… is from pages 73-74 of NYU economist William Easterly’s superb 2006 book, The White Man’s Burden – a book that explores the differences between economic ‘development’ that is designed and imposed by “Planners” and economic development that is undesigned and generated by “Searchers”:
The other great accomplishment of markets is that they reconcile the choices people make for themselves with the choices other people are making. Back at the dinner table we find that no Planner is necessary to process the enormous amount of information that is required to decide how much pasta, rice, cheese, and takeout cuisines of various cultures to supply to the people of New York. This great achievement of markets is achieved through Searchers. The suppliers search for customers, the customers search for suppliers, and the price adjusts up or down to equate supply and demand. So the market determines prices and quantities to reconcile the needs and abilities of suppliers and consumers. The price reflects both the additional cost that the supplier incurs to supply an additional item and the additional benefits that the customer gets from purchasing one more of each item. Hence, the market matches the additional cost to society of producing each item to the additional benefit to society of consuming that item. The market comes up with a basket of commodities produced at the lowest possible price for the highest possible benefit.
Does this competitive, decentralized market pricing system work perfectly in reality – as in ‘never failing to maximize benefits at some given cost, or never failing to minimize the cost of generating some given benefits’? Does this market system always and at every moment ensure that all willing buyers have all of their needs that can be met at appropriate costs actually met at appropriate costs?
Answering these questions can be surprisingly difficult depending on how “benefits” and (especially) “costs” are defined. But my answer is “no.” No: real-world markets, even in ideal institutional and cultural settings, never achieve maximum maximization of human well-being. Genuine opportunities for improvement are always present. (These opportunities are a chief fuel for the on-going market process.)
But the reality that deserves our attention and admiration is that markets, where they are allowed to work, work as well and as smoothly as they do. The failures of markets when private property rights are at least reasonably secure and most prices are allowed to rise and fall in response to market forces are nothing as compared to the successes of markets. And a great danger is this: efforts to tax, subsidize, or regulate a market in ways meant to correct whatever failures currently exist are far too likely not only themselves to fail to correct those failures, but that these efforts will also so disturb the complex interactions of the market that the net result is a worsening of the overall market outcomes.