The Clergy and Economists: Two Windows on Common Objectives
The Economists’ Window on the World
The connection between better incentives and better results is straightforward in the example of shipping prisoners. A more complete explanation of the benefits economists see from good incentives requires an examination of the social cooperation achieved in market economies. Market incentives are certainly not perfect, and are subject to improvement, but the same can be said for the efforts to improve people. What market incentives accomplish, admittedly in conjunction with ongoing efforts to appeal to our better angels, is truly impressive given the magnitude of the task we depend on them to perform.
Each of us benefit daily from the efforts of literally hundreds of millions of people from all over the globe, whom we will never know, but who cooperate with untold numbers of others whom they will never know, to provide us with almost everything we consume, and to provide it so reliably and conveniently and in return for so little effort on our part that we seldom realize, or take time to appreciate, what a blessing we are experiencing.
Economists do appreciate this blessing of social cooperation for a number of reasons, one of which is that we are concerned with reducing poverty. People can produce more wealth when they work together in mutually beneficial ways, and economists are convinced that the most effective way of helping the poor is by creating new wealth, not by redistributing existing wealth. This is not a blanket criticism of redistribution, but wealth has to be produced before it can be redistributed. Who can deny that the tremendous increase in the material welfare of humans over the last two hundred years, despite the huge increase in population, was possible only because of the enormous increase in the production of wealth?3
Economists have tried to understand and explain how untold numbers of complete strangers from all corners of the world have been able to cooperate in ways that have increased wealth by pushing back the limits of scarcity. The explanation is certainly not obvious. No matter how virtuous those who work for our benefit may be, we cannot rely on their concern for us to motivate their effort. It is their concern for themselves and their loved ones that primarily motivates them. Neither can others rely on our concern for them for most of the benefits they receive from our efforts. Even if somehow we all developed an abiding concern for multitudes of others, how would we acquire the information needed to best serve them, and how would they acquire the information needed to best serve us? Economists have developed a powerful explanation for the impressive social cooperation, clearly seen by anyone who cares to look, in terms of the communication and incentives of the marketplace.
The social cooperation we benefit from every day depends on a vast communication network that allows each of us to inform others how they can best serve us and how we can best serve them, with this communication motivating us to act as if we value the interests of others as we do our own. This may seem to assume a completely unrealistic level of technological sophistication and human virtue. In fact, it assumes neither. Market communication has existed as long as people have engaged in exchange (although it has been improved by expansions in the network of those exchanges and technological advances), and the use of the information communicated by markets for the benefit of others requires rather modest levels of virtue.
Understanding the cooperation of the marketplace begins by recognizing the informational role of market prices. Although seldom seen as such, market prices that emerge from the exchange of private property are one of our most effective ways for communicating vital information. The prices we face in the marketplace tell us the value of additional units of products to others and the value of the sacrifice others experience making those additional units of products available to us.4 However, market prices not only communicate information on how our decisions affect others, they also motivate us to use that information to make choices that best serve the interests of others.
A few examples can illustrate the desirable social objectives that are seen by economists as being achieved through the information and incentives provided by market prices.
Consumers Cooperating with Consumers
Assume that Canadians decide that they want to consume more bananas and would like Americans, and others around the world, to cooperate with them by consuming fewer bananas. Canadians could try persuading others to reduce banana consumption by communicating their consumption desires through emails, text messaging, or other state-of-the-art communication technologies. Far more effective communication, however, is the increase in banana prices resulting from the Canadians’ increase in demand for bananas. In response to higher banana prices, people around the world will reduce banana consumption, acting as if each is saying, “Canadians are informing me that they now value additional bananas more than I do, so I will share with them by consuming fewer so they can consume more.” Of course, no one is really saying or thinking this. Few, if any, will have any idea why banana prices went up in their neighborhood stores, or consider sharing bananas for the benefit of Canadians, or anyone else. The advantage of price communication is that it provides the minimum amount of information needed for people to best accommodate the interests of others and provides them with the incentive to do so. Market prices make it possible for people to simultaneously and harmoniously coordinate their consumption decisions on a multitude of goods.
No government agency could possibly keep current on the constantly changing information necessary to know how people could best harmonize their interests as banana consumers, much less do so for an untold number of goods. Assume, though, that an agency could obtain and constantly update all the necessary information, and immediately send out understandable directives to all consumers requiring adjustment in their consumption patterns. The responses would hardly be as harmonious as that motivated by impersonal market prices. Changes in market prices are the unintended consequences of the decisions of large numbers of people, none of whom are telling you what to do. Directives from government officials do tell you what to do and are far more likely to be taken personally and resented. Why should I reduce my consumption of bananas for the Canadians because some bureaucrat tells me to? Changes in market prices are not always accepted passively as occasionally seen with gas price increases when people blame them on oil companies and do take them personally. Such animosity becomes far more prevalent, and social harmony is reduced, when government directives are substituted for market prices.
Producers and Consumers Cooperating with Each Other
Continuing with the banana example, the first ones able to respond to the desires of Canadian consumers for more bananas are other consumers. The higher prices, and profits, also provide banana producers with the information and incentive to serve the interests of consumers, both in Canada and elsewhere, by increasing banana production by way of competing productive inputs away from other employments. This expansion will continue as long as the market price informs suppliers that it is socially beneficial—as long as the price indicates that the value of additional bananas is greater than the cost of producing and shipping them to consumers.
At the same time, price communication motivates consumers to take into consideration the interest of producers. Assume, for example, that insects increase the discomfort workers experience when harvesting bananas. This will be reflected in higher wages for banana harvesters and higher prices for bananas. Once more, without consumers knowing why banana prices went up, they will respond to the higher prices in ways that consider the interests of others—including those harvesting bananas. Consumers will act as if they are saying, “Banana harvesters are communicating to us that the extra discomfort they experience making the last few bananas available is greater than the benefit we realize from those bananas, so we will reduce our banana consumption as long as the benefit to the harvesters is greater than our sacrifice.”
Again, our banana example illustrates the type of social cooperation that is constantly taking place among literally billions of people, involving a multitude of goods and services, and made possible only by the information and incentives communicated through market prices.
Producers Cooperating with Producers
Few products we use can be made from scratch by any one person or firm. Even the simplest products require the cooperative effort of many firms and individuals to cooperate. Consider a simple wooden pencil. As Leonard Read (1958) pointed out in a famous article, no one can make a standard wooden pencil. Its production requires workers and firms in many countries coordinating their use of a number of widely dispersed resources. Yet, pencils are so readily available at such low prices that they are commonly given away to advertise businesses and products. The complex network of global cooperation required to produce pencils, as well as far more elaborate products (such as automobiles, computers, televisions, compact disks, iPods, and cell phones) at costs almost everyone can afford, is possible only because of the information and incentives created by market prices. Those market prices, and the profits and costs they determine, inform suppliers where in the production chain of different products they can move to create the most net value and what provides the incentive for them to do so.
Unfortunately, for producers to cooperate in remaining responsive to constant changes in technologies, preferences, and general economic conditions to best serve consumers, they have to take actions that are commonly seen by members of the clergy, and many others, as socially unjust. For example, when technological improvement makes it possible to produce electronic calculators, consumers will communicate through market prices that the resources and workers being used to produce slide rules would now be more valuably employed producing the calculators. In response to this market information and incentives, slide-rule producers cooperate with producers of electronic calculators and consumers by laying off their workers and going bankrupt. It is as if slide-rule firms and their workers are saying, “We are not serving consumers as well as we would if we released our resources and labor to be used by other firms. So, we will go bankrupt and accept the loss of our current jobs to make it easier for other firms to better serve consumers by expanding their production.” As before, this is not what firms and workers in unprofitable firms are actually saying. They do not want to go bankrupt or lose their jobs and would prefer a government subsidy forcing consumers to continue paying for their products (slide rules) through taxes. The advantage of the market is that without government policies overriding the interests of consumers, it is constantly conveying information to all of us on how to make the best use of our resources to serve others and then imposing the discipline to ensure that we do exactly that.