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Feb 17, 2010

Do Smart People Run The Market?

Merit and the Market
02/16/10 - Econlog by Shikha Dalmia

[edited] Does merit drive the market? I say the opposite, that markets reward merit and many other qualities. The former Soviet Union lacked technical and financial successes because it suppressed markets. Free Markets enable people to turn their smarts and other knowledge into benefits.

Rewards can go to the stupid as well as the brainy. The recent MTV reality show "Jersey Shore" has made a group of young, non-descript Italian-American kids from New Jersey into millionaires for displaying a lifestyle that is self-indulgent and devoid of accomplishment. It is these kids' vices that are making them rich, not their virtues!

Markets create a mechanism to use knowledge about the everyday stuff of life, along with the abstract and complex. There will always be brain-powered industries in any economy, and smart people will do well. In addition, for every Bill Gates, there are thousands of little guys making money through small innovations: improved plastic caps, a tastier salad dressing, a better vegetable peeler, [and restaurants, dry-cleaners, and hardware stores].

The market rewards brilliant ideas, not brilliant people. Markets care only about the idea and its value to others, not its source. Markets are inherently anti-elitist. Smart, educated, credentialed people may lose in market competition, even to someone or some product they consider inferior. They regard this as a symptom of market failure and demand corrective government regulations, such as standards for minimum quality, manufacture outside "sweat shops", [and professional licensing].

Smart people have an undeserved sense of entitlement, that their brains power the market, and that some portion of the world is rightfully theirs. This sense of superiority blinds them to the broader "ecological rationality" of the environment in which they operate. They think that they are the ones who make markets work, instead of the other way around. This offends the vast portion of humanity.

Rational Management vs Random Markets

Academics and politicians routinely pose a question: Do you want us to provide rational, insightful, far-seeing management of your life and resources, or do you want to leave this to the unregulated, unplanned, hit-or-miss results of the market? They are smug in their belief that there is only one smart answer, that rational planning has to beat random action every time.

Of course, they spin the question to get their desired answer. The better question is: which do you choose as the primary way of solving the problems of life and offering you methods and choices?

  • Government

    Empower 100,000 academics, lawyers, and politicians with half of what you produce, and entrust them to find great solutions. They deserve this power because
    - Academics are the best at deriving statistical results from historical studies,
    - Lawyers are adept at interpreting and writing complex rules of procedure, and
    - Politicians are the most likeable and talkative members of their group.

    If they make mistakes, they will shrug their shoulders, will explain why it was the best anyone could do under the circumstances, and will promise to do better in the future with even more of your resources.

    They will coordinate their actions through interpersonal agreements, meetings, organized political support, and lobbying. They will parcel out the work into divided areas of responsibility, to prevent wasteful competition and duplication. Except, if there are indeed multiple committees or agencies working on the same problems, then all will be funded to preserve the widest range of ideas and solutions.

    The most successful gatherers of resources will go on to higher responsibility.

  • Market

    Trust three million people to solve the problems that they understand, using their own resources or those of willing partners. Anyone can participate, at their own risk and for whatever reward they can negotiate.

    If they make mistakes, they lose their investments. This is a direct and unavoidable reason to plan well and be careful in the use of their resources.

    They will coordinate their actions through prices and contracts. Their success depends on delivering value to others, a greater value than the resources they use to produce their product. This creation of value is called Profitability.

    A wide variety of products will be produced to satisfy the same problem area, limited only by profitability for each product. If more than one product competes, and some are not favored, those products will go out of business, ending the wasteful allocation of resources to those products.

    The most successful producers of valuable products will gain funding and trust, enabling them to attempt the production of further products.

The choice is not between government planning or market non-planning. The choice is between  (1) government planning by the few through politics, or  (2) market planning by millions with the knowledge and resources to create more value than they use up.

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