C&B Notes

In Awe of the Mundane

Friedrich Hayek has written that “the curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

Economic forces at work will continually impact decisions to shuffle resources and adjust decisions on multiple margins to the point where the result of the market agitation is exchange efficiency, production efficiency, and allocational efficiency.  In this way the underlying variables of the market — tastes, technology and resource availability — come to be aligned and reflected in the induced variables of the market — prices and profits/losses.  I stress at work because tastes change, new technologies are introduced, and discoveries of new supplies of resources or of new uses of resources are constantly occurring, and thus setting in motion once again the continually shuffling and adjusting by economic actors guided by the incentives of property rights, the information of prices and the inducement of profits.  The free market system does this with such regularity that we often take it for granted, rather than stand in awe of its miraculousness.  The failure to appreciate the mystery of the mundane leads to attempts to command and control over the economic system…

An omniscient, omnipotent, and benevolent social planner should never be invoked in discussions of public policy — even to figure out so-called “first best solutions” before proceeding to another round.  Institutions and the incentive structures and informational flows they provide can never be ignored in a proper economic analysis of the situation.  To do so, is to commit the intellectual error that Friedman indicted Lerner with.  Those administrative costs must be part of the comparative institutional analysis from the start.  They are not footnotes, or afterthoughts, but a critical component to any economic analysis.