The Rest

of my previous post

There were things I should have said to fill out the argument and didn’t. These are some of them.

Supporting Consequentialist Arguments

I rejected persuasion by moral argument on the grounds that we have no way of showing that our moral views are correct. How can we do it for our consequentialist views?

One way is by evidence of what consequences the alternatives produced in the past. Doing that is easier and more convincing if the institutions of two societies and their consequences are sufficiently different and other features of the societies sufficiently similar to make it plausible that the difference in institutions is responsible for the difference in outcome. East Germany/West Germany and North Korea/South provide parallels in space, China before and after Mao’s death in time. Looking at those cases it is hard to deny that capitalist institution produce more attractive outcomes than communist.

That does not prove that the still more capitalist institutions I would prefer would produce even more attractive outcomes. We don’t, so far as I know, have adequate test cases for that comparison although Taiwan/Hong Kong comes close.

Much of economics consists of working out the logical implications of known facts, so a second way of justifying economic conclusions is by economic logic. That cannot prove that tariffs always injure the country that imposes them since there are possible circumstances in which they don’t but can demonstrate that widely accepted explanations for a negative (“unfavorable”) trade balance depend on logical mistakes as does the widely accepted view that tariffs can be expected to improve job opportunities and balance trade. It is similarly straightforward to show that whether a minimum wage law helps or harms low wage workers depends on facts of the labor market that could go either way. Neither of those proves the relevant policy conclusion, free trade or no minimum wage laws, but both support the conclusion by refuting consequentialist arguments against it.

Socialist Grains of Sand: Centralized Coordination in the Market

My previous post described centralized coordination as something that could work for small groups but scaled badly. It then described a market that contained no centralized coordination at all, an agoric economy of individual actors coordinating by trade. That was a deliberate simplification. In the actual private market some of the actors coordinated are firms, miniature socialist economies within which coordination is centralized; the capitalist beach is made up in part of socialist grains of sand. The head of the firm figures out what his employees should do and tells them to do it.¹

The firm however, like an individual actor, has costs transferred back to it in the prices it must pay for inputs and labor, benefits in what it is paid for what it produces. The costs of centralized coordination are born by the firm just as the costs of decentralized coordination, of finding buyers and sellers and negotiating prices, are born by the individual. So each actor, firm or individual, finds it in its interest to do those things, make those choices, that maximize the net benefit.

The differences between the logic of a firm in the private market and a full scale socialist polity, in its simplest form entirely coordinated from the center, are that the former must pay for its inputs a price at which their owners, including its workers, are willing to supply them and that the firm, to stay in business, must be able to produce its output at least as inexpensively as it can be produced through decentralized coordination. The socialist polity does not face those constraints.

What Does Market Coordination Maximize?

I referred to value or net benefit without explaining what that meant, how value was defined or how values to different individuals could be combined. What it meant was economic efficiency, which defines the value or cost of an outcome to an individual as the largest amount he would pay to get it (value) or prevent it (cost); see this previous post for an explanation and defense of the concept. The sum of values defined in that way is what the private market approximately maximizes and the political market does not.

My previous post offered one reason, market failure, why an economist might reject that conclusion. He might also accept the conclusion but reject economic efficiency as a criterion of value. My earlier article offered a number of reasons why someone might do so.

One was that economic efficiency treats the willingness to spend a dollar as representing the same value to everyone, rich or poor, materialist or ascetic. A utilitarian could plausibly argue that that overweights the interest of rich over poor and so support government intervention to modify the market outcome by taxing the former and subsidizing the latter, reducing efficiency but perhaps increasing utility.² A second criticism is that the criterion defines value by what people do not what they should do, makes no distinction between the value of heroin to an addict and that of insulin to a diabetic. Government could intervene to tax or ban the former, permit, perhaps subsidize the latter. A third criticism is that the only value counted is value to humans. A work of great literature, an animal, an ancient redwood tree counts only to the extent that humans value it.

All three of these imply that there are things a government could do that would produce an outcome preferred, by values many people hold, to the efficient one. They do not show that they are the things that a government with the power to substitute its decisions for the market outcome would do. Government actions are the result of individuals acting on their values in the political market, so human values are all that can drive them. Each of us is an expert in himself, so it is hard to see why others would know our interest better than we do. Hence for the second and third criticisms it is hard to see why one would expect the decisions it was in the political interest of political actors — voters, legislators, bureaucrats — to make would align more closely to the suggested values than the decisions made on the private market. It is logically possible, just as it is possible that the decisions made on the political market will, by chance, align with economic efficiency, but it is not the way to bet. We have a mechanism, decentralized coordination on the market, to maximize the shared values represented by economic efficiency. It is not clear that we have a mechanism to maximize alternatives.

There is, however, a reason to expect the political market to weigh the welfare of the poor more heavily than the private market, at least in a democracy — poor people have less wealth than rich people but the same number of votes per capita. So a government with the power to redistribute might find it in its political interest to redistribute in favor of the poor. Or it might not. The better educated and better informed — and richer — may be better able to use their vote to benefit themselves.

It is possible that government intervention in a democracy would alter market outcomes in ways that increase utility at a cost in efficiency. Also that it would not. Whether in fact it does, in existing societies, is a question people disagree about.³

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1. This is a simplified account of firm structure, which typically combines elements of centralized and decentralized coordination.

2. I discussed the concept of utility in two previous posts: Utility: Part I and Utility: Part II Heresies.

3. My (old) views on the subject can be found in Chapter 4 of The Machinery of Freedom. Scott Alexander, in his friendly but critical review of the book, argued that they may have been true when written but not at present.