Crawl Across the Ocean

Monday, April 27, 2009

9. The Efficient Society (Part 3)

Note: This post is the ninth in a series, Parts one, two three four five six seven and eight

In chapter 5 of The Efficient Society, Joseph Heath discusses the virtues of markets, the primary one being that they allow us to solve the question of how much stuff of different types should be produced to make a complex society work, a problem that is too mathematically complex to be solved mathematically but can be resolved by allowing individuals to make their own decisions and then allowing the market prices determined by those decisions signal where more of goods that are in demand are needed and vice-versa.

He notes that it is possible to have trade and markets without necessarily having competitive markets, using the example of the early days of the fur trade in Canada, when the British government gave one company (the Hudson’s Bay company) a monopoly on the fur trade, rather than encouraging competition.

Heath makes a few key points about competition in this chapter:

1) Competition is a way of getting people to put in more effort. It isn’t really tied to capitalism specifically as competition is used in many areas, from Soviet factories that were offered prizes to whoever could produce the most, to Girl Guides who have a competition to see who can sell the most cookies.

2) Competition, by its nature, creates Prisoner’s Dilemma type situations. All will make the effort to achieve something, but it wouldn’t be a competition if there weren’t people who end up losing the competition. Heath explains how businesses in competition with each other are trapped in a Prisoner’s Dilemma since even though they would all be better off to cooperate to keep prices high, each of them has an incentive to undercut the other's prices for their own benefit.

3) Because of its Prisoner’s Dilemma type structure, competition is generally considered a bad thing (why do you have to be so competitive all the time, anyway?) – competition is only good when there is something good produced as a result of the competition.

4) Competitions can only produce a good result, when they follow certain rules.

Picking up the third point in more detail, a competition between two hockey teams is valuable because of the entertainment it provides. Competition between various companies is good because it results in a push for innovation to better serve customers and it serves to lower prices for customers (note these could be considered positive externalities to the competitive process).

Moving to chapter 6, Heath notes that in the market, a proper price signal reflecting the true level of supply and demand is only created when the people in the market follow their self interest. We’ve all been in the situation of trying to decide on where to eat, and each person wants to go along with what the other person wants, but as a result can’t be sure if what the other person is saying is what they really want or just what they think you want. Heath gives the example of electrical generators being sent to Montreal after the ice storm in 1998. There was a backlash against people 'gouging' the residents by offering to ship generators there for an extremely high price, but that high price also has the benefit of signalling the true level of demand and encouraging more people to ship generators there.

(Note that this ties back to chapter 10 of 'No One Makes You shop at Wal-Mart' where we saw that the reason for the backlash in this case is that there is an involuntary component to a transaction involving selling a generator to someone who might otherwise freeze to death or be forced out of their home.)

It is this aspect of markets - that in the market the best action is to pursue your self-interest rather than altruistically pursue a collective good - which Heath believes accounts for the historically 'dishonourable' nature of being in trade or being a merchant (of Venice, or otherwise).

In an interesting passage, he comments on how Nietzsche saw morality as a conspiracy of the weak against the strong, and that Ayn Rand picked up this thread but made it more plausible she "dilute[d] this Nietzschian animus towards morality with a fawning respect for capitalism"

More plausible, In Heath's view because of the point above that when you are in a market, the outcome is better if you compete and follow your self interest rather than being altruistic and cooperating.

He then notes that markets don't require no morality, they just require less morality. He says,
"In order for capitalism to function smoothly, we need to refrain from stealing, from using violence to achieve our ends, from making fraudulent misrepresentations, etc. The list goes on and on. These are all legal and moral obligations. If people did not respect these basic rules, the entire system would fall apart"

Actually, if the list really does goes on and on, I wish Heath would have continued. For now, I'd just note that if you think back to Jane Jacobs' 'Systems of Survival', her list of 15 commercial ethics included 'Respect Contracts', 'Shun Force' and 'Be Honest' which matches up pretty well with Heath's 'refrain from stealing, from using violence to achieve our ends, from making fraudulent representations'.

Both this idea of Heath's that the markets require 'less morality' to function and the contract between Nietzsche and Rand's concepts of ethics are things that I'll likely return to before finishing this series.

More on chapter 6 and the concept of Market Failure in the next post.

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