“Markets need nervousness and uncertainty to work.” That’s the view of UBC business professor Paul Kedrosky, writing in today’s Globe and Mail Report on Business in an article entitled, “Red stones, and why we trade.”
Kedrosky suggests you “imagine you have a red stone and you think it’s worth $5. Imagine you know four other people who have the same red stone, and they all think their red stone is worth $5 too. Now let’s say that all five of you have only $3 left after buying red stones. Assume that there is no one else around, and you have food, water and shelter, pretty much the only thing you’re left wanting is more red stones.
“What would happen?
“All else being equal, nothing. After all, if no one has enough money to offer $5, and if everyone thinks red stones are worth $5, why trade?”
Kedrosky goes on to describe ways this market could be kick-started, such as convincing someone else that a red stone isn’t worth what they thought it was, or starting a rumour that somewhere nearby there was a huge cache of red stones, all soon to arrive on the market.
“If we all think red stones are worth the same amount, then no trading should happen. That is because I would not be willing to part with my red stones so long as I’m not getting the value I want, and you would not be willing to offer that amount, because it is your value too.”
Kedrosky concludes: “Disagreement is at the core of the market. Strangely enough, it is only when we agree on anything and things seem smooth that the market gets itself into trouble.”