Arnold Kling  

Taking Bryan's Counterintuitive Claim Challenge

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Unchecked and Unbalanced Soviet Shoes...

Recently, Bryan posed a challenge and a follow-up to state a basic economic claim that is difficult to explain simply and intuitively. Of all of Greg Mankiw's Ten Principles of Economics, the one that I think is hardest to explain using simple intuition is this one:


Markets Are Usually a Good Way to Organize Economic Activity.
Households and firms that interact in market economies act as if they are guided by an "invisible hand" that leads the market to allocate resources efficiently. The opposite of this is economic activity that is organized by a central planner within the government.

Why would markets be better than a central planner? One reason, emphasized by Austrians, is subjective valuation. In "Man and Superman," George Bernard Shaw wrote, "Do not do undo others as you would that they do unto you. They may have different tastes." The late Bernie Saffran used to keep that quote on his door. The central planner does not have access to individual tastes.

The other advantage of markets is that they adapt more easily and learn better through trial and error. This is a difficult point to get across simply and intuitively. If it were obvious to more people, then my ideas on health care policy would be mainstream and the reforms currently under discussion would be out on the fringe, instead of the other way around.

The simplest intuition I can think of is this. "Market economies consist of individuals who are constantly making mistakes for which they must suffer. Central planning consists of individuals who are constantly making mistakes for which others must suffer."


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CATEGORIES: Economic Education



COMMENTS (12 to date)
Blackadder writes:

I have to say I've found Bryan's recent posts on this subject somewhat mystifying, particularly given his book.

The fact that most people believe things contrary to basic economics and that it usually takes significant education before someone can be argued out of such beliefs suggests strongly that basic economics is not intuitive.

On the other hand, the fact that Bryan can come up with short examples of economic principles that seem intuitive to him is very weak evidence that basic economics is intuitive since a) Bryan is atypical in many respects (as I'm sure he'd be the first to admit) and b) he has already studied economics intensively for decades. If Bryan really things basic econ is intuitive, he should try his explanations out on the layman and see how many converts he makes.

Gary Rogers writes:

Could it be that central planning cannot process distributed knowledge? Somebody used an example the other day about a group of satisfied Cadillac owners trading cars with a group of satisfied Prius owners. The fact that everyone is happy before the trade would indicate that both cars are equally good. But that does not mean that anybody will be satisfied after the trade because each person has to satisfy desires that a central planner can never comprehend.

dkite writes:

Blackadder: Most of these things are outside of people's experience. North American economies have been remarkably stable and satisfy the majority of people. I doubt that most people could imagine a world without what we take for granted.

A group, growing group of people that I've run into that are forced to learn are entrepreneurs or small business owners. It's interesting to watch people who had stable jobs, pensions, steady wage increases, who find it disappearing under their feet, and are forced by circumstance to sell their skills on the open market. All of a sudden he onerous government regulation becomes a millstone. High taxes, regulated minimum wages, trade restrictions, the perversities of political/economic decision making, etc. start being issues that they never imagined.

Funny, I remember in social studies in high school studying the soviet 5 year plans. People my age are upper management levels in government right now, and you can hear in their explanations what we learned those decades ago. Not really funny.

Derek

Phil writes:

How about,

"In a market economy, if you want something, you have to persuade only one of millions of actors to do it for you, and you can offer them incentives. In a planned economy, you have to persuade the only planner to do it for you, you have to wait in line behind millions of others asking for different things, and you go to jail for offering incentives."

kebko writes:

I agree that this is the crux of the problem. I think there are very strong parallels between evolution & market economics. Both are about the overwhelming strength of decentralized systems. And, to those who choose to understand them, they are self-evident, elegant & powerful ideas. But the human mind is simply not designed to appreciate them. If I hear a non-market argument about economics, it sounds very much to me like a creationist argument.

The problem is that you have to commit to truth-seeking to overcome the human tendency to crave solutions from a central authority. For a creationist, the incentive to remain loyal to the God-figure is strong enough to prevent it. For a non-believer in markets, the incentive to signal your concern for the less fortunate and your willingness to act on it is strong enough to prevent it.

For a creationist, loyalty to the pure dogma is the measure of progress, so the world always looks like it is wallowing in more & more ungodliness, and evolution is just one example.

For the market-denier, the measure of progress is that all outcomes are exactly the way you wanted them to be, with no "losers" even temporally, so progress (which necessarily requires change) and diversity look like just more unfairness, and the world always looks like a deepening cavern separating haves & have-nots.

Sadly, I think it is the anti-market sentiment that is hardest to break. Smith beat Darwin by 100 years, and I think Darwin has made more progress.
It's kind of ironic, really. You would expect to discover DNA first, then realize that its sexual combination creates unfathomable diversity & growth in life, then realize that by applying that same decentralized approach to human endeavors you could create progress at breakneck levels. We actually discovered these things in reverse order, yet the oldest & most powerful discoveries are still the slowest to gain full acceptance.

Dorian Taylor writes:

My lessons in regulatory parsimony come from the software world. The first is Conway's Life, in which a tiny but magnificently complex ecosystem flourishes (or dies) with just four basic laws.

The second is (Frederick) Brooks' Law from his essay The Mythical Man-Month, stated as "adding manpower to a late project makes it later". The reason he cites is that the complexity of communication increases exponentially as another person is added to the network (not to mention training and ramp-up).

The parallel I draw from this to something like central planning is that the entity in question simply overwhelms itself with information — it becomes physically impossible to keep up, so it grows. But, the very act of growing slows it down (exponentially) sooner than the gains achieved by the growth. This can be observed in any entity as it grows, from governments to megafauna to corporations. We can therefore project that there is a "right size" for any identifiable structure.

But as it relates to my profession, larger constructs with more rules are typically harder to understand and to navigate.

Kurbla writes:

Of course, market can be seen as evolution. But, what is the product of evolution? Human being. Animals. Their behaviour is determined both by central planning (brain) and by distributed behaviour of many individual cells. Central planning must be good for something if it evolved and survived. It is obviously excellent if one must mobilize all his power in short time, otherwise it is very expensive and we have not enough processing power to control every blood cell, so control must be distributed.

Also, look what is the product of market economy - the capitalist company. Again we see that central planning. Central something officers. If central planning doesn't work, capitalist company wouldn't occur; no private owner would form internal department of his company, instead, he'd purchase everything he needs on free market. Each time capitalist corporation forms internal department, it means that owner believes that his local planned economy is more efficient than whole world free market. Wow.

The states are another central planned results of evolution.

Whenever you go - you see centrally planning emerging. So, it appears to me that central planning is winning, although not that easily as Lenin expected. It is technology that cannot be developed easily. There are two main problems neglected by enthusiasts of central planning: (1) processing power. Stupid people as we are, without knowledge of math, without computers cannot plan really much. (2) Even if we have processing power, it is not enough to plan how things "should work", we also must plan circulation of incentives through system, and it is very hard. Libertarians like to stress both of these problems. Righteously. However, we already have LOT of central planning - IBM has 350 000 employees, and its central plan is hell of the plan. So, people gradually solve these problems.

Tim Worstall writes:

"The simplest intuition I can think of is this. "Market economies consist of individuals who are constantly making mistakes for which they must suffer. Central planning consists of individuals who are constantly making mistakes for which others must suffer.""

How about "Hey, you'd learn faster too if you were losing your money instead of mine"?

DaveL writes:

Intuitive way to put it:

Do you think you or a friend will do a better job of shopping for your groceries, your clothes, your car, etc.? How about an acquaintance? How about someone who has never met you?

Kurbla writes:

"Market economies consist of individuals who are constantly making mistakes for which they must suffer. Central planning consists of individuals who are constantly making mistakes for which others must suffer."

So, central planners are like dentists? Hm ... (banjo started playing)

Freedom Thinker writes:

As the Underground Man pointed out in Dostoevsky's famous book sometimes 2+2=5. Man is not always rational. Love, hate, fear, courage are contained in everybody. Create the most perfect formula for predicting man's actions and many will do the unpredictable just out of spite. Russia of course ignored Dostoevsky's warning and got the greatest technocrat of all time - Lenin.

JamesO writes:

I think it's strange that people spend so much time debating whether market economies "work" or not. A market economy is best because it is consistent with individual freedom as well as basic justice. Whether it improves GDP is as tangential as whether murder reduces GDP. Libertarians should not submit to the notion that society should accept whatever works best regardless of individual liberty.

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