The idols of the marketplace

When Francis Bacon was laying out the foundations for experimental science 400 years ago, he listed out a series of confusions and mistakes that people would most likely encounter. Curiously, the “marketplace” was the most troublesome for him, even though at that time the free market and its ideology had not dominated the zeitgeist as it does today. Back then, markets were functional rather than obvious things, but even then, he warned about being enraptured by the “idols of the marketplace”, asking the seemingly satirical question at the time “If, through the world, the markets ran itself, what was the need for kings?”

What we do know about the markets today is that they are not efficient, and that they do not handle the majority of the world’s economic activity because only a limited category of goods can be traded impersonally; for everything else you need relationships of trust, for which price no longer does the decisive work. The current pandemic has shown us that a depression or great recession explicitly shows that markets do not look after people, and that we do need regulators and kings to expand and instill the ideas of justice and fairness and hope and mercy. Consequently, the discussion has moved towards all the ways that the government can revive asset and labor markets. But it is important to remember, that especially in the case of cities like Dubai, we make the markets, not the other way around. There was no freehold, and then through liberalization, a new market was created, which two decades later has come to dominate the economy. Markets are made by people, but they don’t do what each of us individually choose. Even the biggest actor in the most thinly traded of markets must usually deal with outcomes that are not under their control. This thing that we create acts back upon each of us as an independent force. And yet this force can, and has been tempered, as we introduce new pieces of regulation in order to make the market operating system more stable. It is these incentives that then propel various sectors of the economy forward, even as market forces realign in the background to exert pressure on variables anew. The recent dollar weakness (an output and a function of both government stimulus measures, as well as market forces reacting to these new variables), suggests for example that the outlook for real estate assets in Dubai have brightened, and that despite the gloom and doom being expressed by analysts, there appears to be cause for optimism. This optimism is itself a function of the intervention that has been undertaken by international governments, that impact money flows, in addition to the stimulus measures that have been and will be offered by the UAE. The critical point to note here is that, despite the narrative, asset price signals (that indicate herd behavior, not some collective intelligence), are best observed through the combination of judicious intervention by authorities that seek to assuage parts of the economy so as to get the wheels of commerce moving smoothly again. This is not new for Dubai; having created markets where none existed before, the authorities are well aware of the stimulus measures needed for the large asset markets, as well as the nurturing steps needed to incubate new ones. Liquidity is the key, and its torrent then guides human behavior such that the incentives of land and labor, capital and enterprise align. Following the lockdown, the steps taken have so far yielded encouraging results, but we know these are early days, and that the negative impact of the pandemic has not fully worked its way through the economy. This is true for the world economy at large, despite the somewhat stupid exuberance shown in some of the equity markets in some of these countries. 

Which brings us back to Francis Bacon. He thought it would be possible to take out the “magical thinking” out of the wonders of the market place, and to only see the clear, factual, cause and effect between things. Most of the time, markets are not visible, and whilst we’re in it , we can’t see it, only witnessing the giant swirl of prices formed by buyers and sellers. If the current pandemic has shown us anything, it is that markets have a function, but that we need to put markets back towards functionality, rather than dominating forces. Markets are silver and gold, the work of men’s hands. They have mouths but they speak not; they have eyes but they see not.