Art Carden  

Markets and Prices Allow Us To Use Knowledge We Don't Have

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Why Do Government Enterprises ... Anthony de Jasay on "rights"...

Another semester is upon us, and in my principles of macroeconomics class at Samford we spent the first week reading Frederic Bastiat's What is Seen and What is Not Seen and Leonard Read's I, Pencil. In class yesterday we considered a fundamentally Hayekian upon reading "I, Pencil:" markets and prices allow us to use knowledge we don't have.

Specialization, division of labor, and division of knowledge allow us to harness and deploy others' knowledge for our own purposes. I don't know how to build a diesel engine, but as I'm writing this I'm harnessing others' knowledge in order to prepare a cup of coffee. I don't know how petroleum becomes the specific kind of plastic that makes up the K-Cup I'm brewing, but I'm able to harness others' knowledge of chemical engineering in order to accomplish my own goals.

Every good we buy and every price we pay embodies knowledge and expectations that are not our own but that nonetheless appear to us in intelligible form: goods and services have physical, temporal, and spatial characteristics, and prices are pretty straightforward ("you can have this iProduct and all it entails for just a few hundred dollars"). If you want to get spiritual or cosmic about it, this means that we are linked across time and space not only by our common humanity, but also by our every action. Far from being an alienating and atomizing force, I think the market actually draws us together in ways that are hard to appreciate but that become really beautiful once you come to understand them.



COMMENTS (4 to date)
ThomasH writes:

Fundamental.

It's the basic reason for my skepticism about exhortation of consumers to buy "environmentally friendly" products. Without Pigou taxes that make the prices they face incorporate externalities, consumers cannot know what IS environmentally friendly.

Steve writes:

I feel like the last sentence in your first paragraph is missing some words?

Chris Wegener writes:

Having read 'I, Pencil' I am fascinated how anyone can take it seriously as a matter of economic analysis.
While it is certainly true that the "market" allows us to trade in goods and services that we do not understand nor are able to produce our selves it also requires laws, rules and regulations to function.
'I, Pencil' is written as though those external factors do not exist. As an exercise I would suggest you require your students to list all of the laws, rules and regulations embodied in the work. Start with the courts and legislatures that allow for private ownership of land, or more likely the leasing of public lands to harvest the trees. Then move on to the mandating of safety equipment to allow the workers to fell the trees and process the wood safely. The taxes used to pay for the roads the trees are transported on. You get my drift... etc.
Suddenly the Hayekian view seems incredibly childish and shallow and the true reality of modern life is far more complicated than your economics can currently encompass.

David Borinsky writes:

Responding to Mr. Wegener’s comment, the Hayekian view not only encompasses courts and legislatures allowing for private ownership and it not only encompasses the other norms he recites, but identifies those practices as the very stuff out of which our modern, complex order emerges.

What Mr. Wegener misses is that customs of ownership and exchange, as well as other foundational norms of interaction between persons unknown to each other, predate law (and can, and still do, exist independent of it).

That is evident, according to Hayek, in the first tool traded by a pre-historic blacksmith (or whatever they were called back then) and is evident in the wealth and sophistication of the city states that dotted the Mediterranean, North and Baltic seas in early modern, pre-nation state Europe.

For example, in The Fatal Conceit, Hayek argued that customs that arise spontaneously and evolve by their own logic – that is, irrespective of the existence of legislators or monarchs who might later formalize them -- are the genetic coding of the ‘extended order’ that allows, in our day, for the manufacture and sale of pencils. Without that dynamic, according to Hayek, we would have no pencils, no Internet and no legislators.

If you, Mr. Wegener, were to read The Fatal Conceit, or most likely any other work by Hayek, you would come to understand, suddenly or not, that your current view of the matter “seems incredibly childish and shallow and the true reality of modern life is far more complicated than your economics can currently encompass.”

Mr. Wegener’s dismissiveness notwithstanding, Hayek nails it.

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