Steven Landsburg on a Decentralized Economy

In his book, The Big Questions, Steven Landsburg does a wonderful job of explaining why people have a hard time visualizing why a centrally planned economy doesn’t work well.

It’s impossible to imagine a billion of anything, so sometimes we settle for imagining a hundred.  But a hundred can be a poor proxy for a billion.  That, I think, is why so many people recoil from the headache problem of pages 161 and 162, where we sacrifice one life to cure a billion headaches.  They imagine something like a hundred headaches instead, and overlook just how much suffering a billion headaches can add up to.

Likewise, if you find it difficult to imagine that a decentralized economy can allocate resources better than any central planner, it’s probably because you’ve been led astray by irrelevant visions.  You imagine organizing a birthday party or a small business and conclude that someone’s got to be in charge.  But the economy is complex in ways that a party or a business is not.

When I organize a party, I tell people how they can be most helpful.  If you asked me to organize the economy, I’d be paralyzed.  The economy is too big and too complex — and your talents are too varied and too unobservable — for me to have any idea how you can be most helpful.  I need you to figure that out for yourself.  For that, you’ve got to know which goods are in high demand.  And for that, you need prices.

Amazingly, that’s all you need.  Goods are efficiently produced and delivered through interaction among billions of individual decisions coordinated by prices, just as mental experiences arise from interaction among billions of neurons.

That’s exactly right.  We have such a difficult time imagining billions of voluntary, mutually beneficial interactions made by self-interested (not necessarily greedy) individuals, that we reduce it down to something we can understand like organizing a birthday party.

But, even then we should be in awe of the decentralized economy.  Where would we be in our party planning if we didn’t have the decentralized economy to back us up?  Who would you direct to build the shelter, or make the flour for the cake and sugar for the icing or make the candles to blow out or matches to light them with?  Thankfully, the decentralized economy has made all this stuff readily available to you through the price system so organizing a party can be greatly simplified and is much more joyous.

For those curious about the headache problem on pages 161 and 162, Landsburg wrote about The Headache Problem posed by a “distinguished philosopher”:

A billion people are experiencing fairly minor headaches, which will continue for another hour unless an innocent person is killed, in which case they will cease immediately.  Is it okay to kill that innocent person?

Landsburg’s answer:  Yes and he believes any economist would understand.

Here’s how an economist sees the question: First, virtually nobody will pay a dollar to avoid a one-in-a-billion chance of death. (We know this, for example, from studies of willingness to pay for auto safety devices).  Second, most people — at least in the developed world, where I will assume all of this is taking place — would happily pay a dollar to cure a headache.  Third, this tells me that most people think a headache is worse than a one-in-a-billion chance of death.  So if I can replace your headache with a one-in-a-billion chance of death, I’ve done you a favor.  And I can do precisely this by killing a headache sufferer at random.

I have one problem with his last sentence.  I’m presuming he can do “precisely this” by selling a headache pill to willing individuals that happens to have a side effect of killing one-in-a-billion.  I wish he would state it like that.  The way he has worded it sounds creepy.