The Miracle of the Market
For the first time in human history, we’ve seen societies emerge with widespread material abundance. Innovations in economic production have far outpaced the Malthusian scarcity trap. There are many reasons for this. Advances in technology, radically improved infrastructure for communication and transportation, improvement in food production and storage, investments in human capital, and ever expanding trade have all played roles. But at the core of it all is a dynamic economic information system.
In the previous post I said that the biggest macro-economic questions a society faces are how much of which things should be produced and how to achieve a just distribution. The production question requires that we have some way of determining how much people need of a particular item, determine how much capacity we need to allocate to meet the need, and find the resources required to produce it. The problem is that in any given nano-second, some needs are met while others emerge. In the next nano-second, it shifts again. And this is just one product. Multiply this by millions, if not billions, of individual items. There is simply no way to monitor what level of need exists at any precise moment in time and assuming we could know it would be obsolete a nano-second later. We need a real-time dynamic feedback loop. Fortunately, we have one. It is called the market.
Let’s take a practical example. Who should determines how many number 2 wooden pencils I need right now? I should. I’m the one best positioned to weigh competing demands and opportunities in my life. I’m best positioned to know my self-interest. For whatever reason, I’ve decided I need a box of two dozen pencils.
Off I go to the business-supply store. I find a box of number 2 pencils. If they’re priced higher then I think they should be, I might look elsewhere or I might rethink my need. If they are lower than I expected, I might be enticed to buy more than I thought. They cost about what I expected them to, so I buy them.
The business-supply store’s computer tracks how many boxes of pencils have been sold. When it falls to a certain level, the store determines that it is in their self-interest to buy more pencils from pencil manufactures, likely tracking multiple suppliers to see who is offering the best deal at the moment. The store orders the pencils.
The pencil manufacturer takes the order from the business-supply stoare, along with orders from other buyers, and determines how many pencils are going to be needed to fill the orders at the agreed upon price. She then determines that it is in her self-interest to fill this order. She determines how much of the following are required: The wood and the lead, the paint that goes on the pencil, the metal tip that goes on the end of the pencil to hold an eraser, the eraser, the cardboard box to hold the pencils, the shrink wrap material to wrap the boxes, the number of lager boxes to hold the smaller boxes, the number of pallets to hold the larger boxes …. you get the picture.
Then the lumber mill, the lead mine, the paint manufacturer, the tin seller, the eraser producer, the box manufacturer, the shrink wrap supplier, the pallet company, etc., take the order they got from the pencil manufacturer and combine it with others they have received from other businesses and decide if it is in their self-interest to supply their goods at the price the pencil manufacturer is offering. They place their orders with their many suppliers and the whole process becomes incomprehensibly complex. The pencil is a very simple product and I’ve way oversimplified things here. (See I Pencil for a more intriguing essay.) Now multiply this scenario times millions and millions of products and there is no way to appreciate the magnitude of what is happening across the economy.
At any point in these transactions buyers and suppliers can bid prices in either direction depending on what they think is in their self-interest. Each bid causes a ripple to hit the market and requires players to adjust. Our economy has no pencil Czar to oversee that an adequate supply of pencils are made and distributed. Yet day after day a sufficient number of pencils are produced and sold at a reasonable price. Pencil production is achieved by a massively complex information system with a real-time feedback loop communicated through bids and sells. Those bids and sells are a product of each individual player weighing what is in their self-interest. And, assuming no deception or coercion, if both parties agree that a transaction is in their self-interests, then it is a win-win situation.
People being responsible for themselves and then acting on their self-interest in the marketplace is the most effective way to manage the production and distribution of goods in an unfathomably complex economy like ours. To the degree that economies move more to this economic communication system (supported by things like communication and transportation infrastructure, and appropriate legal structures), they create an economy that produces material abundance and meets basic needs well. In historical terms, it is something truly to be marveled at.
Therefore, if we just get out of the way and let people freely act on their self-interest we can achieve a Utopian world approaching the coming shalom of the Kingdom of God, right? Categorically and unequivocally wrong! Earlier I said the individual is the one who is in the best position to know what is in his or her self-interest. Clearly we know we need food, shelter, and clothing, but when we get much beyond that, how many of truly know what our self-interest ultimately is? It is one thing to acknowledge that we are each best positioned to know what is in our self-interest but it is profoundly another to say that we truly do know our ultimate self-interest, much less that we act on it.
Market economies are creating unprecedented abundance and that can be celebrated. But tremendous evil and mischief is also done by people having the freedom to act on their perceived self-interest. The dilemma is that economies without this freedom do not create abundance and still tend to create just as much, if not more, evil and mischief. Trusting to self-interest alone is not enough.