Herald Square causes the price of apples there to rise, and your selling apples in Times Square causes the price of apples there to fall. You — and other apple arbitrageurs — will continue to buy apples in Herald Square and haul them to Times Square for sale until the price of apples in both places is pretty much the same.
Your profit-seeking actions enable people in Times Square to share in the relative good fortune of people in Herald Square — that relative good fortune being an initially higher supply of apples at Herald Square than at Times Square. Looked at differently, your profit-seeking actions oblige people in Herald Square to shoulder some of the relative misfortune of people in Times Square — that relative misfortune being an initially lower supply of apples in Times Square.
In other words, your profit-seeking actions move a valuable good from where it is relatively more abundant to where it is relatively less abundant, eventually equalizing its abundance.
Now suppose that before any of this arbitrage occurs, a neighborhood association at Times Square, upon hearing rumors that apples are selling in Herald Square for a mere $1, enacts legislation to force the price of apples in Times Square down from $2 to $1 apiece. Although this neighborhood association means well, what is the consequence of its new rule?
Answer: No one bothers to haul apples from Herald Square up to Times Square. (Buying for $1 to sell for no more than $1 yields no profits.) This legislation prevents the market from performing its sharing function.
Legislation meant to help people in Times Square ends up benefiting only the folks down at Herald Square by erasing your and other arbitrageurs' incentives to haul apples from Herald Square to Times Square. It harms the people in Times Square by ensuring that none of the relatively more abundant supplies of apples in Herald Square make it up their way to Times Square.
The same process operates over time. When speculators buy today hoping to sell tomorrow at higher prices, they move goods across time; goods are moved from a time when they are relatively more abundant to a time when these goods are relatively less abundant. Successful speculation obliges people in times of great abundance to share their good fortune with people existing in times of great scarcity.
Markets spread burdens and benefits more equally across space and time. Beautiful, isn't' it?!
Donald J. Boudreaux is a professor of economics and Getchell Chair at George Mason University in Fairfax, Va. His column appears twice monthly.