Today's Economic History/Hoisted: In Soviet Union, Optimization Problem Solves You
: In Soviet Union, Optimization Problem Solves You: "Both neo-classical and Austrian economists make a fetish (in several senses) of markets and market prices...
...That this is crazy is reflected in the fact that even under capitalism, immense areas of the economy are not coordinated through the market. There is a great passage from Herbert Simon in 1991 which is relevant here:
Suppose that [‘a mythical visitor from Mars’] approaches the Earth from space, equipped with a telescope that revels social structures. The firms reveal themselves, say, as solid green areas with faint interior contours marking out divisions and departments. Market transactions show as red lines connecting firms, forming a network in the spaces between them. Within firms (and perhaps even between them) the approaching visitor also sees pale blue lines, the lines of authority connecting bosses with various levels of workers. As our visitors looked more carefully at the scene beneath, it might see one of the green masses divide, as a firm divested itself of one of its divisions. Or it might see one green object gobble up another. At this distance, the departing golden parachutes would probably not be visible.
No matter whether our visitor approached the United States or the Soviet Union, urban China or the European Community, the greater part of the space below it would be within green areas, for almost all of the inhabitants would be employees, hence inside the firm boundaries. Organizations would be the dominant feature of the landscape. A message sent back home, describing the scene, would speak of ‘large green areas interconnected by red lines.’ It would not likely speak of ‘a network of red lines connecting green spots.’6
This is not just because the market revolution has not been pushed far enough. (‘One effort more, shareholders, if you would be libertarians!’) The conditions under which equilibrium prices really are all a decision-maker needs to know, and really are sufficient for coordination, are so extreme as to be absurd. (Stiglitz is good on some of the failure modes.) Even if they hold, the market only lets people ‘serve notice of their needs and of their relative strength’ up to a limit set by how much money they have. This is why careful economists talk about balancing supply and ‘effective’ demand, demand backed by money.
This is just as much an implicit choice of values as handing the planners an objective function and letting them fire up their optimization algorithm. Those values are not pretty. They are that the whims of the rich matter more than the needs of the poor; that it is more important to keep bond traders in strippers and cocaine than feed hungry children. At the extreme, the market literally starves people to death, because feeding them is a less’efficient’ use of food than helping rich people eat more.
I don’t think this sort of pathology is intrinsic to market exchange; it comes from market exchange plus gross inequality. If we want markets to signal supply and demand (not just tautological ‘effective demand’), then we want to ensure not just that everyone has access to the market, but also that they have (roughly) comparable amounts of money to spend. There is, in other words, a strong case to be made for egalitarian distributions of resources being a complement to market allocation. Politically, however, good luck getting those to go together.
We are left in an uncomfortable position. Turning everything over to the market is not really an option.... Moreover, working through the market imposes its own costs.... This is one reason (among others) why Simon’s Martian sees such large green regions in the capitalist countries--why actually-existing capitalism is at least as much an organizational as a market economy. Planning is certainly possible within limited domains... but... only possible within those domains because making money gives firms (or firm-like entities) an objective function which is both unambiguous and blinkered. Planning for the whole economy would, under the most favorable possible assumptions, be intractable for the foreseeable future, and deciding on a plan runs into difficulties we have no idea how to solve.... That planning is not a viable alternative to capitalism (as opposed to a tool within it) should disturb even capitalism’s most ardent partisans. It means that their system faces no competition, nor even any plausible threat of competition. Those partisans themselves should be able to say what will happen then: the masters of the system, will be tempted, and more than tempted, to claim more and more of what it produces as monopoly rents. This does not end happily.
