The Unsung Successes of the Market

And now watch the Bandini hit the fandini.

You don't argue over which computer is better, or which car is better. Why argue over which economic model is better? Why not just live and let live, as you shop and let shop, each in whichever economic community he prefers, as each in whichever shop he prefers?

You know why.

Redistribution.

But precisely because it's the "bottom line," as Prof. Boudreaux put it, it's also the hot potatoe you won't touch.

And when you don't challenge the enemy's bottom line, you concede it.

Don't blame the enemy for that. Blame yourselves.

John,

I wasn't arguing with you, but I think you mistake my meaning.

Hong Kong has no natural resources to speak of, but one, humans willing to endeavor to create value.

Hong Kong manages to have excess resources because the people there have enjoyed the rewards of producing them.

In command economies, such reward is lacking, therefore, there is little incentive to produce them. In fact, the incentives are often the opposite.

This is why command economies, no matter what raw materials are available to them, tend to have fewer excess resources available for economic development. Those who believe in command economies appear to think that value can be conjured from the ground with guns.

In the end, slave labor is not very productive.

Richard: "Why isn't it right that our higher modern standard of living is due mainly to technological innovation?"

Technological innovation that increases standard of living doesn't just arise magically out of the desert. Decisions have to be made about which technological developments deserve investment of labor and capital. Such decisions can lead to effective and efficient investment - or not.

An economy which efficently employs its labor and capital to produce goods valued by its consumers will enable its population to realize a higher standard of living. An economy which invests inefficently - or invests in unneeded technology - will enable a much lower standard of living. Free markets and the price mechanism have so far excelled beyond all other methods at most efficiently employing labor and capital to meet consumers' needs.

sam grove: "you are explaining why command economies tend to have fewer excess resources available for investment."

Again, Sam, it doesn't matter whether a command economy has fewer resources to invest or not. What matters is how efficiently and effectively they invest those resouces. An oil kingdom can continue to receive trillions of dollars every year in exchange for its oil. But if it ignores market principles in allocating those dollars, it will end up with shortages of required goods just as surely as did the Soviet Union for so many decades.

John Dewey, you are explaining why command economies tend to have fewer excess resources available for investment.

No one has found a way to eliminate negative feedback without eliminating feedback altogether.

Ultimately, command economies cannot succeed because they are not permitted to fail...

....until the whole thing comes tumbling down.

sam grove: "Command economies can make investments, but the availability of excess resources tends to be more limited under such."

I agree, Sam, but I think the most important difference between command economies and free markets is the way decisions are made. Suppose that a command economy had huge amounts of excess resources - such as billions of barrels of surplus oil sitting under the ground. Such an economy would still be faced with the problem of how to make investment decisions with the proceeds from sale of those resources.

Perhaps the biggest problem with command economies is an inadequate feedback loop. Or with lack of incentives to respond to that feedback. So bad investment decisions in command economies go unchecked.

In a free market economy, of course, there are millions of investment decision makers and many more millions of consumers providing feedback. Market price provides an immediate check on bad investment decisions. No such check existed in command economies, where history has shown that unwanted goods will continue to be produced and unneeded technological "innovation" will continue to be funded.

As I see it, it is not just that command economies possess less investment capital. It is that no feedback exists for ensuring that such capital is invested where it is needed.

ugh - there, not their

When people say that markets don't work, they are complaining that we don't have an egalitarian system of wealth distribution. Of course, in this respect then, they are correct. This however isn't the function of markets. Markets are intended to provide a just means of exchanging goods and services freely in order to maximize the use of scarce resources most efficiently. If markets were left alone, they might do this flawlessly. In the current situation, markets are responding to incentives exactly right, but politics is preventing the losers from actually losing. Instead, the losses are being shifted to the taxpayers, while those who ran their banks into the ground are being rewarded with largess from the treasury. Markets work fine for those who don't expect something for nothing. For those that do, their is legalized theft and graft.

Standard of living is based on our ability to produce the goods and services that we require and desire.

A minimal standard of living meets the requirements of survival.

To have a standard above survival depends upon our ability to produce more than we require. Technological development is rooted in this "excess".

I didn't read all the comments so I don't know if anybody made this point, but it should be obvious that our standard of living is not driven primarily by technological innovation. If that was the case, Africa would have at least a similar standard of living as we do.

Gil,

You are making a horrible assumption about the Amish. They are very, very technologically savvy. It's just that they as a group decide which technology is good or bad for their particular community. Part of that decision involves their desire to be separate from the rest of the world and not be tied into the network.

http://www.kk.org/thetechnium/archives/2009/02/amish_hackers_a.php

But I'm still not sure why Boudreaux thought it was a mistake for Conan to attribute our high standard of living to technology.

Technological development requires investment, which requires savings to provide the resources to those engaged in such development.

A free economy produces rewards for taking risks and making investments.

Command economies can make investments, but the availability of excess resources tends to be more limited under such.

The only thing that kept the Soviet economy functioning at all was the black market that developed to circumnavigate official channels.

Sure, the Soviets managed to get into space, but like their attempt to take Afghanistan, it was somewhat exhausting for their economy. They could build decent appliances and food lines occupied much of the time of many citizens. Toilet paper and soap were rare commodities, etc.

There are those who have supposed that the largest factor crippling Soviet development was the totalitarian nature of the government and all would have been well if they had had a functioning democracy, but I say that the

Soviet economy was crippled by the rejection of property and money, that is, economic freedom.

Gil,

You asked,

"P.S. What's force got to do with this argument, dgl?"

If it had nothing to do with it, there wouldn't be any argument.

If there were a free market and free choice in economic as in computer systems, there would be no more argument between socialists and pro-capitalists than between Apple and PC users. There might be friendly differences of opinion, but no more heated issue, armed conflict, war, holocaust, and genocide.

Apple users and PC users don't go to war over their differences, they just go to different stores.

If, as it appears, now, that you would not force your economic any more than computer choices on others, you have implicitly accepted the free market, within which you might still choose socialism for yourself, just not for others.

1. What non-sequitor? It's akin to a person who makes a $1,000,000, pays a 50% tax rate and is left with $500,000 versus another person who makes $50,000 and pay no taxes. The second guy would qualify as free whereas the first guy is still richer anyway.

2. Why not? Freedom to choose not to be hyperprodutive. E.g. The Amish.

3.4. Embarrassing spelling bloopers aside :(. What is the argument when Conan O'Brien is wrong to suppose technology? I presumed an example is the Space Race - the Amish can't put a man into orbit no matter how hard they try but the Soviets did but they were unfree and generally poor. In other words, I suggested a possbility where technology and freedom may not go hand-in-hand.

So, ultimately, when one sees the footage of the Moon Landing what are they supposed to think? Wow look at the technological progress that achieved! Or - how dare the government comandeer huge resources to put a man on the Moon, it's expensive, pointless and the resources wasted could have been better spent by those who had their resource confiscated for this show in the first place!

Gil,

1. Richard made an inquiry. You read into something that wasn't there. Stop. Making. Assumptions.

2. No we don't. That you (continue!) to believe so suggests that you either haven't read our arguments, haven't understood them, or are simply unwilling to accept that we believe something other than your preconceived notions.

3. "Why not tru [sic] amd [sic] point out an inverse correlation to technology and free markets?"

Why not? Because that's not the argument he's making. Read more carefully.

"the Soviets were beating the U.S. in the Space Race yet could barely feed their own people."

They also had elevators that barely functioned. The problem is that, under a command economy, resources aren't allocated efficiently. Meaning, the government can shoot a man into space (by devoting enough resources to it) but their people can't feed themselves or ride in an elevator (because not enough resources are devoted to it).

A government simply cannot anticipate the wants/needs of its people sufficiently well enough to justify taking control of the means of production.

Richard, I can't speak for Dr. Boudreaux, but I can tell you what I suspect he's getting at. To attribute the rise in the standard of living to technology doesn't get to the root of the change. It's a kind of deus ex machina; an explanation without explanation. The obvious question would be "what drives the change in technology?" The essay, "I, Pencil" may give you some insight into what he means. It's well worth the read if you haven't read it.

I appreciate the spirited exchange in response to my question. But I'm still not sure why Boudreaux thought it was a mistake for Conan to attribute our high standard of living to technology. I would have thought that a libertarian would have acknowledged the central role of technology, but then attributed technological progress -- especially in consumer goods as perhaps contrasted with military and "space race" goods -- to capitalism and small government. Is that not a fair statement of the libertarian position?

M&M your reply was as clear as mud.

Your points:

1. Non-sequitor? Richard posted:

"Why isn't it right that our higher modern standard of living is due mainly to technological innovation?"

Contrast this with Don Boudreaux assertion:

"(Note that O'Brien mistakenly believes that our modern standard of living is caused principally by technology.)"

I think my comparison was a reasonable sequitor.

2. Well actually Libertarians prefer to emphasise freedom over productivity. Slaves can be made to be productive. But it is interesting you took this sentence away from the next and remove the context I was writing in.

3. Or to put it another way: does it grind Libertarian gears to see Socialist Europe not turning into a collection of Third World nation states? Shouldn't such 'high-intervention' states go belly-up and fast? Why do such non-free market states continue to operate like the Energizer Bunny despite Libertarian claims that such 'economies' should grind to halt and cause mass poverty?

4. A tad melodramatic but if we would presume it took 200 years to get people from an agrarian culture to the modern standard living why didn't it occur in times past? Wouldn't Libertarians point to the opportunity costs of statist interventions? People were too busy being forced into building pyramids and temples when they could kept to themselves and create technology to make their own lives easier? Why not tru amd point out an inverse correlation to technology and free markets - the Soviets were beating the U.S. in the Space Race yet could barely feed their own people.

P.S. What's force got to do with this argument, dgl?

Gil,

I agree with you, up to a point.

I too believe that not only mixed capitalism/socialism is superior to laissez faire, but that all-out socialism is superior to both, and want to live under it.

But where I part company with most of my fellow socialists is that I wouldn't force my preferences, and, perhaps, mistakes, on others, that I would lead by example, not force. And then, if it should happen that I had been wrong, and my experiment didn't work out, there would always be the more capitalist alternatives to fall back upon.

And that's really what the free market implies, competition between different ways of doing things.

Since I am convinced that my socialist way would be best, I am certainly not afraid of that competition.

How about you?

Once again, I don't know why I bother.

Gil,

"Indeed Richard. Such is my thought. If mere laissez-faire [sic]..."

Richard asked about technology, not laissez faire economics. It was a signal sentence. How you could have come to such a severe non sequitur must have taken some impressive mental gymnastics.

"Do Libertarians loathe to admit that wealth comes primarily from production?"

No, in fact that is among our principle arguments. That you would believe otherwise is indicative of functional illiteracy or a preexisting prejudice.

"Does it grinds their gears knowing a quasi-Socialist/Capitalist highly-productive nation will outperform a pure laissez-faire low-productivity nation?"

Nothing more or less than an assumption. And one simply not grounded in reality. Take a look at Dr. Lawson's Index of Economic Freedom. Prosperity has a positive relationship with freedom (both economic and political).

"Or would they [sic] something along the lines of "if everyone was peace-loving, laissez-faire-loving and gold standard-loving then all of our problems would have been solved 4,000 years, people would have our current standard of living some 3,800 years ago and we'd be spread all over the galaxy by now"?"

...Sigh. Bad grammar aside, we have never asserted that free markets would solve all of the worlds ills. Ever. That you would continue to believe so is indicative of functional illiteracy or a preexisting prejudice.

Gil, it's easy to knock over straw-men. Dealing with the arguments actually placed in front of you is different. Try it.

Indeed Richard. Such is my thought. If mere laissez-faire is the cure then why has the second half of the 20th century seen a greater shift in the standard of living than the 1700s and the 1800s? Even when the first half of the 1900s was mired with Depression and two World Wars?

Do Libertarians loathe to admit that wealth comes primarily from production? Does it grinds their gears knowing a quasi-Socialist/Capitalist highly-productive nation will outperform a pure laissez-faire low-productivity nation? Or would they something along the lines of "if everyone was peace-loving, laissez-faire-loving and gold standard-loving then all of our problems would have been solved 4,000 years, people would have our current standard of living some 3,800 years ago and we'd be spread all over the galaxy by now"?

Then again is some discotent good? Isn't discontent that with which all people can change for the better? If people were fit to be content in the Middle Ages and not be greedy and ungrateful then nothing would changed since then.

Actually, he is very popular, particularly among Honor students. Instead of learning he simply advocates different policies and disregards free-market thought as a religion. The classes are merely he and I debating the entire class. He tries to frame the debate in such a way that one looks absolutely evil if they do not agree with him. I might be making an impact on him because he is starting to pick up on his own thinking's contradictions and I got him to read The Black Swan to put a little doubt into his mind. It's a little scary sometimes how people follow his thinking.

Why isn't it right that our higher modern standard of living is due mainly to technological innovation?

I don't want to get this discussion sidetracked, but bringing mathematics into it would do so, and, to keep it out, Cafe Hayek needs the stronger brew of Mises.

I have used the example of those collapsible umbrellas.

I was in NYC when it began to rain. I purchased this collapsible umbrella on the street for $5.

I would explain to people: "This complex umbrella came all the way from China and I was able to purchase it for $5. It has passed through a number of hands and everyone along the way made a profit in delivering this umbrella into my hands."

Greg Ransom,

You wrote,

"The problem is how to use the math."

Not in economics it isn't.

The problem is how to to stop using it.

There is no math in real economics.

Here is why.

This whole blame capitalism for the ills of socialism syndrome has been going on from the earliest days of socialism, and when there was no more capitalism to blame, they blamed capitalists in the woodpile, the counter-revolutionary saboteurs and wreckers, or just plain incompetents, in the soviets, as in the Bush Administration, but never their own policies. Socialism has never failed, nor capitalism succeeded. The facts always show otherwise.

And that is why economics must ultimately be based not on empirical facts but theory, and, without empirical data and numbers, not on mathematics but logic, or, more precisely, praxeology.

Louis C.K. does this type of material on his current tour and I highly recommend it to anyone who has the opportunity. My stomach hurt for the whole night from laughing.

Jeremy - I hope that the rest of your classmates laugh off your nutty socialist teacher. Otherwise I'm scared for the future of this nation.

My socialist AP Econ teacher was showing off his new kindle in class the other day. I found it comically ironic that he was reading The Communist Manifesto on his 2nd generation Kindle. Oh, the fruits of capitalism :) Isn't it great that we still live in a country where people are free to do stupid and ironic things for me to laugh at?

Greg - can we really leave something as important as food procurement in the hands of private markets? I think the entire food supply industry should be immediately nationalized!

/muirduck mode off

Roger Garrison makes the powerful point that despite whatever disequilibrium exists in the market during a recession, the market still all the while is coordinating an unimagined number of activities in order to supply the citizens of New York City with food.

Garrison contrast the "coordination is impossible" model of Keynes and the "coordination is always perfect" model of Lucas with the "coordination is an adaptive process" model of Hayek and Mises.

http://www.auburn.edu/~garriro/j6lachlucas.htm<...>

The problem is how to use the math -- how to use the math constructs of "micro" and "macro". That's were most all economists fail utterly massively. They don't know how to do it.

"Rational expectations" math falsifies the process. The IS-LM math falsifies the process, the "New Keynesian" math falsifies the process.

And the radical nihilism of Keynes in the GT regarding the coordination of savings and investment is merely a mindless punt -- a claim that flies in the fact of the self evident fact that New York City does get fed.

I believe Louis C.K has a valid point: people take what the system of capitalism has provided them for granted. Everything wrong in society is blamed on the process which provided the negative outcome, but the miracles which happen because of this system are simple taken for granted.

Despite the financial crisis, unemployment being on the rise, we still have a better standard of living then even five years ago. People fail to realize that industry, not government, is responsible for this. I look around my room right now, and the amount of, to be honest, crap I have, is unbelievable. It's not provided to me by the government, there was no central planner telling me to buy my coffee maker so I can wake up on time to go to school, or my TV so I can know what's going on the world around me.

I don't understand why people are never happy with what they have. They feel that they deserve more. It appears that people aren't happy with capitalism because it doesn't provide them with everything the want. It seems that they argue that capitalism fails because it doesn't provide them with enough. Only government can provide them with more then capitalism can it is claimed.... Oh, how flawed that logic is....

It seems the stores are all humming. Restaurants are full. It's big ticket items that aren't moving(cars, houses, big appliances).

My supermarket was stocked with Easter candy yesterday.