Pur Autre Vie

I'm not wrong, I'm just an asshole

Friday, December 30, 2011

The Inevitability of Coordination of Economic Activity

Incidentally, I think my previous post on time and money points the way to a fairly deep point about society - the extent to which "nominal" coordination is necessary in order to achieve "real" outcomes, and the trade-offs that arise.

Some libertarians take the view that people should simply be left to their own devices. Coordination will spontaneously emerge thanks to the invisible hand, etc. etc.

In my view, this is unrealistic both as a description of how coordination is achieved and as a concept of how it could be achieved in an ideal world. I think coordination is a central problem of modern society and that it is inherently political. Of course, the government need not be the institution doing the coordinating. But coordination is pervasive, and no matter who does the coordinating, it will favor some and not others.

By way of example, think about a futures market. The idea is that you have defined contracts specifying the commodity, the quantity, the quality, and the time and place of delivery. The seller undertakes to provide the commodity at that time and place, and the buyer undertakes to pay for it. (The contract doesn't specify the price, which is established on an exchange.)

Very well. This can all be arranged without government help (although of course it probably helps to have a general background of legally-protected property rights and contract enforceability).

But who defines the contracts? You might think that you could have infinitely many contracts, varying continuously along all dimensions, but that's not the case. For contracts to be traded anonymously on an exchange, you want liquidity, which means you want to coordinate on a few specified contracts to the exclusion of others. So you have a few grades of each commodity, and a few places of delivery (famously, West Texas Intermediate crude oil is deliverable at Cushing, Oklahoma). As Canadian grain farmers are gaining the ability to sell their grain to anyone, and not just the Canadian Wheat Board, they will have to consider which futures contract makes the most sense for them, since they can't each write a contract that meets their precise needs. I read a Wall Street Journal story indicating that exchanges are competing on the basis of what contracts they support - some support Canadian-dollar-denominated contracts, others don't. (Sorry, no link - it was in the December 23 issue, I think.) Farmers are thinking about how much they care about liquidity vs. how much they care about the quality of the hedge. (A contract deliverable in Chicago is probably a better hedge than a contract deliverable in Los Angeles, even though the grain itself might be delivered to Toronto. I am making this example up, but you get the idea.)

Now, note, no one is forced to use the futures market, as far as I know. It's purely voluntary. And yet I'm guessing that lots of people who don't trade futures pay attention to the prices on the exchanges, and I'm guessing that farmers know how to optimize the grade of grain that they ship to market, based on the relative prices of the different contracts (or maybe just based on the contract specifications generally). That is, a lot of "real" activity goes into conforming economic activity to the "nominal" coordination achieved by the futures market. Another way of putting it is that conforming to the market standard may be voluntary in the legal sense, but it is compelled by economic logic. And therefore a standard that is in no way compulsory ends up affecting behavior, just as daylight saving time affects when people wake up (even people whose jobs do not require them to show up at work at any particular hour).

Anyway, my bigger point is, contracts could be defined well or poorly, but they have to be defined, and people will have different preferences about those definitions. My broader point is that a lot of human activity benefits tremendously from coordination of one kind or another, and I think libertarians are naive to think that all of this can be achieved in a decentralized way. The question facing modern society is not whether or not to have a leviathan, but how to choose (or design), monitor, and control that leviathan for our collective benefit. (Again, the leviathan need not be the government - it could be the clearinghouse, or the CGPM, or whatever.)

But so, these decisions implicate people's interests, and so they are political, and so we probably need political institutions to deal with them. Often, the government is well-situated to play this role. If someone is going to crush your liberty, it might as well be someone subject to public scrutiny and competitive elections, and bound by a written Constitution and norms of fairness and democracy. But, you know, not always. We have other good institutions with roles to play - the market, academia, etc. And so you end up with the "ideological division of labor" among the institutions at our disposal. I think some libertarians imagine they can avoid playing this game, but they can't. Society will be coordinated. But how and by whom, and in whose interest?

[Update: Another way of making this point is to think about whether socially-imposed conventions such as time zones, currencies, language, standardized weights, etc. make the economic calculation problem easier or harder. If the answer is "easier," then perhaps the economic calculation problem is not the all-purpose libertarian argument that it might seem to be on first glance.]

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