Fundamentally Free

This website has, in previous posts, presented a strong voice towards market deregulation but also for a strong attachment towards market fundamentals. Actually, interestingly enough, these two objectives are occasionally considered to be in conflict with each other.

Fundamentally Directed?

These past few years have been fairly vocal over the potential for added regulatory efforts and control of markets. Yet this outlook seems to go against the grain of the idea of a free liberal democracies harnessing the market to empower its economy. So how did this political thematic become so strident?
Well I could propose the following explanation: this political discourse begins over a belief that Price (yes, I am capitalising the word) is driven primarily by fundamentals. In other words, fundamentals such as supply and demand drive price discovery. However, supply and demand are not considered to be the only fundamentals. Other fundamentals such as political sentiment, public interest, national security, environmental concerns are also all considered pertinent in this search for price discovery.

This view over fundamentals as a core driver, however, is at odds with a purist’s view of a free market.

Free Fundamentals

So let’s switch over and see what happens once a more explicit free market outlook comes to the fore.

In a pure ‘free market’, it actually Price that drives fundamentals. Price drives the political reality, price drives the environment and is price that drives national security issues of any nation-state. And Price, itself, is driven by one and only one thing: the matching (or clearing) of a bid and an offer, and nothing else.

(In)Dependent Freedom?

Okay, so hopefully the circular run-around logic will have become apparent here between the two outlooks. But just to digress a bit more here, to take the first outlook diagrammatically in view, then one can use an economist’s famous supply and demand diagrams with price on the vertical axis and the ‘fundamental’ quantity on the horizontal axis. However, if one wants to take a more explicit free market view then one must flip the book so to speak and set price on the horizontal axis and the quantity ‘fundamental up over the vertical axis.

So the debate, therefore, between the two outlooks becomes one of defining the proper independent variable: price or fundamental? Well, maybe the two can meet…

Reaching Equilibrium

I mentioned before the circular logic between the two sides and I’d like to extend this a bit to a more explicit phenomenon. Let’s assume the following: we are in an environment that is termed as a ‘free’ market. Whether things are as free or as unregulated as possible is not really the issue just here, instead we are only deciding to set our opening argument that price is set as the independent variable.

Okay, so we now have price driving the reality of the market but what happens once the price is not being moved uniquely by a desire to match a bid-and-offer (ie to clear a trade) but instead is actually moved by the desire of a bid to merely outbid another contender or an offer to undercut a previous offer. Well, all of a sudden, price itself becomes a fundamental…

But, wait a second, doesn’t that mean that we’ve just flipped over the independent variable over?

Perhaps it is best to view this as a balancing act and one that ultimately settles back towards the pre-eminence of Price in a market agent’s decision matrix. This all brings me back to this website’s goal and ongoing focus: fundamentals do matter but so does Price, indeed, the twine might at times be at odd, except perhaps at a point of equilibrium.

Perhaps, just perhaps, they can meet at a point of competitive equilibrium. Perhaps among waving arms, flashing screens, sweaty brows and pounding hearts, a price is set, a truth is discovered, a fundamental is set. Or, wait, maybe it was the other way around?

So here’s to another year new year at 24. For more insights and more news on different view points and clattering thoughts.

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