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The Real, the Ideal, and the Deal

March 13, 2020
The value — and virtue — of a free market is its functionality, not its perfection.

The supermarket business is tough. After the fixed costs (real estate, labor, maintenance) there are operating costs for buying all the fresh and packaged foods that are the stock in trade. The margin for income is sometimes no more than pennies, but the mark-up cannot be too much or the customers will walk away. The strategy has to be to get numerous customers to buy more, not to gouge one or two buyers of a few items. It's imperfect, but it can work.

The supermarket is a "market," and the goal is to draw as many individuals as possible into your location, to exchange cash for goods and services. Customers keep the market thriving— but the suppliers keep the market successful. If suppliers will not work with the market, the market has to find suitable replacements — or, eventually, different customers.

The market where I shop has five shelves about two-feet wide just to stock Oreos. The Oreo people know there are customers ready to buy Oreos in different sizes, with different volumes of cream filling, different frosted coatings — and especially a strangely contrived series of differently flavored fillings. (Unaccountably, Oreo has not picked up my idea for Nutella filling. I am sure that I'm right on this, and that they'll realize it eventually.)

It is not just Oreos.  Other brands have adopted the convention of constantly altering their products to coerce shoppers to buy some "new" chips or soft drink or Pop-Tarts they do not need but cannot resist. Presumably, but not obviously, there are other things that could fill that shelf space, but the supermarket manager has not identified something that will be a more profitable than the Oreos — or that will be worth the trade-off of denying the space to the Oreo supplier. The manager agrees that the Oreos need that much real estate.

The Oreo supplier needs the supermarket but cannot allow itself to be overlooked. It is building, curating, and maintaining a connection with shoppers, so that it will "know" what they want as it continues to define the meaning and value of Oreos to those customers. I may wish they would adopt my flavor suggestion, but I cannot force them to give me the cookie I want. I can choose to buy what they offer, or not.

The point of all this is that markets exist as physical spaces and functional concepts. In each case, there are roles to be filled by customers (buyers), suppliers (manufacturers, fabricators, distributors, etc.), and the manager or regulator: each one has a certain advantage to be pursued in the commercial setting, but each one risks much by spurning the conventions of the market and exceeding its authority or privilege. And each has a responsibility to maintain the effectiveness and reliability of the market.

We have seen this borne out in recent weeks with the "Phase One" trade agreement between the U.S. and China: Chinese manufacturers and regulators have long exploited a production-cost advantage over manufacturers elsewhere in the world, and especially the trade terms made available to everyone by regulators around the world who have prioritized free-trade objectives over the real concerns of labor, environmentalists, product designers, patent holders, and a growing list of others punished by the Chinese indifference to fair trade principles.

The U.S. decision to implement tariffs in 2018 disrupted both the actual global market and the conceptual free market. For now, the agreement seems to have reestablished everyone's (customers, suppliers, regulators) commitment to observing a proper role and thereby uphold the market's efficacy.

The U.S. agreed to cut in half $120 billion in tariffs on Chinese goods by half, and China agreed to raise its purchase of U.S. goods and services by $200 billion over the next two years. The problem has not been solved because significant details have not been addressed, but the value (and virtue) of a free market is its functionality, not its perfection.