A nice read but I don't agree completely with the final paragraph. The invisible hand uses a greedy algorithm. It does take a mastermind to get close to any kind of optimal solution in many cases. We can't trust the invisible hand to provide healthcare to everyone, nor can we trust it to take into account external costs like pollution etc.
The invisible hand isn't in the business of making moral judgements external to those of the society in which it exists. If people wish to support each other's healthcare, then they're quite capable of doing so without any external assistance.
Regarding pollution, it's interesting to note that in America at least it was originally considered a tort (if someone harmed you by polluting, you could sue them). But various judges have, in the name of the 'common good' of industrialisation, eroded this right.
I think it's important to keep in mind that people acting to support each other's healthcare without external assistance is one of those things that government is. After all, European societies with solid health systems did not require external intervention by aliens or anything to do so. They just agreed that having such a system is a good thing, and the government happens to be a useful framework for implementing it (and keep in mind that a lot of healthcare-related stuff is actually private in Europe, depending on which country you're talking about).
Overall, "government vs. markets" is a false dilemma. Markets need rules, and to a large extent, the historical evolution of governments goes hand in hand with the evolution of markets. Your pollution example fits this observation nicely.
Another important point in the context of the original submission: A lot of discussion in society in this realm is confused about the centralization-decentralization and class/power structure axes. Those are largely independent, but people from all political backgrounds tend to muddle them up. [0]
The pencil story is a nice illustration for why completely centralized control of the economy would be a disaster. However, it is often brought into (mostly laypeople's) political economy discussions where it really has no place, because most such discussions are not about centralization vs. decentralization.
Most political economy discussions are (albeit usually in a hidden way) about class structure and power. Should there be a (necessarily tiny) class of capital owners who own and control the means of production and who, using this control, will be able to wrest for themselves a disproportionally large share of the economy's output? Or should power be distributed more evenly, along democratic lines?
Ownership, control, and (de-)centralization are largely orthogonal. To give a concrete example, one could easily imagine a functioning, decentralized economy in which companies compete in the market place much like they do in the Western world today; but with the important difference that companies are (as a rule) not anybody's property, and that decisions within the company are made through a (probably representative) democratic process in which every employees has one vote.
Such an economy would have vastly different distributive outcomes, but it would still be a decentralized economy that takes all the lessons of "I, Pencil" to heart.
[0] This is particularly annoying when people on the left do it. At least people on the right have a motive for muddling these things up.
There is however a link between centralisation and distributive outcomes in the sense that the former is necessary to ensure certain forms of the latter. If for instance the democratic companies in your thought experiment were somehow structurally less competitive in the market than companies led by a single CEO (I'm not suggesting this is the case, just using it to illustrate), then in a decentralised system the CEO-led companies would outcompete the democratic ones and naturally come to dominate the market.
It would hence not be possible to bring about the distributive outcomes of a market dominated by democratic companies without some centralised force capable of granting the democratic companies some advantage over the CEO-led ones.
In short, if a decentralised economy necessarily leads to greater concentration of wealth/power (again, I'm not suggesting it does), then people arguing for a more even distribution of wealth/power must necessarily also argue for a more centralised economy.
I liked your comment, thank you. I don't quite agree though, because I get the feeling that you're not really talking about centralization of the economy, but about the centralization of power.
True, enforcing a decentralized economy in which company decisions must be legitimized by employees' votes requires a centralized power.
However, the same is true for almost every kind of economy that has any hope of functioning at all. For example, our non-democratic companies of today rely on workers not simply seizing the means of production for themselves. Why don't workers in, say, a car company not decide one day to shut out the owners? The most immediate explanation is that they have been conditioned by society not to do that. But it's important to keep in mind that our economy relies on the existence of a centralized power that would ultimately lock those workers up in prison if they decided to kick the owners out.
It's easy to miss this fact because of status quo bias, but ultimately, it seems that every stable form of societal organization ends up relying on some form of centralization of power.
This all comes to a head in your last paragraph. If the premise of that paragraph is true, then the people need not argue for a more centralised economy. They can stay with a decentralized economy, but they must argue for some action by centralized power.
That's a good point. I think however that proponents of economic decentralisation would argue that it requires 'less' centralisation of power than economic centralisation (assuming centralisation of power can be quantified).
How is this so? Classical liberals argued that the fundamental duty of government was protecting its citizens' lives and property rights from each other and from foreign aggressors. This would largely take place through the courts: if someone attacked you, or stole your property, or rose up and took over your factory, you could sue them, and the State's only role would be enforcing the court's judgement.
This thus would lead to a relatively decentralised power structure, with most power lying in the courts via their interpretation of the constitution / 'natural law' (a bit like English common law) and the executive having relatively little influence.
From this it follows that arguments for any economic structure other than "an economy the structure of which is purely determined by what occurs when the State only protects property rights" necessarily require more centralisation of power, as the State would be required to do more than just protect property rights.
Assuming that by some intrinsic property that "an economy the structure of which is purely determined by what occurs when the State only protects property rights" is likely to be a more decentralised one, then arguing for a centralised one thus entails arguing for greater centralisation of power.
Of course, this ultimately depends on the exact form the property rights in question take, but I think it's reasonable to suggest that for any particular set of rights, a State based solely around defending those rights would involve less centralisation of power than one based upon ensuring the existence of a particular economic or social structure.
'Victimless crimes' are an example of this: they wouldn't exist in a purely rights-based legal system as there'd be no parties whose rights were violated by these activities, so such things as the immigration department and the departments required for the war on drugs simply wouldn't exist.
What is the economic mechanism by which we can expect a government, particularly one guided by direct voting or representation, to do any better? After all, the production of a government that can solve market failures isn't an easier task for a society than solving the market failures themselves.
I don't know whether we can find an economic system that gives better results. I'm willing to assume for now that we cannot. But what I am sure we can improve is the incentive system upon which our current economic model operates -- for me it is struggle enough to ensure that the "greedy" system we have seeks to maximize actual human flourishing, and not something else.
I do not dispute that the system of incentives in place now has worked and continues to work miracles. But the poorly-handled corner cases have become pressing. The problem is that there are important goods that we have not figured out how to treat economically. Human happiness has value, even when the human in question has no means to pay for it. The long-term health and beauty of our planet has value, but we lack the concepts to list it as a gain or loss on a balance sheet. The same is true for human health, peace, friendship, solitude, ... the list goes on.
Our current approach is to consider how much a person would pay for any of these things -- and this is a fine start. But this approach ensures that we overlook ways to create value for the poor. And it overlooks the fact that economic culture may create blind spots: goods that we value but that we will not pay for economically in proportion to their value.
A "greedy algorithm" means an algorithm follows local optima. It does not mean the actors are greedy. Human beings are capable of jumping over local maxima, their alleged greediness notwithstanding.
Even in free markets, the individuals may act in non financially-optimized ways. If people only used money to advance their financial interests, no one would found a charity, or volunteer, or even go to a theme park. Even for-profit companies may be founded for reasons other than accruing wealth for the shareholders.[1]
>"[D]ecisions are often made based on information other than price"
Price is one of the most important sources of information, as Mises made clear.[2]
This essay was written in 1958, before the 'Invisible Hand' was replaced by the Coase theorem which actually explains why externalities don't happen in free markets as often as you would think they would (instead of just observing it).
"It does take a mastermind to get close to any kind of optimal solution in many cases" isn't correct. Relaxing the optimality constraint doesn't actually make central planning any easier, difficulty is dominated by the worse-than-cubic scaling on the number of moving parts of the system (and look at how complex even pencil manufacturing is).
Nations actually tried this, a whole lot of useful math for optimization problems was discovered, but economic optimization is still algorithmically intractable.
> This essay was written in 1958, before the 'Invisible Hand' was replaced by the Coase theorem which actually explains why externalities don't happen in free markets as often as you would think they would (instead of just observing it).
Coase's theorem explains why externalities occur even if you make the idealized assumptions of rational choice theory (perfect knowledge and utility-optimizing behavior); it does directly state that (in those idealized assumptions) you wouldn't have externalities without transaction costs, because those who would otherwise suffer externalities would be motivated to buy off those who would inflict them. However, transaction costs are a very real thing, and are particularly significant in the case of externalities with diffuse impacts (whether that's harms or benefits that are diffuse.)
Coase himself criticized misapplication of the theorem to claim that externalities were unlikely, since such applications necessarily discounted the real occurrence of transaction costs. Such misapplication essentially inverts the whole point of the theorem.
>This essay was written in 1958, before the 'Invisible
Hand' was replaced by the Coase theorem which
actually explains why externalities don't happen in
free markets as often as you would think they would
I'm struggling to understand what you mean by this - Coase's theorem shows why externalities are often not addressed by market solutions, even when an apparent market solution exists (spoiler: transaction costs).
Exactly what I was thinking about as a I read the essay! I was disappointed when instead of being about how incredible it is that the cosmos can produce a pencil, it was about claiming that the cosmos can do it "without the government."
Henry Petroski's excellent book The Pencil[1] uses the same subject to explore the history of the pencil's development into the common artifact we know today.
This is, well, shallow propagandising guff. It promotes an agenda but diverts criticism with mythologising illusion.
Markets fail in various ways. Should we just let that happen? -- and just have 'faith' in the wonder of 'freedom' etc.? As Stiglitz says, a common reason why 'the invisible hand' is invisible is because it is not actually there.
Yes, markets should be allowed to fail. It is part of a very natural and successful process that has brought us to where we are. The same goes for governments. It's a trial and error process that goes back to the beginning of life. There is an anaology I really enjoy which relates the idea of saving economy and markets from the natural process of failing:
"In the 1970s the US developed a policy of forestry that espoused 100% prevention of forest fires; let’s call it “fire is not an option”. This policy resulted in the systemic suppression of small fires and eventually into very unbalanced forest ecosystems where fire is now not just an option, but a certainty of disaster. We now know that fire is a natural part of a forest’s life-cycle. Without fire, the forest floor gets overgrown, making it a source for bigger and hotter fires. When fires break out in a “managed” forest where fires have been suppressed for years, they burn so hot they turn the ground to glass. Fires that were survivable by trees are now so destructive that they denude hills and wipe out the entire ecosystem. Our financial system has become much like a poorly managed forest, harboring within it the increasing probability of a systemic and destructive conflagration."
Just as no single person knows how to create a pencil, no single person, or group of powerful individuals, have any idea of the complexities that exist when deciding how to guide an economy. It's naive to think otherwise.
I have more faith in freedom than faith in a group of humans with the same greedy intentions as any other human, but with regulatory power over everyone else in the market.
You were effective at using big words and quoting an economist, but not at providing any counterargument to the essay.
