Friday, July 31, 2009

The Market Will Find A Way

Writing a blog each month is more difficult during the summer because we are out of our normal routines. At least those of us in academia are out of our normal routines. This summer, as I have mentioned, I have been travelling up to the Foundation for Economic Education in New York. The largest headache is going through New York’s airport. The one I travel through is LaGuardia. I have learned that if you plan to go through LaGuardia, go early. If one minor hiccup occurs, that airport will get delayed and backed up quickly.

In addition to worrying about the weather and possible delays it might cause, there is also the bottleneck at security. Flying through the Raleigh-Durham airport isn’t so bad because it’s smaller and has fewer travelers. However, LaGuardia, JFK, Boston, Atlanta, Washington, Denver, etc. have significantly more travelers and were designed before the 9/11 attacks. This makes getting through security at each of these locations a potential nightmare. Everyone is sick of having to take off one’s shoes and of putting your liquids into a quart-sized plastic bag that has to be separated when going through security. The lines tend to be long and move slowly. It is nerve wracking because the plane is on a tight schedule. As a result, you either barely make it to the plane or you get there so early you wait and wait at the airport.

An entrepreneur might look at this frustration and say that there has got to be a better way. People might be willing to pay money to not have to go through the hassle of standing and waiting in the security checkpoint line. The market finds a way. Clear Registered Traveler is a company that negotiated with 20 airports to set up separate security lines. Members would pay a fee and enroll into the company. The company would verify who you are by taking a photo of you, taking your fingerprint and scanning your iris. Thus, when you go to the airport you would go up to a Clear Lane, and zip through to the front of the security line.

Do you think that this sounds like a good idea? Is this worth the use of resources? Luckily there is what is called a market test. This company asks, “What’s Your Time Worth?” If consumers find that it is worth paying the fee to by-pass the line, then the resources are wisely used and will be continued. However, if travelers do not find the service worth it; if they think that the price is too high for the amount of time standing in the “free” line, then the company is wasting resources. When companies waste resources, they are shut down by going out of business. The resources that they use are transferred to other companies and are then used in other combinations so that customers will get more value than the cost paid.

So what has the market test revealed? Clear Lanes are no longer available. As of June 22, 2009, they ran out of money and suspended operations. The resources that they were using were not organized in a preferred arrangement. Consumers did not find the service “worth it.” Instead of bailing out such a company, those resources need to be allocated to other organizations that do satisfy the public. Bankruptcy is an absolutely necessary function of a prosperous society. Without it, we would get stuck in unproductive ventures. It is the ability of entrepreneurs to try, fail and try again that makes the capitalist society the most dynamic and versatile.

We have to remember that the function of an economic system is not about creating jobs. It is about increasing the standard of living for all. We do this by allocating resources to their most highly valued uses. Profits and losses are the signals by which these decisions are made. We like to think of the entrepreneur recognizing consumers’ frustrations. Then by individual effort create a company that satisfies those needs and as a result wealth and riches flow. Sometimes that is exactly how it happens, but we cannot forget that the other side, the losses and bankruptcies that occur from the unproductive arrangements of capital structures, are also necessary. While we should not celebrate the loss of a person’s job and company, we should be thankful that we have a system that self-corrects and transfers resources to their most highly valued use.


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