Internal politics and the monetary policy of the central bank. In contrast, the German housing market is dominated by leasing, which reduces political tolerance and economic risks to rising housing prices. And so on.

4. Like property rights, the market is constantly changing and developing for similar reasons.

Today, market changes are often seen as driven by technological changes. This may not be so obvious in the 18th century, and of course Smith did not fully realize this. Take the ability to write and communicate as an example: Thousands of years ago, great apes could draw on the sand with their hands or sticks, or draw marks on stones; then there appeared stylus and ink that could be used on papyrus, and then again. It includes quill pens, pencils, pens, ballpoint pens, typewriters, desktop printers, keyboards, smart input methods, and automatic voice recognition. The self-sufficiency of writing instruments is gradually succumbing to the market, competition, specialization, substantial cost reduction, shortening of product life cycles and general availability. However, in Smith’s time, the speed of change was much slower. Market changes and development were in response to broader economic conditions, seasonal factors, government intervention, consumer or producer pressure, competition, taste, fashion, and A series of issues such as social norms.

5. The market needs infrastructure.

In ancient Greece, the market has developed into a designated public area. The square in ancient Rome was a bazaar that developed civil, legal and religious functions; other bazaars also appeared in the city, where meat, fruits, vegetables and wine can be bought and sold. As Smith reminded us in the first volume of The Wealth of Nations, the market needs a certain size to support growth, specialization, and innovation. In modern times, this means requirements for infrastructure, especially for energy, communications and transportation. Some of these projects can be financed by charging users, as Smith suggested; others are too large in scale, complexity, or risk, and may need to be constructed through cooperation or assistance from state funds. Either way, today’s market usually requires the active cooperation of the state, or at least the presence and passive support of the state, to ensure the rights, accessibility, and interconnectivity required for market success.

6. The operation of the market is not independent of the psychological state of market participants.

The market not only shapes our home, our property, and the music we listen to, but it also shapes our expectations of others, our etiquette, and our ability to trust; these things in turn shape the market. The market is not only an object to be studied by experts to prevent destruction, it is also not only a neutral tool of public policy, and people who trade in the market are not economic machines that operate purely in accordance with economic incentives. On the contrary, the market is subject to “animal spirits”, that is, when humans face unknown confidence or pessimism, humansThe instinct to be moved by stories and rhetoric, and human response to injustice or corruption.

In general, the economic value of the market not only nurtured social value and moral value, but also promoted social value and moral value. It was Smith who made us notice this. What the market constructs is not a purely natural order, but a created and constructed order—an order that can influence and shape its participants. Markets exist because they have economic value to those who participate in them, and because they almost always bring wider spillover benefits.

Limitations shown by the market

Smith’s complete market view is in sharp contrast with the eulogizing that the market is always the smartest or most beneficial, not to mention referring to the one-size-fits-all market template proposed by the financial market.

Whether it is the “efficient market hypothesis” or the criticism of Smith as a so-called “neoliberal”, they are far from Smith’s actual thinking. It can be further said that Smith’s point of view can give us a different and deeper understanding of the problems presented by the 2008 economic crisis. And it can be said that if the leader understands and accepts Smith’s true ideas, he can at least avoid or alleviate the impact of some crises. Because one of the main reasons for the economic crisis is that asset markets led by credit and housing markets did not function as expected by almost all economists and regulators. These people are controlled by an economic ideology, subject to rigid professionalism, and have no attention or understanding of what is happening in reality.

As we pointed out above, few markets are the same or operate in exactly the same way. However, at least for key types of markets, the basic analysis provided by Smith has been surprisingly successful. Approximately 75% of U.S. private sector expenditures, that is, gross domestic product minus government expenditures, is spent on normal consumer goods, namely nondurable goods and services, which is sometimes referred to as the “haircut and hamburger” market. These products cannot be resold, but are manufactured, sold, and consumed, and then new products are manufactured, sold, and consumed. This process is endlessly repeated. Once consumed, these products disappear from the market. For these products, buyers generally have fixed or natural end-uses, such as traveling, eating meals, and vacationing, so they generally do not switch roles to become sellers because of price changes. The sales mechanism of these products is generally to set a single sales price like a supermarket, rather than the bid-ask spread or other possible price mechanisms seen at the airport foreign exchange kiosks. In general, these markets operate based on Smith’s so-called “invisible hand” model. Both supply and demand tend to be in a competitive equilibrium, and they operate very well.

Another view of these markets is that they exhibit the so-called “wisdom of the crowd”. They are able to do this because they meet four conditions at the same time: the people involved are diversified in obtaining information and expressing opinions; people are independent, and everyone is practicing Practice their own opinions rather than listen to the opinions of others; people are scattered, so they can be more specialized or use local knowledge; there is a means, such as a market mechanism, to pool their private judgments or choices to form a collective decision.

Smith is very interested in market dynamics. He can see that not all markets operate in the same way, and he is careful to seek explanations for their differences. In particular, he specifically pointed out the contradictory effect of the tendency of mankind to worship the rich and powerful. He recognizes that this is the core driving force of competitive behavior and people’s pursuit of progress; he also believes that wealth and greatness are deceptive, and they are traps and illusions that can never make human beings truly happy.

Smith pointed out that these people have missed important things in their lives by pursuing “frivolity and dazzling gadgets”, which shows that he realizes that the market can be driven by human passion and calculation. Today, we can call some of these commodities “Veblen commodities”. Named after the great Norwegian-American economist Tosdan Veblen, referring to commodities used for “conspicuous consumption”. When the price rises, the demand for this commodity does not decrease as predicted by the standard theory. On the contrary, its demand will increase because consumers regard the price increase as a signal of relative scarcity or a status symbol, so the price increase will Make this product more popular. The market results tend to be orderly, just like the common jewelry and luxury car markets. But the history of bubbles, fanaticism, and collapse also proves that such markets are not always orderly, and they can also fluctuate.

Asset markets often have characteristics similar to Veblen types. Of course, not all capital markets are the same, but they have common characteristics. They are very different from non-durable goods markets such as “haircuts and hamburgers.” In asset markets, such as real estate, credit, derivatives, and other securities markets, products will not spoil, they are traded and re-traded. Especially for securities, the buyer and seller are generally not fixed, and their identities will be changed according to the price. The market mechanism is generally a bidding model, rather than a single pricing model of “buy or give up”. Therefore, the function of the asset market is completely different from that of the product market.

In the asset market, there are both special channels and general channels, which link asset price increases, credit growth, and profitability. This makes asset markets inherently unstable, and this instability can lead to dangerous cycles from self-reinforcing prosperity to depression, which in turn can cause terrible harm to the wider economy. This is exactly what happened when the economy collapsed in 2008. It was a “balance sheet” recession—not the more frequent and familiar one, which is determined by the entire business cycle.

Jesse Norman

Member of British Parliament, Doctor of Philosophy and Honorary Academician of the University of London, Director of the National Institute of Economics and Social Studies, Visiting Scholar of All Souls College, Oxford University, once worked at Barclays Bank. Author of “Edmund Burke: The Godfather of Modern Conservative Politics” and other books.