Brian Gongol
One of the biggest misunderstandings about market thinking is the common misconception that supply and demand are forces that evolve in a vacuum. All too often, people perceive that the supply curve and demand curve emerge spontaneously from the ether. Though they do arise organically from the natural order, supply and demand emerge from human behaviors. This means that we have to take human thinking into account whenever we consider market behavior.
The failure to think of supply and demand functions as human patterns leads to critical errors by both market advocates and market opponents:
The Market Advocate Failure
Markets are incredibly powerful tools. They more efficiently distribute more well-being to more people than any other economic system ever has. They can be phenomenal predictive tools. They are profoundly effective at signaling what people want and need and at rewarding the people who supply those things. However, even market advocates need to remember that market outcomes are not always good. They may usually be good, and they may be good more often than any other set of economic outcomes. But because they result from human thoughts and behaviors, they are still subject to shortcomings in human thinking. Market advocates must remember that sometimes improvements can be made to market outcomes.
Example: There has always been a market for health care. However, it was not until a great polio epidemic that Jonas Salk got the funding develop a vaccine against polio. Perhaps the market had not called for a vaccine prior to that time, and perhaps without a major fundraising campaign by the March of Dimes, not enough funding would have been availble for the research. But that does not mean that the absence of a vaccine was a good outcome. The use of a national educational and fundraising campaign fundamentally altered the existing supply and demand functions, and the result was much more "good" than had no vaccine for polio been found.
The Market Opponent Failure
Market opponents are most often guilty of thinking that government intervention is the only way to redeem market shortcomings. The market opponents' habit of clamoring for government regulation, intervention, and taxation at every turn ignores the fact that many market failures can be easily resolved through education -- and the fact that government intervention can make bad market outcomes even worse.
Example: Restaurants can improve the quality of life in a community. Suppose, though, that for whatever reason, a town has Italian and Chinese restaurants, but lacks any Mexican restaurants. This could be viewed as a market failure -- surely some residents would be happier if they had close access to a Mexican restaurant, and it's hard to imagine anyone being worse off because a Mexican restaurant had been opened. But that hardly means that the city government should intervene to subsidize the opening of a Mexican restaurant, or to tax the Italian and Chinese restaurants in order to "level the playing field" in order to artificially alter the supply or demand curves for Mexican food. (The example may sound absurd, but in a parallel, governments perpetually interfere with the supply and demand curves for entertainment -- whether by subsidizing public broadcasters, regulating the content of television and radio programming, or specifying the national origins of what programming is aired.)
Human Patterns Require Human Thinking
Both market advocates and market opponents have to remember that supply and demand are set by the tastes, preferences, and choices of many different people, and that sometimes those choices are not necessarily "good." Knowing that those choices can sometimes be improved upon does not, however, mean that the only way to resolve them is to allow government to interfere with them. Humans are capable of learning, and the process of educating both those who set the supply curve and those who set the demand curve can improve upon some outcomes.