The awesome power of markets

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Ok.  I know its tough; markets haven’t exactly put their best feet forward in recent memory.  But leave aside for a moment the systemic failures and just think about what financial markets are able to do the majority of the time.

I came from a non-profit and social sciences background, and therefore had little understanding of financial markets before I began attending business school at NYU.  And I have to say that I am often in awe of what they do.

The power of markets lies in their ability to allocate capital to those institutions that would use it best (defined by returns in the world of finance).  What amazes me is how responsive markets are to the news of potential success.  If a rumor about the Apple tablet proves to be true, markets respond instantaneously, sending Apple’s stock price (NASDAQ: AAPL) streaking upwards in a fraction of a day before settling near a new equilibrium price that represents the product’s potential for increased returns.  Dell’s price (NASDAQ: DELL) may accordingly drop.  All of a sudden, Apple’s fundraising capacity has mushroomed.  It is able to attract even more capital that it can invest in its next cool doohickey.  And the cycle continues, as long as the market sees potential.

I imagine the potential for applying this to the social and public sectors.  A public school develops a new curriculum that proves successful in narrowing the achievement gap, or a government health agency makes a major breakthrough in the development of an AIDS vaccine, and funders are instantly drawn to the solution like moths to a flame.  The “stock” rises and, all of a sudden, there are financial resources readily available for these organizations that would use them best.  For training teachers on the curriculum.  For mass production and distribution of the vaccine.  For the potential to solve a problem.

In the markets, those who demonstrate the most potential become great institutions and those who don’t fade away.  We are left pining over what the Apple tablet may bring and quickly forget about those who failed before.

There is a powerful logic to this I find compelling.  Non-profits solicit funding; it rarely comes to them, and many ineffective organizations remain afloat because they are simply able to find some funder somewhere.  We accept failed companies so that we can have iPhones.  Should we not accept failed organizations so we can have those that create real impact?

I am not yet finished with this thought…

Posted on January 14th 2010 in ideas

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