Friday, 25 November 2016

Economics is Elegant! (not boring)

The Market for Elegance

There is a tendency for intellectuals to believe in big government because it gives their intellect a role in planning society. It’s hard for them to conceive that million of decisions taken by individual actors may outperform their own intelligence or the intelligence of mandated “experts” but in reality it has and always will, and for logical reasons.

Nobel Prize winning economist F. A. Hayek explained that no one has the information to centrally plan an economy – and even if they did, this information is constantly changing in real time. People’s behaviours, values, preferences, ideas, expectations and knowledge change constantly and in unpredictable ways (thankfully so lest we be reduced to a bunch of deterministic automatons!) The information required to plan an economy is distributed amongst us all – and it is expressed in every transaction we make or choose not to make. Every time we decide something is too expensive, every time we buy something that is on sale because we only find it worth the cost at the reduced price. What we choose to buy is about as accurate a representation of what we value as we are likely to devise (apart from perhaps the way we choose to spend our time and attention) because each buy is at the expense of everything and anything else we could choose to buy with the same limited resource. It’s a measure of what we value in our particular circumstances.

It’s the interplay of countless actors trying products and services, rating them, deciding whether or not they want to buy them again, recommending them, cautioning others against them, which enables producers to know – without even talking to the vast majority of their customers – what exactly is desired and what is not. We are constantly giving out signals to producers of what to produce, in what quantity, limiting waste through overproduction and preventing shortages. This leads to approximately the right goods being produced in approximately the right quantities approximately all of the time. It also limits waste as goods that no one wants will not be in production for long, those that have been produced already will fall in price ending up in the bargain bin until someone finds them a home. This accounts for why in planned economies there are always mass shortages of some goods and wasteful overproduction of others.

Of course there will always be some Maverick or hard-headed producers that completely ignore all these signals and just do what they want, (Henry Ford, “If I had asked people what they wanted, they would have said faster horses.”) but they will not be in production for long to waste resources unless they really do know better than their customers. 

This is just evidence that human knowledge is not perfect. Consumers don’t always make the best choices first time – how could they? But they are unlikely to make the same bad purchase a second time. When they do err, the consequences of bad decisions are usually limited to some small number of people. On the other hand, when government policy-makers or central planners step in to make decisions over the entire economy, a poor choice can affect millions.

It’s this idea of one-size-fits-all – the customary approach of government – which is exactly what we need to combat, because it relies on the assumption of perfect knowledge (a priori) on the part of a small qualified number, which can only be gained by the individual experience huge amounts of individuals (a posteriori). Occasionally an inferior product, a VHS, will outperform a superior one, a Betamax, but ultimately DVD will come along and outperform both. The market acts like a sieve for good ideas, leaving bad ones behind.

It’s a wonder that so many fail to grasp the beauty and elegance of this self-correcting system of interdependence.

A. S. 11/2016

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