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In my latest column for AIER [2] I explain some of the reasons why the enormous and unprecedented simplicity of modern life [3] depends upon the enormous and unprecedented complexity of the modern, global market economy. A slice:
As Adam Smith emphasized nearly 250 years ago [4], the greater the degree of specialization among producers – what Smith called “the division of labour” – the more productive is each producer. And the more productive is each producer, the greater is everyone’s access to goods and services. Lives are made simpler by simply having more stuff such as food, clothing, and shelter. Less time and effort are spent preparing for possible severe deprivations. Also, less time and effort are spent arranging for the reuse of materials and for the repairing of damaged goods. (When was the last time you darned a pair of socks?)
As producers become ever-more specialized, the processes and institutions that connect them constructively to each other – and to consumers – become ever-more complex. A cobbler need only acquire leather from the tanner across town, who in turn acquired rawhides from local farmers. Most of the productive actions that go into a pair of cobbler-made shoes are performed by the cobbler and a handful of other input suppliers. One human being can observe all of these actions and comprehend them.
But cobblers cannot make shoes in the enormous quantities that we today take for granted. Today’s shoes are made (and transported to market) largely by machines, each of which is a complex assortment of material inputs (including electricity, which must be generated and transmitted) and innovative ideas that originated in at least a few dozen different places around the globe. The markets – and market and legal institutions – that connect these many input suppliers to each other are themselves complex, relying as they do on particular contractual provisions, insurance availabilities, transportation options, and organizational arrangements.
The best way to organize some ‘stages’ of the production or distribution process of shoe inputs might be to have each of these stages performed by a single firm. For example, the same firm that stitches together the tongues, eyestays, and toe caps might also fasten the entire upper parts of the shoes to the soles. The optimal means of performing other ‘stages,’ though, might be performed by two or more different firms. Does the firm that fastens together all parts of the shoes also itself transport the finished shoes to wholesalers, or does that firm purchase this transportation service from another company?
Choose one way to carry out the production and distribution of shoes and you get one cost of doing so; choose another way and you get another cost. The challenge is that no one can know in the abstract what is the ‘best’ way to carry out the production and distribution of shoes. The only feasible way to acquire this information is to discover it through competition.
By allowing different suppliers to experiment with different ways of arranging for each segment of the production and distribution process, the arrangements that are relatively best will come to dominate those arrangements that are worse. In addition, if entrepreneurs are allowed to innovate, over time new means of arranging for each segment of the production and distribution process will be thought of and tried. These new means will compete against the existing means. The means that will ‘win’ – at least until yet another innovative idea comes along – will be the means that is the lowest cost.