04 April 2008

The economy isn't always a happy place.

I just read an interesting quote of Sandi Heller, University of Colorado, at Time Magazine. "What I learned from economics is that the market is not always going to be a happy place."

This has some interesting wrinkles in it. Some people might focus on the words "economics" and "market", and propose that we need socialism or communism, in order to get rid of the market.

So let's re-word this quote. "What I have learned from life is that the world is sometimes an unhappy place."

And what do we mean by "unhappy"? With this focus on economics, "unhappy" means that sometimes we're short of resources. The photo on the above link showed a house with a foreclosure sign in front. The owners must have been short of resources, and could not pay their mortgage. They will lose their house. That is an unhappy situation.

Now we can immediately blame the market (why are we still arguing against lunatic forms of resource allocation in the twenty-first century?), but a market is just a place where things are exchanged. It's like blaming the hammer for our sore thumb. Economics is a science that simply describes what happens when people exchange things in certain ways. There's no point in blaming that.

What we can blame, however, is the shortage of resources. We will never have enough. Every species is insatiable, and humans are no different to dandelions in this way. When we run short of a particular resource, we face a constraint.

Now as a group, how we allocate goods among ourselves under a constraint will always be contentious. There's not enough to give everyone the feeling of really having as much as they want.

The best we can do is to allocate so that everyone's marginal utility is equal. This is most conveniently done with trade. If we don't use trade, we need an omniscient and benevolent dictator who knows everyone's marginal utilities, and can allocate so that everyone's marginal utilities are equalized.

Of course, there is no such thing as an omniscient and benevolent dictator. Which is why we need markets that allow fair trade.

No, the world is not always a happy place. The marketplace imposes adjustments and dislocations when resources run out. These are not comfortable. The appropriate response is to get on with life, and look for a better opportunity.

1 comment:

Sandi said...

I couldn't have said it better myself...

Sandi