What markets are really good for

It’s the end of the week and I’ve been wandering down online byways, prompted by a comment on my earlier post on Michele Bachman and Ludwig von Mises. The comment (a pointer to a book by von Mises cited in Sandmo’s Economics Evolving) led me off to Hayek’s famous 1945 AER article on The Use of Knowledge in Society.

It’s a terrific article, the central argument being that the point of markets is as a social mechanism for co-ordinating many decentralized sources of information about supply and demand. The price set in the market contains all the information individuals on either the buy or the sell side need in order to match the varied preferences and needs of customers with the resources and goods and services available. This is a task beyond a central planner – one of the aims is to explain why a market economy is superior to a centrally planned one, without relying on the professional economist’s incantations about the welfare properties of general equilibrium – Hayek not being daft enough to think this is real. He says:

“The problem is precisely how to extend the span of our utilization of resources beyond the span of the control of any one mind; and therefore, how to dispense with the need of conscious control, and how to provide inducements which will make the individuals do the desirable things without anyone having to tell them what to do.”

He also offers the following marvellous quotation from Alfred Whitehead:

“It is a profoundly erroneous truism, repeated by all copy-books and by eminent people when they are making speeches, that we should cultivate the habit of thinking what we are doing. The precise opposite is the case. Civilization advances by extending the number of important operations which we can perform without thinking about them.”

This question of what we can get our minds around in making economic decisions is becoming ever more important, the more information we are flooded with. Next week I’m attending what looks like a fantastic workshop at the Toulouse School of Economics on the Economics and Psychology of Scarce Attention. It’s organized by Paul Seabright, whose book The Company of Strangers: A Natural History of Economic Life is a brilliant, accessible overview of the marvel of co-ordination by the market in the social and anthropological context in which actually existing markets (rather than theoretically pure markets) have evolved. I think this book is a must for anyone interested in the overlap between economics and anthropology/evolutionary biology.

The Company of Strangers: A Natural History of Economic Life (Revised Edition)

The other terrific supplement to the Hayek article is Francis Spufford’s docu-novel Red Plenty, the first successful attempt in (more or less) fiction to explain the formal equivalence between a centrally planned economy and the Arrow-Debreu general equilibrium. It is, believe it or not, a completely gripping read, and an essential part of the education of anyone too young to remember the Soviet Union. If nothing else, it stands alongside Hayek’s article as a perfect reminder – at a time when there is understandable scepticism about the merits of markets in theory – of why they are essential in practice.

Red Plenty

Share