Markets have no role in determining happiness, love or whether or not our lives have meaning. They do, however, determine wages and income, and the price of goods.   Like it or not, that is truth, and warrants a lesson on how it works.

Businesses combine people, machinery, raw materials and management expertise to make things. Economists call these inputs to production. The demand by businesses for each of these items is dependent upon how much value each input brings to the production of the good or service the business sells. In turn, businesses engage in the sale of these products or services in another market.  Most businesses have only minimal choice in the price of their goods.  If they enjoy some monopoly power—for example, the Big Three auto makers, circa 1960—then they can realize above market prices.  This is good for the workers, management and capital owners, of course, but bad for consumers (that is another story).  The essence of the demand side of markets is that the limit to how much income goes to workers, the owners of the machinery and land; and management is determined by how valuable each is to the production of the good. 

Supply matters also.  The supply for machinery is global, the rest is more local.  If there are very few workers of a particular type, then these workers will obtain wages up to the full value they bring to the production process.  If there is an abundance of a particular type of worker, they will get less. 

Markets rule supreme, but they also work imperfectly and will do so as long as humans themselves remain imperfect. Workers obtain the wrong skills (38 percent of last years’ graduates with a Ph.D. in history are unemployed).  Businesses make products few consumers want (see Volt, Chevrolet) and governments try to manipulate products and pricing (see again Volt, Chevrolet).  Businesses mistake the value of a CEO, star player or shift operator.  The rich imperfection of markets does not mean that one can wish them away any more than a paratrooper can wish away gravity.  Further, these types of market failures tend to self-correct in time.

Despite the rhetoric of the day, the wage share of income in the U.S. has remained trendless at 75-80 percent of total commerce for several decades.  Profits have dropped as a share of production for 40 years, while payments to owners of machinery and land have risen, as has the share the government collects.  

The ineluctable truth is that the only ways to alter the outcome of this equation is for individual inputs to become more productive or to have government redistribute income. Redistributing income is something every society does, and today, roughly one in four households are recipients of this redistribution. Redistributing income changes the share everyone gets, but does not make the economy larger.  Alternatively, boosting the productivity of land, machinery and workers will increase their incomes, even if the share does not change. This process is called simply ‘Economic Growth.’