On the efficient allocation of scarce resources with alternative uses

Most of what I know about “the economy” is outdated (Adam Smith, Karl Marx, John Maynard Keynes) or incorrect (the news) so I decided to read a textbook. Basic Economics, 5th Edition by Thomas Sowell is clear, modern, and generally an argument against economic regulation, particularly centralised planning, tariffs, and price control. I still have questions.

The premise of market economics is that a free market efficiently uses prices to allocate scarce resources that have alternative uses, resulting in improved standard of living. But when results are compared, they are given in terms of economic metrics, like unemployment, growth, or GDP/GNP. The implication is that more consuming is correlated with a better standard of living. Is that true? Are there non-economic measurements of standard of living, and do they correlate with the economic measurements?

Even if an economy does yield “a better standard of living”, shouldn’t the spread of living standards and the accessibility of high standards across the population be measured, to determine whether the market economy is benefiting all participants or emulating feudalism?

Does Dr. Sowell arrive at his office at 9am and depart at 5pm? The common 40-hour work week is a result of labour unions and legislation, not supply and demand economics. Should we not be free to set our own working hours? Related: is “unemployment” such a bad thing, do we really need everybody to work their forty hours? If it is a bad thing, why not reduce the working week and have the same work done by more people?

Sowell’s argument allows that some expenses, notably defence, are better paid for centrally and collectively than individually. We all get the same benefit from national defence, but even those who are willing to pay would receive less benefit from a decentralised, individually-funded defence. Presumably the same argument can be applied to roads, too, or space races. But where are the boundaries? Why centralised military, say, and not centralised electricity supply, healthcare, mains water, housing, internet service, or food supply? Is there a good “grain size” for such centralising influences (it can’t be “the nation”, because nations vary so much in size and in centralisation/federation) and if so, does it match the “grain size” for a market economy?

The argument against a centralised, planned economy is that there’s too much information required too readily for central planners to make good judgements. Most attempts at a planned economy preceded broad access to the internet and AI, two technologies largely developed through centralised government funding. For example, the attempt to build a planned economy in Chile got as far as constructing a nationwide Telex network before being interrupted by the CIA-funded Pinochet coup. Is this argument still valid?

Companies themselves are centralised, planned economies that allocate scarce resources through a top-down bureaucracy. How big does a company need to get before it is not the market, but the company’s bureaucracy, that is the successful system for allocating resources?

2 Replies to “On the efficient allocation of scarce resources with alternative uses”

  1. Thank goodness you mentioned Karl Marx as a source of knowledge about the economy in the opening of your post which allowed me to brace for the impact of the final two paragraphs. It’s astonishing how widespread and enduring this infatuation with communist thinking still is to this day. It seems people are just drawn to simplistic ideas and various forms of “the everything equation.” I do encourage you to continue reading about this interest in economics of yours.

  2. You draw an interesting connection, between Marx (who didn’t write about centralised, planned economies) and my final two paragraphs (which were about centralised, planned economies), but don’t describe the relation between them, unfortunately.

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