Monday, February 15, 2010

The efficiency of the market and Nazis

Godwin makes everything better.

It is often claimed the the free market produces the most efficient distribution of resources. There are many ways to criticize this, but I will choose two: Nazis and happiness.

Efficiency as an end in itself
There is something seductive about efficiency. It draws you in. It's almost like the thrill of an action movie, explosions and guns and no point at all. There's where the problem comes in: What is the point of efficiency? By itself it is nothing; a tool at most. Tools are useless without something to work on and are terrible is used for the wrong purpose.

Enter the Nazis. They were efficient in many tasks. Such as killing millions of people. Despite the hyping up of health care, Obama's death panels would have a hard time killing millions of people in less than a decade. No matter how many Hitler mustaches and swastikas you paint on him, he is not as efficient as the Nazis.

The Holocaust was efficient, but clearly, efficiency itself is not a noble cause. In contrast modern factories are very efficient and that let's us all (exclude those who are excluded) have a higher standard of living. That is good. But again, efficiency in itself is not good. Instead what matters is the purpose of the efficiency. What goal does the market have? That goal is the true measure of it, not its efficiency.

Efficient happiness
The market produces optimal distribution of goods by allowing us to maximize our happiness through rational exchanges of goods and products. Right? Well that depends on what you're measuring.

If we are looking for the total happiness in the world, then huge gains would be made if you were half as wealthy and that was divided up among the poor. This isn't due to some socialist enlightenment or freedom from materialism. It's simple diminishing returns. Having a car, house, refrigerator, and computer will yield a huge gain in happiness compared to not having those. Spend that amount again fora bigger house, better food in the fridge, and faster computer and you won't have double the happiness. In fact, you're likely to have less, due to additional stress from work and financial strains to afford the luxuries. In terms of arbitrary numbers, it's a case of 100+5+5+5+5+5+5+5+5+5 being less than 90+10+10+10+10+10+10.

If we are looking for individual happiness, well then the free market works very well if you're on the 100 side of the addition, less so on the 5 side.

You are bad and should feel bad
Individual happiness and total happiness are different measures and are unlikely to be reconciled, unless one thing changes: tie individual happiness to total happiness. In other words, give rich people a huge guilt trip.

That's not likely to happen. If someone doesn't feel guilty about corporate policies that cause pandas to be killed by orphan child soldiers, what could possibly cause them to feel guilty?

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