What I’ve learned

There are two prices for everything. The two prices are known in the stock market as “bid” and “ask” prices. The “bid” price is the highest price someone is willing to buy. The “ask” price is the lowest someone is willing to sell.


What seems to be true is that the existence of these two prices is the reason for the existence of money. And, the existence of these two prices is the reason why the arithmetic works out so counter-intuitively in Ricardo’s trade calculations.


Well, say you and your friend each have a car. Your tastes and needs run about the same. Your cars are the same. But, for both of you, it’s time to move somewhere over the waters. You live in Metropolis. Your friend lives in Timbuktu. Who gets the better deal for their car?

You do.

Heck, your friend will be lucky to get any price above zero. You have lots of buyers available. You simply take the highest bid.

Now, you and your friend have moved. You moved to Gotham City, and your friend moved to Podunk. You’re both in the market for a car. Who gets the better deal?

You do.

You have plenty of cars to choose from. You go with the guy asking the least for his car. Your friend probably has no cars to choose from. He’ll need to pay for the trip to Gotham City to buy one.

Now, isn’t that interesting. In the big city, both the buyer and the seller got a better deal. How is that possible?

It results from the “spread” ‘tween the bid and ask prices. In the city, that spread is narrower than in the boonies. In the city, the bid price for a jalopy might be $5000 and the ask price might be $5500. In the boonies, the bid price might be $0 and the ask price might be infinite. You lost $500 in your move. Your friend? Well. It’s sad.

The conclusion from this:

The larger the market, the more efficient it is. And by more “efficient”, I mean the narrower the “spread” is.

So, that explains the existence of money. Money is a way to combine in to one big market, many markets, each for a separate thing.

The “larger market is more efficient” principle is the heft behind Ricardo’s observations.

And others things too numerous to remember.

Anyway, that’s the way I look at it.

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