Information Aspects of Alternative Economic Systems
Pasour, E. C. Jr.
E.C. Pasour, Jr. Information Aspects of Alternative Economic Systems Any form of economic system requires information. Furthermore, the amount of information required to allocate goods and...
...If each individual does not make decisions on the basis of his own preferences, there is then no basis to determine what the public wants or, indeed, what action is in the public interest...
...The information role of prices in a market economy has long been recognized by some people, but is not fully appreciated by most people...
...If each individual attempts to follow his social responsibility (instead of his self-interest), what is the outcome likely to be...
...Even if all firms and individuals were motivated by the "cooperative ethic," the information required to act in the public interest would pose the same problem discussed above...
...The same problem would face the person making a decision concerning choice of vocation...
...368...
...Instead, it should compare existing markets with existing bureaucratic agencies...
...The necessary condition is that firms maximize profits and individuals maximize satisfaction...
...Samuelson supports this statement...
...The alternative to the market as a way of pricing resources and final products is central direction, which by its very nature involves bureaucracy...
...Second, if individuals reduce their desires for any good to the quantity available, the problem of scarcity is solved...
...This is not to say that altruism on the part of firms or individuals is necessarily bad...
...In the above example, assume that everyone attempts to follow his social responsibility in the use of timber products...
...The relevant comparison in making such choices is not between the existing market and an idealized bureaucracy...
...The modem theory of welfare economics demonstrates that efficiency in production and consumption are guaranteed by a perfectly competitive free enterprise system...
...Under these conditions, the rules of the game must be formulated by government such that firms or individuals find it in their self-interest to take account of the external effects (e.g., by taxation) in making production or consumption decisions...
...Charles A. Reich...
...R.C...
...P.A...
...N.J., 1972...
...This type of social organization is said to entail a sense of "egalitarian cooperation...
...For example, the individual who stops driving his automobile to fight pollution will do little more than inconvenience himself since his contribution to the pollution problem is a negligible part of the total...
...Furthermore, the amount of information required to allocate goods and services efficiently is much greater for an advanced economy than for a simple agrarian (or subsistence) society...
...If production or consumption decisions by particular firms or individuals affect production costs or the level of satisfaction by other individuals, resources will be misallocated unless the firm or individual is forced to take these side effects into account when making such decisions...
...In recent years, the New Left in the United States has spurned both the market and formalized administrative procedures as ways of coordinating economic decisions...
...Random House, N.Y., 1970...
...I contend that the achievement of this scenario which assumes an economic system based on human cooperation is doomed to failure...
...Thus, there is no reason to expect the results of an economic system which relies on "cooperation" (or self-affirmation) to provide signals to consumers and producers to be those expected or desired by its proponents...
...The suggested criterion for each individual is to select the vocation which is most satisfying and fulfilling regardless of whether the selected vocation is an established occupation...
...Assar Lindbeck, The Political Economy of the New Left, An Outsider's View...
...The proper course of action is taken to be that which will further the public interest...
...The above cited examples illustrate that the information requirements facing individuals relying on cooperation as a touchstone for choice exceed those which mortals can hope to achieve in a modern society...
...The economic implications of such a society are quite drastic...
...We know, of course, that individuals are not and never will be all-wise...
...Instead 'participatory socialism" is held up as the model society...
...That is, there must be some organizational structure to determine and implement decisions pertaining to product mix and the allocation of resources...
...Let us assume, however, that a nation is composed of individuals each of whom has as his paramount goal not self-interest but "social responsibility...
...In such a system, there is no mechanism to prevent a surplus of artists or a shortage of plumbers...
...The answer to the problems or questions posed requires that individuals be omniscient...
...If each ind-vidual were omniscient, he would know and be able to evaluate the impact of any action on his part on the level of satisfaction of everyone else...
...A variation of the cooperation theme in choosing a vocation is described in Reich's The Greening of America...
...If one ignores market signals in choosing his vocation, what criterion would be used...
...Harper & Row, N.Y.., 1971...
...For example, in driving an automobile or polluting a stream, there is a divergence between costs to the individual (private costs) and costs to society (social costs...
...I defy you to show that it (a Utopian self-sufficient colony) can continue to exist as a viable economic entity without monthly allowance checks from parents outside the community...
...In weighing the merits of the market or centralized control for any particular activity, it should be remembered that the market almost always possesses the virtue of reducing the coercive control by man in the affairs of other men.n the affairs of other men...
...Here again, however, there is no reason to expect the "cooperative" ethic to lead to the optimal result...
...What criterion, then, would be used in determining the proper course of action...
...As Iindbeck has pointed out, "...the more strongly we are against bureaucracy, the more we should be in favor of markets...
...As a product price increases, additional resources are drawn into production of the good by bidding up resource prices...
...In a book devoted to a "radical analysis of American society," Edwards et al...
...Instead, it is proposed that economic decisions should be based on the principle of cooperation...
...This phenomenon is often referred to as consumer sovereignty...
...Lindbeck, op...
...Hence, the scope of the coordination problem increases with economic growth...
...First, if the supplier of any good or service is not motivated by pecuniary rewards, this implies that the supply of the good is perfectly inelastic...
...That is, an increase in consumer demand for a particular product results in a price increase which serves as a signal to producers of the product to increase production...
...Participatory socialism "requires the elimination of bureaucracies and all hierar-chial forms and their replacement...by a self-governing and self-managing people...
...While this would undoubtedly solve the alleged exploitation problem, there is little reason to expect that this would represent an optimal solution to the problem...
...Should everyone stop using timber products...
...Now assume that all individuals attempt to follow their "social responsibility...
...In this view "changes in the environment can interact with changes in the individual to usher in a new era of human cooperation" (Edwards, et al., p. 5...
...However, it is not clear to what extent altruism is a laudable objective for individual decision-making...
...In the absence of scarcity, there are no economic problems...
...The effect of many regulatory agencies has been found in recent years to be much different from that described by the statutes...
...When one considers the number of goods and services in a modern economy, the problem of pricing all goods and services by an alternative mechanism is readily seen to be one of gargantuan proportions...
...First, human beings are strongly motivated by self-interest and the profit motive...
...In a free enterprise economy, the market serves as a mechanism through which changes in consumer wants and preferences are transmitted to producers via prices...
...Furthermore, if a single individual attempts to do so, the result is likely to be different from that anticipated...
...It seems almost impossible to conceive of a society functioning for any significant period of time in which men work only for the betterment of other men and are not concerned with nor motivated by material goods...
...Any market price reflects a great deal of information concerning demand and supply conditions for that particular good or service...
...indict both traditional state socialism and capitalism...
...However, the public interest is determined by adding up, in some sense, the preferences of the individuals comprising society...
...Even Utopian colonies operating on this principle have not been able to function on a self-sustaining basis for extended periods of time...
...Edwards, M. Reich, and T. E. Weisskopf, The Capitalist System, A Radical Analysis of American Society, Prentice Hall, Inc., Englewood Cliffs...
...For example, the individual who stops using timber products in order to conserve our natural timber resources is likely to do littie more than inconvenience himself since his use of these products is a negligible part of the total use...
...Indeed, some degree of "cooperation" is necessary and desirable for a smoothly operating economy...
...cit., forward, p. XIX) One would expect the problem of resolving conflicts between individuals to be much less in such conditions than for an entire economy...
...That is, how would one decide which vocation he should enter in order to promote the "public interest...
...The information requirements necessary to select a vocation which will meet these criteria are no less demanding than those whose sole criterion is cooperation...
...In summary, on the basis of past experience, it seems unrealistic to expect firms or individuals to place social welfare above self-interest...
...In the case of automobile pollution, each individual would then need to know how much the cost of operating an automobile should be increased to make the private cost equivalent to the social cost...
...Consequently, an attack on competition (the price system) in any phase of economic life is tantamount to an endorsement of bureaucratic planning or central direction for that phase of economic activity...
...In Reich's view, although the vocational decision should not be made with total indifference to the needs of the community, the individual can best contribute to his fellow men by selecting a vocation which will "affirm the self" (p...
...Such calculations would have to be made by each individual in deciding what vocation to enter, the price to charge for anything he had to sell, or any other decision which affected other people...
...Increases in the number of economic decisions related to a single product accompany increases in the specialization and division of labor...
...Economic decisions must be coordinated either through a market or by a formalized administrative process...
...In the United States, one can better appreciate the role and impersonal nature of market prices after observing the highly arbitrary and personal nature of wage and price decisions made under the current regime of wage and price controls...
...Again, he would have to know and be able to evaluate the impact of his action on everyone else...
...Increases in price would then have no effect on the amount of production...
...It is quite clear that in cases where a single individual attempts to sacrifice his own interests to further some higher social responsibility, the result is likely to be different from that anticipated...
...This assumes that there are no side effects ("externalities") associated with the acts of individuals or firms...
...The practical choice for virtually every economic activity in a modern society is then reduced to either the market or central direction...
...For example, in the case of the choice of vocation, each individual would then presumably need to know his comparative advantage relative to all other workers in performing those tasks which must be performed...
...Consequently, there seems to be a heavy burden on those who hold that the social environment can be modified in such a way that the profit motive can be entirely eliminated...
...This is a modern day version of Adam Smith's Invisible Hand doctrine, viz., that individuals and firms, by following self interest, serve the public interest...
...Such omniscence is absent even in the halls of academe...
Vol. 6 • January 1973 • No. 4
