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Quotation of the Day…

… is from page 246 of Richard Epstein’s wisdom-packed 2003 book, Skepticism and Freedom:

Markets will do well in organizing the delivery of goods and services because the system has a collective rationality greater than the rationality of its individual members.

DBx: Indeed so.

Note that Epstein here emphasizes markets’ rationality being greater than that of any individual person. His observation differs from – although is complementary to – Hayek’s observation that markets process and use far more information and knowledge than could possibly be processed and used by government officials charged with allocating resources in place of the market’s allocation.

Note also that Epstein’s argument isn’t that market rationality is perfect; it’s that market rationality is greater than that of any individual. Even the most rational, intelligent, and sober flesh-and-blood individual is beset by cognitive biases, subject to lapses of good judgment, and at least occasionally prone to allow emotion to mask reality. This fact is true for individuals working in the private sector and in political arenas. A benefit of markets is that commissions of error and irrationality typically create profit opportunities within markets; the negative consequences of error and irrationality are quickly detected and minimized.

A related benefit of markets is that Jones’s error or irrationality on some particular margin at some particular moment are often offset, and perhaps even negated, by Smith’s and Williams’s astuteness and rationality on that same margin at that same moment.

This important feature of markets is yet another that advocates of industrial policy either ignore or blithely dismiss as being surmountable. Industrial-policy advocates – ever-eager to point to actual (and imaginary) imperfect decision-making made by actors in private markets – assume that the officials who carry out industrial-policy schemes will be less prone to error and irrationality than are private-market actors. But of course there’s absolutely no justification for this assumption. Indeed, spending other-people’s money almost certainly makes government officials more prone to error and irrationality, not to mention also to interest-group pressures, than are market actors.

Moreover, because industrial policy, by its very nature, constricts the ability of people with rival ideas to challenge and compete with the ideas of industrial-policy mandarins, any errors committed by these mandarins are less likely to be discovered and countered as quickly and as fully as market-actors’ errors are discovered and countered.

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