Vendor at Jocotepec Mercado in Lake Chapala, Mexico

There are very few concepts more important for U.S. citizens to know about than the operation of the free market.

After all, the free market has traditionally been an American specialty, and its application is what many think is one of the primary reasons that the U.S. has been able to provide so much material prosperity to its citizens.

Yet, just 20 U.S. states mandate that high school students take economics, according to the Council for Economic Education. 

It is one thing to try to learn how the free market works in a classroom from a textbook, but it makes much more of an impression to see it in action. I recently had such an opportunity, ironically not in the U.S. but rather as part of a road trip through Mexico to desirable expatriate locations, when we visited a small town mercado (market) in Jocotepec, adjacent to the very popular expat destination of Ajijic, on Lake Chapala.

The Jocotepec mercado is an example of the unbridled -- and as far as I can tell, very lightly regulated -- free market, its mechanisms unadorned, uncomplicated, raw and relatively complete, which makes the workings much easier to understand.

The four elements necessary for a free market are the same in Jocotepec, the U.S. or anywhere else in the world and are very simple: potential buyers; potential sellers; voluntary transactions; and very little outside interference or "help." These are the elements that the Jocotepec mercado has.

The Jocotepec mercado is bustling, crowded and noisy. Transactions take place in a rapid pace.

There are usually multiple vendors selling the same type of products. For example, there is more than one bakery and more than one fish vendor.

For the consumer, this lack of monopoly power keeps prices low.

If fish vendor A charges too much, it is very easy for customers to move on to fish vendor B at the other side of the building, which they would do without hesitation. Customers in Mexico typically don't have a lot of extra money, so if prices are too high, they are extra quick to move on somewhere else.

This lack of monopoly power also keeps quality high. If fish vendor A sells low-quality fish, you can bet that customers will say, "adios" and move to fish vendor B.

If fish vendor A keeps selling at higher prices and/or lower quality than fish vendor B, he will take in very little revenue, which, because Mexico has much less of a social safety net than the U.S., will mean that fish vendor B will have very little to eat. Having very little to eat would be a powerful motivator for fish vendor B to lower his prices and raise his quality.

So who wins when fish vendor A and fish vendor B complete to have the lowest price and highest quality? Customers.

The free market also encourages innovation.

At 7 a.m., I noted that the price for a single sweet role was four pesos. When I returned three hours later, the price and the offering had changed.

At 10 a.m., I could no longer buy just one sweet roll, because the baker had bundled his offering into a set of three sweet rolls, for the total price of five pesos. Why had the baker changed pricing and bundled his offering?

The baker knows that if he doesn't sell out of sweet rolls that day, the sweet rolls that he didn't sell probably won't be sold at all, because no one wants stale sweet rolls. So, he lowers his price to encourage the purchase of a sweet roll but only if the customer buys three of them, thereby making the offer more attractive to buyers while relieving him of his excess inventory faster.

The objective of the bakery owner is to get the maximum total revenue for his goods, so he is constantly trying to figure out how to price them, given the time of day, the size of the crowds, etc. Here in action was dynamic pricing in response to inventory management of a perishable product.

Could a customer just show up at 10 a.m. every day and expect to get sweet rolls at 60% off? Not necessarily.

Perhaps the baker may have sold out earlier that day, so the customer would have zero baked goods to purchase and bring home. This is where the customer also has to be smart, making judgments about inventory, time day, etc.

Added to the calculations made by the baker, the customer's calculations help to dynamically match supply and demand and create better efficiencies for everyone.

Did this Mexican baker read about dynamic pricing and inventory management in a book?

Were all the vendors in the Jocotepec market Harvard Business School MBAs? Not likely, given that the two-year tuition at Harvard is equal to 15 times their annual take home pay.

Instead of an MBA, these mercado vendors have something even better to encourage them to understand how the free market works. They live in the real, unregulated world, where, if you have any smarts at all, the rules become very obvious and you either succeed or you go hungry.

The people who do the buying and the selling in the Jocotepec mercado do so on a voluntary basis, completely un-coerced. No one forces anyone to buy chicken that day or chicken from a particular vendor.

There were no tax subsidies to advantage one vendor over another and no lawyers to gum up the works. There didn't appear to be a lot of paperwork.

There were no monopolies, and very little if any regulation. In these environments, it is the buyers who, every day, even every minute, determine winners and losers, so that the vendors have to constantly satisfy the buyer.

In response to these realities, the vendors were extremely efficient and hyper alert. Their actions were practiced over time, honed over the years to perfection.

They had no wasted movements: scaling fish, taking in money, presenting product. Everything worked like fine clockwork so that they could provide the lowest price and highest quality.

This was all done without anyone telling them what to do.

All this freedom means that both customers and the best vendors win. Customers win because all the vendors in the mercado are competing with each to provide the best price and quality.

The best vendors win because, if they can become more efficient or somehow provide better price and quality to their customers, they will be rewarded with a virtually unlimited stream of customers clamoring to buy their low-cost, high-quality products so that they and others can spend less money and provide better for their family, just like other consumers all over the world.

This article is commentary by an independent contributor. 

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