Allocation of resources – the invisible hand, socialism, and the mystery of social life…

The economy may have become slowly the most fascinating mystery around…
Physics and biology have made so much progress as to render the natural world at least understandable enough that we can work on it in a way our ancestors would not have imagined possible: flying, going to the moon, curing many diseases (or blowing ourselves up, big time).
Psychology is frustrating, but at least at the individual level there are many cases when patterns can be understood, and help given. And when not, at least you can always take pills – they will never be enough to eradicate urangst, or despair. But you can track their action, however limited or short-lived.
Not so in economy. It still seems that even economists mostly make wrong predictions and propose solutions, which don’t work. And non-economists generally appear lost, mostly resorting to fully inadequate tools: morality (“the modern economy is bad”), childish voluntarism (“let’s just create jobs and/or distribute money and/or whatever”)…What is exactly the matter?
Until “recently” (two centuries ago, even for most of the world a couple of decades ago), the issue of producing and allocating goods was relatively simple: shortage was the rule. There was mostly not enough food, not enough non-food items, not enough luxuries of course. This did not mean that there was no economy to think about: it took a long time for the right concepts to come around, but slowly emerged the ideas of specialization and comparative advantage, the notion that free trade could benefit both parties, and some understanding of that most vexating of all issues, currency. At least, on the latter, it was understood that the supply of currency had as much impact on the price of goods as the supply of goods themselves. And there was much thinking about resources allocation and privat property, from Rousseau to Marx, for instance. And still, not much was understood at all, and “solutions” proved worse than the ills in many times – just think about the Soviet Union as an experiment of solution…
Now, what gradually happened was that the very underpinning of the world so far was changing radically: penury was on the wane. Productivity and machines made such progress that there is now more food than we can eat overall (or at least there is the potential for it) and there are certainly more goods than we can “reasonably” consume (hence the constant product “innovations” – and don’t think it would be any different if we were to add more poor countries: markets saturate rather quickly in a world of such productivity as ours). There is no real shortage of food or non-food, there can only be a shortage in some places where the economy is too little developed, and of course there can be a shortage of land, which is a rather special good in that respect! What we have not developed, however, is any understanding of what to do with this…
Don’t get me wrong. We know a couple of things which don’t work: centralized planning (too few people to decide too many things just cannot work – it is like trying to handle complex processes with one old processor, instead of a massively parallel computer, to take a tech-analogy – and in addition central planning gives too much power to a few, and this is a great source of corruption), for instance. And we also know (more or less) that there appears to be a few economic “laws” that you ignore to your own risk: inflating money devaluates it, say, and a lot of other good things on interest rates, public borrowing, administrative barriers etc. Even so, it seems most people have never heard of them. Recently, in a rare display of intelligence, Sarkozy’s government announced that they were considering re-introducing economics teaching in high school (whoever was the moron who took out the miserable 2 hours that used to be taught during only one year, as if even this was too much!?).
But more fundamentally, the tools, both mental and factual, are still the ones developed for a world of shortage. And so is the vision of income allocation. The interesting situation is that:
- We have a world of potential sufficient supply of pretty much everything for pretty much everybody, if the best technology were used everywhere
- Given the number of more or less idle people around (unemployed or underemployed, in rich and poor countries alike), there is the potential to produce really a great deal more
- The few problems on the way are:
o If you produce these additional goods and potential clients do not have the resources to buy them, you lose money, and you have to find this money somewhere (see “does not grow on trees”)
o If you first distribute money around to poor people so they can purchase something, you create inflation
o Experience has shown to whoever cares to look that full-scale “socialism” (in the sense of state property and state-ordered distribution of income) corrupts ethics absolutely, ruins the economy and destroys freedom – if anyone has doubts, I volunteer to organize tours of the worst bits of the former Soviet Union.

Looks like a pretty evil conundrum: we have the resources to feed and clothe all, but we don’t know how to allocate them better. Should this not be a topic for research? How to do it in a way that works, that is…and without going back to closed borders where you make people everywhere worse off.

A couple of small bits of elements for potential ideas:
- Probably not the best approach to throw millions of money at some executives, as if they were such a rare resource – I mean, good management skills are rare, but that rare?? Rising inequality is kind of not exactly what seems to make the most sense in terms of allocating resources better (I mean better here not from a moralperspective, that it would be better if poverty were to disappear, but from an effectiveness perspective, that a better distribution would be one that reduced crises, by having more spread consumption and more stability in the system…I am dreaming!)
- Maybe at least part of the answer (and also part of the expanation of why the “financial world” has looked so out of control in recent years…) is in this fundamental innovation of the last 30 years: capital has grown increasingly mobile, across borders and inside borders. This is great, it has allowed considerable innovations, and massive growth in a number of countries that once looked desperately poor. But this has not been accompanied by more freedom of movement for labour. Quite the contrary, with all rich countries clamping down on immigration. It means poor countries workers are “locked in” and have a bad bargaining position, while rich countries workers can resist salary changes, but then see their jobs move overseas…Not that it is so simple, but I guess part of the answer lies there somewhere.

Just thoughts. I have no theory and I think the problem is so complex that it may largely lay beyond our capacity to solve it. After all, this is about psychology, compounded billions of times. What makes people work, strive, etc. The total failure of the large-scale experiment to replace private property and market by state property and planning should make us humble and careful – but it should not prevent from asking the questions…