The price system is the best communication network

I enjoyed this post from Russ Roberts on motives vs. results. One piece of it:

So my opposition to a minimum wage or government schools or agricultural price supports or bank bailouts or mandatory health insurance or mandatory retirement contributions or mandatory eating habits doesn’t come from my selfishness or greed. Rather it comes from respect for my fellow human beings and a belief (not a faith) that leaving people free to choose what is best for themselves usually works out better than strangers making decisions for them.

When you catch yourself supporting government fixes because the cost-benefit analysis seems so clear and right to you, just do me three favors.

First, keep in mind that you are wanting to impose your will on others through government. I don’t believe many people consider that.

Or, they dodge that accountability by saying others want it too and hiding behind a majority or plurality vote. It’s the bandwagon effect or the old psychology experiment where the subjects gave electric shocks to a fake test subject under the command of a researcher. And they kept giving electric shocks even though it sounded like they were causing great harm to the fake subject, because they were just doing what they were told.

Second, consider that your cost-benefit analysis might be wrong. Unless you are extremely wealthy, there’s no evidence that you have any great talent at being correct with cost-benefit analyses. Perhaps you’re doing okay. Fine. That says that you’ve made some safe bets and the best thing you can do is model that behavior for others, rather than force them to follow your path, because your path may not be right for them.

Finally, since there is a possibility that you could be wrong, why not fall back on the standard doctors use — and the argument environmentalists use for global warming — do no harm? In other words, why impose your will on others if you might be wrong?

I also liked the comment to Russ’s post from Steve Horowitz:

Profit is a motive, yes, but more important, it’s about knowledge – it’s a coordinating signal. We need a profit and loss system not primarily to “motivate” people, but to generate the knowledge signals we need to get the *results* we care about if we want the world to be a more peaceful, prosperous place.

That’s very well stated. Profits convey knowledge. Each of us use that knowledge daily. The builders of the city that I linked to in this post did not use the knowledge conveyed by profits and now they have a ghost city.

When I decided recently to abandon my effort of making an agility ladder out of duct tape and instead bought one, I responded to the profit motive and the knowledge it conveyed to me (it was not worth my time).

I’m certain there are things you stopped doing and started doing in this past week where you too were responding to the knowledge you gained from profits.


One thought on “The price system is the best communication network

  1. the milgram experiment which you reference is a glaring critique of the human condition. im curious as to whether the results would change across different socio-economic strata. im also curious about the cross-culture variability as different cultures must have different ‘authority’ cues.


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