James Gwartney's 2008 Presidential Address to the Southern Economic Association is outstanding. It's entitled "Institutions, Economic Freedom, and Cross-Country Differences in Performance" and is published in the April 2009 edition of the Southern Economic Journal (Vol. 75, pages 937-956). Here's an especially important paragraph (from page 946):
Our modern living standards are almost entirely the result of investment, entrepreneurial discovery, and gains from depersonalized trade – trade between people who do not know each other and often never meet. As Adam Smith noted long ago, the division of labor is limited by the extent of the market. Much like a telephone or an Internet system, a market economy is a network good. As the size of the market expands from the local town or village to the region, nation, and beyond, network participants derive larger and larger benefits from trade, specialization, and economies of scale. For those connected to the global market, this system generates employment opportunities, high productivity per worker, and a vast array of consumer goods that are available at almost unbelievably low prices. This network system makes high-income levels and living standards possible.
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So this post gives me an idea: "browse local". The idea is that people should choose web sites local to them, rather than the web sites that outsource their content to China. I think it could be the perfect Internet spoof, because you just know it would get support from the certain segments of economic stupidity.
Is there no concern that at some size and connectivity, that chaotic effects will cause the system to go unstable? Has there been any sort of theoretical investigation in this area?
Bret,
There has been some concern. It's called "liberalism," and it's wrong.
Liberalism is not only wrong, it's a Humanistic religion where a government of men takes on the attributes of a god.
EvanM and John -
You're being incredibly unfair to Bret.
Bret – yes, people do think about this sort of thing. I think of it as a type of transaction cost, and Coase suggested that when transactions costs associated with contractually maintaining an extended network engaged in some coordinated activity get too high, we write contracts for residual (rather than specific) rights and organize production hierarchically in a firm. Oliver Williamson talked about this too.
So I always think about the two opposing forces of Smith/Stigler and Coase/Williamson. Smith and later Stigler talk about the "division of labor being limited by the extent of the market" – as markets grow specialization is possible because there is a broader market for specialization. Coase/Williamson recognize that participation in these markets is not costless (as you intuit) and suggest that non-market institutions emerge as we bump up against the limits of network coordination.
I don't think Smith/Stigler or Coase/Williamson are in conflict at all. Given an increasing degree of specialization in a broadening market, Coase/Williamson detail the efficient institutionalization and really the efficient congealing of certain sectors of that network.
Great question!
What John said. ^
Bret -
And in terms of instability specifically there's certainly the New Keynesian coordination failure models.
Daniel Kuehn,
Thanks for the answer. Very interesting. If you have a link handy where I could read more, I'd greatly appreciate it. For example, I'm interested in what sorts of "non-market institutions emerge" and how they handle the "residual rights" sort of thing in an extended network.
Bret -
Pick up and read Coase's "The Nature of the Firm". Williamson put out a good edition of this that includes essays by other people as well.
I think this work almost exclusively talks about firms – but it does address corporate organization.
George Mason's Experimental Economics group does a lot of work with transactions within institutions – ie, reintroducing market mechanisms within a firm that help to allocate resources.
I'd also very highly recommend googling George Stigler's "The Division of Labor Is Limited By the Extent of the Market". He basically says EXACTLY what Smith says in the Wealth of Nations, but he presents it in a neoclassical framework that I think many people are more familiar with.
I'd also recommend the work of Xaiokai Yang at Monash University (at least I think he's still there). He's often over my head, but he takes the division of labor to a whole new level – he calls it "New Classical Economics" (not to be confused with new classical macro), and it's basically a mathematical formalization of Smith as well, but it eschews a lot of the neoclassical framework that Stigler uses. I think Stigler's version is great though, and more than adequate to get your head around modern applications of Smith.
"… and a vast array of consumer goods that are available at almost unbelievably low prices."
A couple years ago I purchased a digital alarm clock for $15 dollars. It displays the time, date and day of the week in customizable formats, the room temperature in Celsius or Fahrenheit on a large liquid crystal display that has excellent backlighting that allows me to check the time at night without waking my wife. It is energy efficient, I honestly can't remember ever changing the batteries. All for $15 dollars. I truly am amazed that this product is only $15 dollars.
When I use this example in conversations as an example of the power of the free market, the response is usually confusion followed by a change in subject. It's obvious they're thinking, "Why would anyone be so amazed by a $15 dollar alarm clock?"
We take so much for granted. It only goes to show the eaten bread is soon forgotten.
Cheers,
Tom
Tom H. -
Your post reminds me of this Louis CK and Conan clip – I love this one:
http://www.youtube.com/watch?v=jETv3NURwLc
Daniel Kuehn,
I didn't even have to follow the link, I absolutely love that clip. When I first saw it, I sent it to all of my friends and family.
Thanks,
Tom