Economic Miracle

[JP226]

The idea that even the brightest person or group of bright people, much less the U.S. Congress, can wisely manage an economy has to be the height of arrogance and conceit. Why? It is impossible for anyone to possess the knowledge that would be necessary for such an undertaking. At the risk of boring you, let's go through a small example that proves such knowledge is impossible.

Imagine you are trying to understand a system consisting of six elements. That means there would be 30, or n(n-1), possible relationships between these elements. Now suppose each element can be characterized by being either on or off. That means the number of possible relationships among those elements grows to the number 2 raised to the 30th power; that's well over a billion possible relationships among those six elements.

Our economic system consists of billions of different elements that include members of our population, businesses, schools, parcels of land and homes. A list of possible relationships defies imagination and even more so if we include international relationships. Miraculously, there is a tendency for all of these relationships to operate smoothly without congressional meddling. Let's think about it.

The average well-stocked supermarket carries over 60,000 different items. Because those items are so routinely available to us, the fact that it is a near miracle goes unnoticed and unappreciated. Take just one of those items -- canned tuna. Pretend that Congress appoints you tuna czar; that's not totally out of the picture in light of the fact that Congress has recently proposed a car czar for our auto industry. My question to you as tuna czar is: Can you identify and tell us how to organize all of the inputs necessary to get tuna out of the sea and into a supermarket? The most obvious inputs are fishermen, ships, nets, canning factories and trucks. But how do you organize the inputs necessary to build a ship, to provide the fuel, and what about the compass? The trucks need tires, seats and windshields. It is not a stretch of the imagination to suggest that millions of inputs and people cooperate with one another to get canned tuna to your supermarket.

But what is the driving force that explains how millions of people manage to cooperate to get 60,000 different items to your supermarket? Most of them don't give a hoot about you and me, some of them might hate Americans, but they serve us well and they do so voluntarily. The bottom line motivation for the cooperation is people are in it for themselves; they want more profits, wages, interest and rent, or to use today's silly talk -- people are greedy.

Adam Smith, the father of economics, captured the essence of this wonderful human cooperation when he said, "He (the businessman) generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. ... He intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain." Adam Smith continues, "He is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. ... By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it." And later he adds, "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest."

If you have doubts about Adam Smith's prediction, ask yourself which areas of our lives are we the most satisfied and those with most complaints. Would they be profit motivated arenas such supermarkets, video or clothing stores, or be nonprofit motivated government-operated arenas such as public schools, postal delivery or motor vehicle registration? By the way, how many of you would be in favor of Congress running our supermarkets?

Makes you begin to understand why something like Socialism just isn't viable in the long term, or how a system such as the old soviet empire actually came about to collapse.

[Bovril]

Makes you begin to understand why something like Socialism just isn't viable in the long term, or how a system such as the old soviet empire actually came about to collapse.

Socialism is not the same as a command economy, market socialism and participatory planning are both viable alternatives.

Many of the biggest command economies in the world at present are corporations. The fact that this not only not universally recognised, but is difficult for people to understand, speaks volumes about the effectiveness of the ideological orientation of economic consciousness in the educated classes.

Also, the use of Adam Smith in this context is disingenuous in the extreme (provided the author has actually read the wealth of nations).

[JP226]

Many of the biggest command economies in the world at present are corporations.

What? Care to explain that a little more?

[Bovril]

What? Care to explain that a little more?

I hope we can agree that corporations are essentially command economies. Their main mode of conducting their affairs is by hierachical systems of command. Since large corporations might account for a whole system of production, and all sorts of complex economic inter-relationships (which in a Smithian system would be handled by thousands of economic concerns), they are no less a command economy than soviet Russia, perhaps moreso, since Soviet Russia had at least some free market sectors (even if they were largely illegal).

McDonalds farming, slaughtering, transporting, cooking and serving animals is no different from a state providing the same service from the point of view of market interferance in the process. The "billions of different elements" (to quote the article) in this system of production are happily organised by one hierachical power structure. It seems these days that it is not only possible to perform very complex economic processes with no imput from markets untill the very end, but that it is more effective than breaking these processes up into tiny bits and letting the market decide how to sort things out. This is shown by the ever incresing dominance of the world economy by an ever decreasing number of corporations.

The utopianism of the idea of 'enlightened self interest' may seem to many like a charge levelled at communism, but it a justification often used by (neo-)classical economics for markets, based, falsely, on Adam Smith's pre-capitalist utilitarianism.

[JP226]

I hope we can agree that corporations are essentially command economies. Their main mode of conducting their affairs is by hierachical systems of command. Since large corporations might account for a whole system of production, and all sorts of complex economic inter-relationships (which in a Smithian system would be handled by thousands of economic concerns), they are no less a command economy than soviet Russia, perhaps moreso, since Soviet Russia had at least some free market sectors (even if they were largely illegal).

Not as long as they respond to price.

[Bovril]

Not as long as they respond to price.

That's kind of by the by. The point of the article was to argue that the market was the only feasable mechanism for dealing with extremely information intensive economic processes. I have argued that these processes seem, in many cases, to be performed better outside the market, with the marketing only having input as the worth of performing the process at all (i.e. is cost of production greater or less than sale price?).

We could also say that the market in this instance simply serves to answer the question "do owners benefit from this entire economic process"? This is hardly the vision of Adam Smith.

[JP226]

That's kind of by the by. The point of the article was to argue that the market was the only feasable mechanism for dealing with extremely information intensive economic processes. I have argued that these processes seem, in many cases, to be performed better outside the market, with the marketing only having input as the worth of performing the process at all (i.e. is cost of production greater or less than sale price?).

Yes, that is the point of the article. But your assertion that corporations are essentially command economies is incorrect. A planned economy is physically making descisons where and how resources are allocated and ultimately consumed. A corporation no matter the size of the monopoly does not have that power. It's still subjected to price which dictates ultimately what to and what not to make.

[Bovril]

Yes, that is the point of the article. But your assertion that corporations are essentially command economies is incorrect. A planned economy is physically making descisons where and how resources are allocated and ultimately consumed. A corporation no matter the size of the monopoly does not have that power. It's still subjected to price which dictates ultimately what to and what not to make.

We should probably differentiate between command economies (what I am talking about) and planned economies (where consumption is indeed planned to the point it is possible to make people consume). A command economy performs various complicated economic processes using a hierachical and centralised command structure. The way in which it prices its products is slightly by the by. It may be to make money for share holders (corporations), it may be to ensure public access to goods such as medicine (certain government services). But the point is that extremely complex economic function can be performed in this way very effectively, an assertion which the article explitily denies, despite overwhelming evidence to the contrary.

Its example of supermarket products are particularly salient. Many own brand products are produced soley by some supermarkets, and others are created using the monopolistic control of certain supermarkets that certainly contradicts free market principles.

[C-Rob]

its' like the weather but far more important.

[JP226]

We should probably differentiate between command economies (what I am talking about) and planned economies (where consumption is indeed planned to the point it is possible to make people consume). A command economy performs various complicated economic processes using a hierachical and centralised command structure. The way in which it prices its products is slightly by the by. It may be to make money for share holders (corporations), it may be to ensure public access to goods such as medicine (certain government services). But the point is that extremely complex economic function can be performed in this way very effectively, an assertion which the article explitily denies, despite overwhelming evidence to the contrary.

Well... a command economy is a panned economy. It's the old soviet union taking x amount of steel, plastic, copper etc etc to produce y amount of cars for moscow. Or trying to plan from start to finish the supply that would satisfy demand. There are no if, ands or buts about that. These are what the article is addressing as intensive information based economic processes that are impossible for a government to complete. Hence why soviet supermarkets were always empty. However, the article does not address one way or the other if it's possible for US mail and UPS to exist side by side which is essentially what you are talking about.

Yes it is possible obviously, but the issues surrounding USPS and UPS are questions of efficiencies and opportunity lost. Which I shouldn't need to go into details as to why, but price again plays an important role. Competition, internally and externally, real incentives as far as making a buck to going out of business push private industries in ways that government operations can't be. It's not even to say that government's don't try to follow price to an extent, they kinda do, but ultimately they don't have to for it's not like the USPS will ever go out of business.

Of course from the theoretical angle, government's as economic entities primary goals are equity. However it sees that equity but equity none the less. Not efficiency. You will always have that glut between supply and demand, whether on a utilitarian level or actual shortages and that's something markets excel at accomplishing. Bringing together in a perfect frame work supply and demand, or the more realistic monopolistic equilibrium. That's just what they do.

[Каие]

Adam Smith also thought inheritance tax is a good idea. It's funny how we pick and choose.

[Treize]

American's REALLY don't know the difference between socialism and communism

So European economies are no free market's?

[JP226]

Adam Smith also thought inheritance tax is a good idea. It's funny how we pick and choose.

He was also baffled that water costs less than daimonds. SOmethings he was spot on, others not so much. However he did lay the foundation for us to improve and figure what works best.

[Каие]

He was also baffled that water costs less than daimonds. SOmethings he was spot on, others not so much. However he did lay the foundation for us to improve and figure what works best.

The interpretation of an economists work is also important and can vary.

[Ummon]

Interesting, and repped, JP.

[Viking Prince]

A corporation is not a country. To suggest that corporations are planned economies is simply a perversion of vocabulary for political purposes.


Re: Adam Smith

Quoting Adam Smith on the benefits or otherwise of inheritance tax is not helpful when the context is left unexplained. In Wealth Of Nations, Book V, ii.h.4: p 859, he discusses inheritance tax in his usual manner with a history of such taxes since Roman times. He distinguishes between a tax on inheritance when the children live at home and concludes such a tax would be 'cruel and oppressive'. Again he quotes Roman law and Scotch law for cases where the children are independent and says inheritance would be 'a real addition to their fortune' and 'might...perhaps, without more inconveniency than what attends all duties of this kind, be liable to some tax'. Certainly not 40 per cent (Augustus set it at 5 per cent). Of course, he was not writing when icnome tax on labour can be 40 per cent (it was zero), plus VAT at 17.5 per cent on consumption, plus local council tax, plus, plus, plus. I would not call on Adam Smith as evidence of a ringing endorsement of inheritance tax.

Listen to Adam Smith: inheritance tax is good | The Spectator

Picking and choosing is always a risk. Adam Smith opposed the tax on the landed English estates where generations of families resided. Since this is what the tax was tageting, he opposed the tax.

[Каие]

A corporation is not a country. To suggest that corporations are planned economies is simply a perversion of vocabulary for political purposes.


Re: Adam Smith


Listen to Adam Smith: inheritance tax is good | The Spectator

Picking and choosing is always a risk. Adam Smith opposed the tax on the landed English estates where generations of families resided. Since this is what the tax was tageting, he opposed the tax.

The Spectator, an English Conservative Party supporting medium. See interpretation.

[Bovril]

A corporation is not a country. To suggest that corporations are planned economies is simply a perversion of vocabulary for political purposes.

If the term 'planned economy' (I used the term command economy, but everyone seems to think they are interchangeable, so I'll play along) is exclusive to governments, then to say a corporation cannot at least have the features of a planned economy is begging the question. It's a semantic game which avoids the substance of the argument.

[Viking Prince]

But a corporation is not a planned economy unles you are going to state that the Viking household is a planned economy. This is all too much of a stretch, but getting off topic for the thread.

The test was from 1998 and is indeed appropriate to test for a working understanding of macro economics as it appears in the news in the USA.

[MathiasOfAthens]

People like to think that a lot of Western European countries are government run economies, which is simply not true. It is true that there are a lot of safety nets, not just for individuals but also for the economy as a whole in times of recessions. France, Germany, Spain, and many others are free market societies not command economies like the Soviet Union. The government does not dictate what and how much will be sold in the stores.
________
BREAKUP ADVICE FORUMS