An important principle of markets

February 18, 2022

In the file of "not how we invest but still pretty cool" goes Eileen Gu's Olympic gold medal performance. Eileen was coming up short on points for gold in the big air competition, so she went off script, tried to shoot the moon, and pulled off a "Left Double 1620 with a safety grab." It was the first time she had ever done it, and it worked.

For those of you who need to buff up your apres ski lingo, drop "Left Double 1620" into your conversation. I'm not sure about the "with a safety grab," if you watch one of these things safety doesn't come to mind.

It's breathtaking when you look back at the medium to long-term performance of market economies. You have to ask what is driving this - what principles created such a magical machine when so many other ideas have failed.

Property rights underpin a critical piece of the success. Property rights are the bedrock on which differing opinions rest. It always surprises me how much people's tastes differ. In normal times, when we are not all trying to tell each other how to behave, society functions surprisingly smoothly with all these differences. Part of the reason is that property rights protect your choices. You may agree with much of Vermont that a Subaru Outback is a logical car, but it doesn't mean the BMW convertible, which holds a tiny market share, is an incorrect choice.

With property rights defined, conflict is mitigated. If the past two years have taught us something, it is the value of a societal structure that allows differences without conflict.

But there is another important advantage, and it's one of the reasons market-based capitalism works so well. In most of your choices, and in most businesses, you are in the minority position. Let's focus on businesses for a moment. We hear a lot about the dominant players: Apple, Google, Microsoft, etc. But most businesses do not command dominance like that. Most of them work in a minority position, and property rights help protect them in doing so. The business uses its minority position, its smallness in the market, to differentiate itself.

And it turns out that minority positions can be a wonderful place to operate. You know what Geico's market share was at the end of 2020, after three decades of heavy national advertising? Just 13.6%.

This is critical to a market economy - almost everyone is operating in some type of minority role. And because the structure of the system protects that right to do so, optimal decisions are allowed to take root and grow.

Dan Cunningham

^{1. Source: Geico market share}