The discrete nature of humans makes the individual the center of all market activity. They decide what has value and how much. Their actions based on those evaluations make free markets operate effectively and efficiently.
The subjective theory of value reveals that the individual plays the most important role in the development of all economic theory. The effective and efficient allocation of resources throughout an economy always depends on satisfying the needs and wants of individuals.
I will mention briefly some of the reasons why individuals are so important to understanding free markets:
Like all things in nature people will always remain separate. Individuals simply cannot form collectives. Communities of all sorts consist of networks of individuals. They have separate minds and the act separately. The subjective theory of value remains consistent with this fact.
Because individuals provide the source and measure of value they also represent the predominant market power. All market transactions result from the actions of individuals. When organizations act, they do so as a result of the consensus of individual decisions.
The idea of individuals as a source of market power turns most economic theory absolutely on its head. Market power comes from the bottom of the hierarchy; not the top.
Inverted Cost Structure
The fundamental role of individuals inverts the popular model of market cost structure. The amounts that buyers willingly pay for goods and services determine the costs of retailers, distributors, and manufacturers, not the other way around. Goods cost what they do at every level of the production structure because of the demands of consumers for other products requiring the same resources.
When attempting to determine the cost of any good or service don’t look to the source of the resources used. Look to what buyers willingly give up to receive that good or service.
Determination of Market Prices
The bidding of individuals to purchase goods determine market prices. The competition between suppliers does not play the dominant role in holding down market prices. The bidding of individuals for goods actually stimulates competition between suppliers.
Determination of Wealth Distribution
Many people misunderstand the determination of the distribution of wealth. A good only has market value when individuals willingly offer something in exchange. The same holds true of the market value of resources. They only have value if they produce something for which individuals willingly exchange.
This fact holds true of the market value of financial assets. The ownership of a particular stock signifies wealth only because others desire to own that stock. Without legitimate demand — demand backed by substance — the stock becomes worthless.
Like market power, individuals determine the source and level of political power. An individual gains political power when others delegate that person to exercise illegal or unauthorized force against another individual — or individuals. This does not change the original source of power i.e. the individual.
The role of the individual in the distribution of political power becomes important with a discussion of market intervention. I have previously defined free markets as those free of violent intervention—markets free of political power.
No process exists that eliminates the role of the individual in the operation of markets. Individuals determine what they value and how much they value it. No other source exists. As a result, the individuals reside at the center of the operation of any market.
I have only touched briefly on some of the aspects that make the individual so important to the development of economic theory. I will allude to the importance of the individual many times in the course of my blog posts.