The Mind of the Market

by Don Boudreaux on May 22, 2009

in The Profit Motive

Here’s a fine paragraph from page 67 of Pietra Rivoli’s wonderful 2005 book The Travels of a T-Shirt in the Global Economy:

Americans, and now Russians and Slovaks and Chinese, disdain such central planning for its inefficiencies.  A system that ignores market signals, that provides no incentives, that subsidizes losers cannot be efficient in producing goods and services.  Central planners will produce the wrong goods, use the wrong inputs, set the wrong prices, hire the wrong people, and ultimately produce shoddy products, and not enough of them, anyway.  But to meet [Chinese textile-mill manager] Tao [Yong Fang] in the Number 36 factory is to realize that the real tragedy of central planning lies not in its inefficiency but in its crushing of the intellect, of 20 years of Tao’s energy and intelligence laid to waste.  For 35 years the spindles in the Number 36 mill clattered, and no one working in the mill had to decide anything.  So today there is determination but bewilderment as Tao faces the basic questions of running a business rather than turning a cog: what to produce, where to sell, whom to hire, what to pay?  [original emphasis]
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Beautiful — both the explanation and the humanity-building capacity of markets.

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{ 50 comments }

MnM May 22, 2009 at 9:44 am

Didn't Smith say something similar? I think it was when discussing the division of labor. Somebody help me out, I don't have the text in front of me…

Sam Grove May 22, 2009 at 10:34 am

It was long thought that the so-called Queen ant directed the activities of the coolony, sending out commands via chemical signals to guide the behavior of the workers.

It is actually the other way around, the "queen" is merely the reproductive organ of the colony, responding to the signals brought by the workers. Ants necessarily operate independently according to their nature.

Central direction is not required, indeed would be a hazard to the colony.

So it is with us.

Mathieu Bédard May 22, 2009 at 10:53 am

Reminds me of the confusion some teenagers have when they've just gotten out of school and are wondering what to do with their lives. Many of them have been living on their parent's planning of their lives, and the intra-family 'redistribution'. This sudden responsibility and freedom of choice can be quite overwhelming too..

placebo May 22, 2009 at 11:44 am

The most successful countries/economies are a combination of the two. The question is what is the ratio that best meets the needs of a society's members.

I_am_a_lead_pencil May 22, 2009 at 11:56 am

"The question is what is the ratio that best meets the needs of a society's members."

Which group of individuals get to answer that question?

mike farmer May 22, 2009 at 12:14 pm

"The most successful countries/economies are a combination of the two. The question is what is the ratio that best meets the needs of a society's members."

Just because some central planning is present in the most successful countries doesn't prove the presence of central planning is vital to the success — these countries could be wildly successful if what central planning does exist was removed altogether. It's my opinion that countries are held back by even a little economic central planning, and the successful countries are successful due to the extent of free market principles which operate unhampered,and in spite of the central planning which holds them back from even greater success.

MWG May 22, 2009 at 12:15 pm

"The most successful countries/economies are a combination of the two."
-placebo

Oh yea? Which countries/economies would those be?

Rudy May 22, 2009 at 12:22 pm

The more freedom, the higher the standard of living. Pretty simple. Excellent post.

placebo May 22, 2009 at 12:32 pm

I cannot come up with any country that doesn't have central planning. Can anyone provide one? Therefore, unless someone can show otherwise, whatever country anyone chooses as "most successful" has central planning.

My personal picks for most successful would include the United States, Denmark, Norway, Sweden, Germany, France, Japan, and so on.

Lee May 22, 2009 at 12:49 pm

"For 35 years the spindles in the Number 36 mill clattered, and no one working in the mill had to decide anything."

Nice STORYTELLING because it is a better narrative: no decision at all or now deciding under market system. The truth, as my father who worked as a manager before and now in China, is that you decide less and take less responsibility then, but more now.

Honestly, I am sick of all these zero or nothing posts on China.

Veritas May 22, 2009 at 12:51 pm

@placebo,

Yes, the "most successful" countries have some central planning.

Even Olympic athletes are capable of getting a parasite/tapeworm in their otherwise highly effective bodies.

placebo May 22, 2009 at 12:53 pm

Rudy, how do you measure freedom? If you mean free of government intrusion then I would say that the people of Somalia are some of the freest on earth. But, their standard of living is one of the lowest. There's got to more to a higher standard of living than freedom.

Cheers May 22, 2009 at 1:10 pm

placebo,

You should try taking a trip to africa sometime. You'll find it significantly less free than you first imagined. Just because there is no constitutionally-defined government, doesn't mean there is none to speak of. Africa is a highly governed place. It simply isn't governed in the way we're used to. That's like saying that 1920's Chicago was the pillar of the free market. Government comes in many forms. Some are voted into power, some are not.

placebo May 22, 2009 at 1:23 pm

Veritas, didn't you mean to say that, … Yes, the "most successful" countries have much* central planning?

* much as defined by the hard core Libertarians that visit Cafe Hayek

dg lesvic May 22, 2009 at 1:36 pm

Placebo,

Before measuring freedom you must define it.

It should be noted that everybody is for it, even the Communists, even the American Civil Liberties Union, but, what kind of freedom, for aggression or from it, freedom for some or for all? While only the strong could have freedom for agression, everyone could have freedom from it. So, freedom, as an equal right of all, must mean freedom not for but from aggression, the right to be let alone, to offer or withhold one's own resources and none but one's own, the right not to free choice but mutually voluntary interaction.

Voluntarism is freedom from aggression, not need, from external, not internal compulsion, from the gun at your head, not the hunger in your stomach. But since hunger is tantamount to the gun, what good is freedom from the gun without freedom from the hunger? None, if there were only the one option; but, with a second, you could choose the better of the two — if there wasn't the gun at your head.

There is no third alternative, nothing that isn't either the one or the other, freedom from or for aggression, the right to be let alone or the violation of it. And since there could be no right to aggression, to rape, to force oneself on others, no right to violate the right to be let alone, that is the only civil right there is. So, there are no civil rights plural, just the one right, to be let alone. And it does not include any right to "equal opportunity." In a free society, we owe nothing to anyone that we have not contracted for, no service, good or bad, treatment, fair or unfair, opportunity, equal or unequal. If we have any right at all, it must be to offer or withhold our own resources, services, treatment, and opportunities.

And though the definition of "one's own resources" vary from one time or place to another, the principle is the same, the right to one's own, however defined.

Accusing the individual defending his own resources of "dictating" to the robbers is like accusing the woman resisting rape of raping the rapist.

In the latest Newspeak, taxation is an economic stimulus and forcing oneself on others a civil right. But, in the real world, you cannot build a civilization on a foundation of aggression, plunder, and rape, whatever you call it.

Now, the fact that the Somalis are free of the state doesn't mean that they're free from aggression. There is aggression within the jungle as well as the state.

But, not in the free market!

MnM May 22, 2009 at 1:43 pm

"Before measuring freedom you must define it.

It should be noted that everybody is for it, even the Communists, even the American Civil Liberties Union"

dg lesvic offers a great insight, here.

QFT.

Sam Grove May 22, 2009 at 1:59 pm

There's an island in the Pacific, a U.S. territory.

I once read (or perhaps saw) a documentary about this island and what happened after it became a target of government largess.

Scads of money was sent to the island.

Rather than improving the lot of the natives, the influx of money had perverse results.

Relieved of the necessity of exerting themselves to survive, the natives began to stop caring. Alcoholism became rampant and the island became littered with trash.

If you relieve people of the necessity of caring for themselves, they often stop caring…about anything.

placebo May 22, 2009 at 2:00 pm

Cheers, are you saying that government can increase people's freedom? That is going to upset some of the hard-core Libertarians on this site.

TrUmPiT May 22, 2009 at 2:01 pm

Move to China and work there if you think it is so wonderful. I don't see a lot of immigrants moving to China in search of work. They come, including many Chinese, to the U.S. for better or worse. I'm studying Italian presently, but taking Chinese herbal medice to treat my health condition. I'm ecletic when it comes to goods and services that can benefit me. Fortunately, I'm rich so everything is free for me. I've beaten the price mechanism! For you, there is a servile job in McDonald's waiting for you. HaHa! I've won and you've lost. Make me my burger, you slave-wage cheeseburger flipper! I want onions and secret sauce on mine. What do they put in that sauce that makes me hallucinate anyway?

placebo May 22, 2009 at 2:16 pm

dg lesvic said: "… There is aggression within the jungle as well as the state.

But, not in the free market!"

You must be referring to the mythical "free market." In practice it is not quite the panacea you make it out to be.

dg lesvic May 22, 2009 at 2:21 pm

What's wrong with it?

Methinks May 22, 2009 at 3:04 pm

If you mean free of government intrusion then I would say that the people of Somalia are some of the freest on earth. But, their standard of living is one of the lowest.

Placebo, the mess that is Somalia was created long before it freed itself from any central government at all. Compare Somalia today with no central government to Somalia with a central government. That's the relevant comparison.

SaulOhio May 22, 2009 at 3:38 pm

"the real tragedy of central planning lies not in its inefficiency but in its crushing of the intellect"

Thats what Ayn Rand said 50 years ago.

Placebo: Somalia's problem is not that it has no government, but TOO MANY. Warlords and other factions claiming to be the rulers of the same territory. It is far from being free of government.

Placebo is the typical anti-capitalist who comes to an internet forum with no idea what free market ideologies like libertarianism are all about.

Freedom is, most simply defined, the absence of the initiation of force. It means that you are free to be left alone to do what you can, aided only by the voluntary cooperation of other free men, and never interfered with through the use of violence or coersion. This means a government constitutionally restricted from using force against anyone who does not himself use or threaten force, but which does act when criminals threaten freedom through theft, violent assault, or fraud.

These are the basics you should know before you come onto an internet forum to criticize the ideas of pro-capitalist thinkers, but which your questions and assertions prove you don't know.

placebo May 22, 2009 at 3:40 pm

Methinks, your point is well taken, but it is off-topic. The posts prior to mine were criticizing central planning followed by a claim that more freedom equals a higher standard of living. The inference being that central planning takes away freedom and prosperity. My Somalia comment was a challenge of that claim's validity. Find a place with no central planning (as in Somalia) and see if the people there have prospered.

placebo May 22, 2009 at 3:45 pm

dg lesvic: What's wrong with it?

monopolies, cartels, externalities, …

MnM May 22, 2009 at 3:54 pm

Thomas DiLornezo on the myth of the natural monopoly.

placebo May 22, 2009 at 4:09 pm

SaulOhio, what are you yapping about? I believe in capitalism, and I favor many of the libertarian positions. But, I am not one of the "drink-the-Koolaid" Libertarians such as you appear to be. The libertarian ideal you have in your head is a mythical dreamland. I'll throw you the same challenge that I've tossed out in prior posts: Show me any successful country that embraces the libertarian ideal of minimal government. When you can't do that then at least give me the closest example that you can provide. Your best example will be ripped to shreds by other die-hard libertarians for having too large a government.

It's fun to bitch and moan about the evils of government, but every prosperous democracy has rejected the libertarian ideal you espouse.

S Andrews May 22, 2009 at 4:11 pm

My Somalia comment was a challenge of that claim's validity. Find a place with no central planning (as in Somalia) and see if the people there have prospered.

Somalia is a failed communist state. Have you read it's history. If anything, Somalia is an extreme case of failed Central Planning.

S Andrews May 22, 2009 at 4:17 pm

Show me any successful country that embraces the libertarian ideal of minimal government.

Yes, we all have a vision of a perfect country and that perfect country doesn't exist – it doesn't matter if it is a libertarian version of utopia or a totalitarian version of it. If we were all perfect, we will need no debate, because we will all be doing that absolute perfect thing that we all recognize.

The question is which way do you want to the society to go? Towards liberty or towards tyranny ( which includes the tyranny of the majority )

Now, we can always point to countries, which, while not perfect, we could still live with. United States was one such place for most of the early 19th century, may be even for most of the 19th century – at least to my mind.

SaulOhio May 22, 2009 at 4:23 pm

I get this bad argument all the time: "Show me an example of a perfectly free economy".

It is assumed that if I can't provide such an example, there is no information from which to argue.

But the fact is that we can actually point out the real effects of government planning and interference in the market. Name the government intervention, and we can explain and even show, using real-world examples, how that leads to economic chaos, not order. We don't need to meet your impossible standard of proof. We have all sorts of other evidence, which have been used to develop the economic principles whic constitute our arguments.

Methinks May 22, 2009 at 4:35 pm

Placebo,

My point about Somalia is that it has prospered relative to what was going on when it was subject to a totalitarian dictator. It hasn't turned into a major economic power or anything, but it's a relatively better off and isn't that what we're talking about?

Sam Grove May 22, 2009 at 5:04 pm

Somalia is going through withdrawal symptoms, a necessarily messy process.

Under central planning, the customs of markets are destroyed. When the central planning is removed, the customs must be restored.

dg lesvic May 22, 2009 at 6:30 pm

Placebo,

What's wrong with the free market, I asked.

"monopolies, cartels, externalities, …," you answered.

Let's take one at a time.

What's wrong with free market monopolies?

placebo May 22, 2009 at 7:01 pm

SaulOhio, you said: We don't need to meet your impossible standard of proof. We have all sorts of other evidence, which have been used to develop the economic principles whic constitute our arguments.

The problem is that the marketplace (the electorate) doesn't want to buy your product. To borrow from the past, it's as if you're selling Betamax in a world that wanted VHS. You've got all sorts of studies that show you have a superior product, but you're research has apparently fallen short in identifying all the features that are important to the consumer (voter).

Earlier I asked you for an example of a successful libertarian society. I don't know if this applies to you, but several others on this board long for the late 1800s to early 1900s. That period appears to be similar to what many Libertarians are promoting now. If it was so superior why did the voters abandon "small" government a few years later? As a democracy prospers why do its citizens look to government to solve more and more of their problems and allow it to grow? Somehow all of your evidence has some big omissions. There are some unwanted side effects of laissez-faire capitalism that you either overlooked or choose to ignore.

MWG May 22, 2009 at 7:07 pm

"how me any successful country that embraces the libertarian ideal of minimal government."
-Placebo

You are correct. There are no examples of successful economies w/o government. But your list ("My personal picks for most successful would include the United States, Denmark, Norway, Sweden, Germany, France, Japan, and so on.") is pretty far off. Try Hong Kong, Singapore, Chile, Estonia, New Zealand, Ireland, ect, ect

MWG May 22, 2009 at 7:16 pm

Placebo,

It's also important to keep in mind that you can't look at a country's economy as a picture. Japan, for example, is pretty wealthy, but has seen almost NO growth over the last 15 yrs since they embraced Keynesian economics. Chile, on the other hand, is not nearly as wealthy as Japan, but since they embraced free market policies back in the late 70s, has become the wealthiest country in S. America.

There is absolutely no doubt that those countries who move the farthest from central planning are precisely those who see the greatest growth in their economies. France is far from being the great example you think it is.

SaulOhio May 22, 2009 at 9:45 pm

Placebo: Another one of those stupid arguments I keep hearing over and over again. Because we have, as yet, failed to persuade people that free markets are a good idea, we should give up. Maybe everyone else knows somehtign we don't.

If everyone else believes in God, does that make the atheist wrong? If Galileo thinks the sun is the center of the solar system, but everyone else thinks the Earth is, does that make Galileo wrong?

We will continue to argue for what we see to be the truth, wether the voters are convinced or not. Changing my principles, based on empirical observation and sound reasoning, just because they are unpopular is not in me.

Isn't there a formal name for this fallacy? Argumentum ad populum or something like that?

If there IS something wrong with the theory behind laissez-faire economics, and you can prove it, DO SO. And of course, get the theory right. I suggest you actually study it for a while, since you are getting it wrong. You sound like all you have read about free markets is some leftist rants.

MnM May 22, 2009 at 10:57 pm

Saul, you're a credit to Ohio.

argumentum ad populum

Gil May 23, 2009 at 1:19 am

Duh, placebo, Libertarians would rather be someone earning $50,000 and paying no taxes than be someone earning $1,000,000 and pay a 50% tax rate.

dg lesvic May 23, 2009 at 1:28 am

Placebo,

You wrote,

"The problem is that the marketplace (the electorate) doesn't want to buy your product."

Whether the electorate is really the marketplace, and doesn't want itself, you're essentially right: the majority doesn't want to live in a completely free market society. But that isn't my problem. My problem is that they don't want me to live in it either.

I don't care if you want to live in a society run according to the principles of the Marquis de Sade. I only have a problem with it when you want to force it on me.

So, why can't you live and let live, live in the socialist or partly socialist society you prefer and let me live in the completely capitalist society I prefer?

Gil May 23, 2009 at 1:43 am

"So, why can't you live and let live, live in the socialist or partly socialist society you prefer and let me live in the completely capitalist society I prefer?"

Unless you're living in Lesviconia or some other free-market non-democracy then tough luck dgl.

dg lesvic May 23, 2009 at 3:43 am

Gil,

So, it's my "tough luck."

We all understand what that means, so don't deny it. It means that you don't give a damn. It's perfectly alright with you that I be dragged kicking and screaming into a socialist or partly socialist lifestyle I abhor.

Was it also alright with you, too, that Blacks were dragged kicking and screaming onto the plantations of the old South, and that countless millions under Hitler and Stalin were dragged kicking and screaming into their concentration camps and slave labor camps?

Was that just their "tough luck" too?

And would it just be your "tough luck" when it happened to you, too.

I hope it does, you miserable bastard.

Gil May 23, 2009 at 4:21 am

Yeah, and s'pose you'd talk tough about the 2nd Amendment but when push comes to shove you wouldn't have the guts to pull the trigger.

But then when was the U.S. 'yours' such that you could do what you want as though it were some sort of anarcho-capitalist utopia? Yeah we all prefer things in our lives to better than what they are. But, of course, if you're not a Libertarian you have 'positive rights' issues. Only darling Libertarians have 'negative righst' issues. You might complain when non-Libertarians outnumber Libertarians, get outvoted and then blame the system but then you'd probably complain about the U.S.A. during the 'golden era' (i.e. before modern democracy) when the decisions were made by men of notable wealth because you probably wouldn't have been one of them. And, oh course, comparing a modern fat-arse white American to some luckless black Africans forced into plantations (wasn't slavery in both North and South at first?) – want some cheese to go with . . .?

"I'm a tax-slave!" Whatever.

SaulOhio May 23, 2009 at 5:59 am

Whats all this argument about what kind of society we "prefer" to live in. We all want prosperity and freedom. The question is, what principles of prosperity and freedom are true? What are the facts?

The facts are that prosperity depends on production, and production is dependant on the human mind to even define what production is. The human mind needs to be free to do this. Freedom requires property rights. Government force, when used for other things than retaliation, violates freedom. These are facts.

If you think I am mistaken about these facts, lets discuss it. But lets stop this childish "I want! I want!"

dg lesvic May 23, 2009 at 6:39 am

There can be no discussion with Gil, or with anyone else who just doesn't give a damn. Economics presupposes giving a damn, having goals, and the question, then, how best to attain them.

Fellow Ohioan, what is childish about the desire to be free? And why do a socialist's goals require my enslavement?

Gil May 23, 2009 at 7:47 am

"The human mind needs to be free to do this. Freedom requires property rights." – SaulOhio.

Uh oh! It looks as though SaulOhio gets tough. If freedom requires property rights then seeking freedom is a pro-active 'negative' right in that you have to seek it and not wait for it to happen. Which is why I can't help but chuckle at the bully stereotypes in The Simpsons who never get any sort of 'come-uppance' because their victims are weaker than they as it doesn't happen in real life either.

dg lesvic May 23, 2009 at 8:54 am

Gil,

If you're expecting any more answers from me, don't hold your breath. I can't begin to make sense out of anything you see. Bye, bye, have fun, you raving lunatic.

placebo May 23, 2009 at 10:10 am

dg lesvic, you asked, "…what is childish about the desire to be free? And why do a socialist's goals require my enslavement?"

I'm assuming that you are not an anarchist, and that you believe that some level of minimal government is necessary. How would you respond to the anarchist that doesn't want to be enslaved by your preferred size of government? Are you going to force your government on the anarchist? If you answer "yes" aren't you a hypocrite? If you answer "no" how are you going to make your minimal government function?

placebo May 23, 2009 at 11:14 am

SaulOhio:

Of course you think I present "stupid arguments." What else can you say when you either cannot or do not want to address them?

I'm sure that there is much we can agree on. I admit that government in America today is too big, corrupt, usually inefficient, and so on. But, the minimal government that hard core Libertarians advocate does not have a long shelf life in a prospering democracy. Do you have any examples where the size of government does not increase as a democracy prospers and doesn't trample civil liberties?

Finally, if you only measure prosperity by "production" you will never understand why your libertarian ideal is doomed to fail.

K Ackermann May 23, 2009 at 1:13 pm

Somalia is a country without central planning.

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