Thursday, February 19, 2009

Econ 101: It’s the Allocation, Stupid

For those that are gracious enough to visit this site, you may have noticed that we try to combine a variety of disciplines: economics, architecture, religion, politics. Though it is true that we, like most bloggers, are better schooled in some areas than others (and consequently go into more depth in those areas), we do not neglect common sense when offering commentary on how it is we thing society is best ordered. I would like to offer such common sense as it seems (at best) a healthy minority of friends and colleagues refuse to investigate the realities of our current economic mess.

As I understand it, economics goes something like this: there’s a scarce amount of goods and services in the world, and we have to figure out how to allocate them. There are a number of ways of doing this, but two in particular have been tried most frequently, and one is in the process of being implemented in America as I write. The first way is to, as a society, do nothing. It’s often called the “free market” or “free enterprise.” It allows people, in a lawfully agreed-upon manner, to freely engage in trade. People are allowed to use their gifts, talents and skill to make products, offer services, transport goods, invent things, pretty much do anything that others place a value on. The market then acts not only as a place where goods are exchanged, but even more importantly, where information is exchanged. In trillions of daily voluntary exchanges, information on prices, demand, supply, production and everything related to the free exchange of goods is shared.

There are setbacks to this economic model. Good theology tells us people are sinful and imperfect, and in a free society, people’s innate sinfulness will spring up from time to time and cause harm. Most of the time, this sin, via the simple fact that sin will distort the free market and will thus corrupt the inherent value of goods and services, is localized and prosecuted, if it isn’t fixed within the market system itself. Greed is allowed to flourish in this system, as it does in all systems, and appropriate legislation and the rule of law are required to ensure the free market stays as free of corruption as possible. But greed, because it is spread so disparately across millions of producers and consumers, is rarely concentrated in a way that is finally detrimental.

The second model is one of centralized redistribution. The model is quite simple in theory and far older than the free market approach, but surprisingly complex in practice. The thinking says that we can morally take the property of individuals for the good of the collective, or use the excess of the wealthy to “balance” the poverty of the poor. In essence, through forced taxation (much like the medieval feudal system), citizens hand over their property to a central planner, who then “provides” for the needs of all. Various severities of this idea has been tried through the centuries. We seem, through the nationalization of several industries and by acquiring more debt than our GDP, to be slowly (or perhaps rapidly) adopting this point-of-view. Instead of feudal lords, the federal government is taking more and more of our property and centrally planning the economy.

There are setbacks to this model as well. History tells us that it is virtually impossible to administer this model because of its complexity, and because the voluntary information that flows so freely in a free economy is now choked off at several bottlenecks along the way. Information instead lies in the hands of a relative few people, people who cannot possibly have the adequate information to make informed decisions about the inherent value of goods and services. In other words, the proper allocation of resources becomes impossible, as an organic pricing system is replaced by an artificial pricing system. One small example might be the overabundance of size 12 shoes in the former Soviet Union, shoes that went unused. So where there wasn’t enough bread, there were far too many shoes that weren’t used. Information wasn’t able to be conveyed. There were simply too few ears for all the speakers.

There are serious moral ramifications of this collective model as well, too many to account for here. Suffice to say individual liberty and property are compromised. When allocation of resources is placed in the hands of a select group of people, rationing is the only possible result, as history tells us. So what inevitably happens is that the “class structure”, which are supposed to be eliminated through collectivization, is strictly enforced, as some get the scarce goods and some don’t, always for the good of the cause.

The difficulty with the free market is that it is that there is very little that is intuitive. It is not concrete. It really is the invisible hand. But we don’t like invisible hands. We like big concrete, centralized hands. We want someone else to produce X,Y, and Z, and we don’t want to leave that production to chance. What if someone doesn’t make it? What if they charge too much? What if I don’t like it when they do make it? Instead, we’d prefer to let a central planner tell us they’ll make it instead of leaving it to an unseen producer.

But with all its problems, one would have to be willing to live in ignorance not to be appreciative for all the free market does for us every day. It has solved, without anyone guiding it or directing it, the great problem of allocation. We have progressed as workers and are free to pursue those things we love to do precisely because we have allocated someone else to do the things we don’t want to do: grow food, ship food, build homes, build furniture, etc.. It wasn’t long ago that most folks spent vast amounts of their time in the drudgery of procuring food and shelter. Why don’t we anymore? We have let the free market decide how to allocate resources. At least we used to. Adopting the collective model will invariably lead to less efficient allocation of resources, bottlenecks, red tape and a terrible flow of information. At least, it always has.

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