Quotation of the Day…

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… is from pages 149-150 of University of Connecticut economist Richard Langlois’s monumental 2023 study, The Corporation and the Twentieth Century (original emphasis; footnotes deleted; link added):

Because of human cognitive limitations, what Herbert Simon misleadingly branded bounded rationality, there are diminishing returns to centralized decision-making. The more complex the division of labor, the costlier it becomes to coordinate through a central mode. It becomes increasingly difficult for the center to monitor the behavior of the participants, and more importantly, it becomes increasingly costly for the center to possess all (or even enough of) the local knowledge of the participants. The market solves this problem by complete decentralization: it assigns the rights to make decisions to those with appropriate knowledge, allowing coordination among participants to take place primarily (though not necessarily exclusively) through the lean and inexpensive mechanism of the price system. This has the added benefit of solving the monitoring problem, since it makes the participants residual claimants – owners – who benefit from the prudent use of their local knowledge, thus creating an incentive for the participants to monitor themselves. In a market, decision rights are alienable, so they can move relatively easily into the hands of those who can make the best use of them.

DBx: Yes.

Scour the descriptions and criticisms of markets offered by Oren Cass, Mariana Mazzucato, Robert Reich, Marco Rubio, Elizabeth Warren, and other proponents of industrial policy. You will find in those descriptions and criticisms no recognition of the function of markets highlighted above by Dick Langlois. And, from the industrial-policyist’s standpoint, for good reason: to recognize this essential function of markets is necessarily to undermine any case for an industrial policy that promises to increase overall living standards in the economy.