Co-ordinated Specialization

I have been thinking about the problem of teaching emergent economics. A commenter suggested The Economic Way of Thinking, so I got the eleventh edition. Paul Heyne started the franchise, and this edition, from 2006, adds as co-authors Peter Boettke and David Prychitko. It is quite good. It is certainly an improvement over the Samuelson tradition in which the market is a machine, technocrats are its repairmen, and economists write the repair manual.

The authors write (p. 16-17)

The economic way of thinking was developed by social theorists largely to explain how order and cooperation emerge from the apparently uncoordinated interactions of individuals pursuing their own interests in substantial ignorance of the interests of those with whom they are cooperating. Economics is a theory of choice and its unintended consequences.

The fundamental assumption of the economic way of thinking is that all social phenomena emerge from the actions and interactions of individuals who are choosing in response to expected benefits and costs to themselves.

I prefer something more Smithian and less Misesian. I would be inclined to start with something like this:

The most striking economic feature of modern society is that we can consume the products and services requiring millions of tasks while performing only a few tasks ourselves. Obviously, this requires some form of coordinated specialization. How can this coordination take place? Consider three possible extremes.

1. Decentralized decisions, but with no prices and profits. People just spontaneously decide on their own what would be most useful to society.

2. Centralized decisions, made by an expert planning bureau.

3. Decentralized decisions, guided by prices and profits, and regulated by competition.

The problem with (1) is that you will get imbalances. Suppose that getting milk to urban consumers requires both dairy farmers and truck drivers. If too many people would rather be truck drivers than dairy farmers, then there won’t be enough milk to transport. If too many people would rather be dairy farmers, then the milk will spoil on the farms. More generally, the jobs that no one wants to do will tend to go undone. Computer programmers will all work on video game hacks, not on inventory control systems. Basically, (1) only works when there are very few tasks to be divided among a small number of people who all get along.

Top-down planning is widely used in the economy. I think of corporations and non-profit organizations as operating this way. But as planning organizations increase in their scope of activities, prolems arise. When central planners draw up their plans, they do not know true costs. Part of the reason for their lack of knowledge is that all costs are opportunity costs, and opportunity cost has a subjective component. Moreover, central planners are not well positioned to gauge alternatives to the status quo. How can a remote planner know whether a factory will be managed more efficiently by Jane than by John?

In a complex economy, these knowledge problems are better solved by competition under a price system with profit incentives.

Returning to Heyne-Boettke-Pryhitko, I would prefer not to put as much emphasis on the methodological dogma that people choose in response to expected benefits and costs. Instead, I prefer to emphasize the question of how a society can operate with each individual performing a few tasks while consuming the products of vast multitude of tasks.

I am not saying that one can do away with the dogma. Offhand, I do not see how to get to “all costs are opportunity costs” without invoking it at some point. But I want to be up-front that the dogma has philosophical consequences.

6 thoughts on “Co-ordinated Specialization

    • I think I see what you mean. Hayek looks upon order from chaos and says how did this happen?

      I think Arnold is referring to the axiomatic praxeology that Boettke, et.al. seem to be employing.

      Arnold seems to be starting more in the middle and asking what are all the conceivable ways to get from disorder to order?

      • I read Hayek and Mises as emphasizing #3. But Hayek spent a lot of time on the decentralized knowledge, whereas Mises basically said that is useless without private property, sound money, and the resulting free prices and profits/losses. Mises also wrote a whole short book on #2’s shortcomings.

  1. Dan Klein’s Knowledge and Coordination, while not meant to be a textbook, sounds like it would be right up your alley. Very Smithian, also attempts to be a less formalistic Kirznerian.

  2. Ever since I read “Learning Economics,” it has always been an enriching joy to read Kling’s ideas on economics. They are always valuable, always inspiring. I’m grateful to him for sharing so generously. He has a knack for being original (giving genuinely new impulses) without achieving this effect in a contrived way.

  3. For the record, you actually skipped the other path to consumption of more than we can ourselves produce. That is *predation.*

    On the decentralized you further delineate what amounts to coordinated and uncoordinated. Thus you aren’t answering how coordination can take place with the spontaneous version. You threw out coordination with one of the definitions. It amounts to just do whatever you assume would be best. It also assumes people give a hoot about society as opposed to their own personal well being. In other words, I am not a fan of your division of decentralized.

    Oddly, I think you have failed to properly delineate centralized planning. There are two types of command, imposed and voluntary. One requires threat of force, the other is intrinsically voluntary. I can agree to work for a corporation with the agreement of my place within the hierarchy. I can also go elsewhere to other competing alternative corporations. Thus voluntary command straddles decentralized and centralized.

    One other weakness in your command extreme, you assumed expertise. There is in no way a guarantee that the planners will have expertise.

    I hope this helps. But in all honesty I think your framework could still be improved.

    I would suggest:
    1) you can do it yourself or with family as generalists (down side — extremely unproductive)
    2). You can specialize in predation (downside — creates a negative sum dynamic which destroys value and thus to a steadily shrinking pie)
    3). You can specialize and coordinate your actions with others using shared rules, property rights, contracts, prices, profits and voluntary forms of cooperation and hierarchy (downside — can’t solve some types of problems)
    4). You can impose order and dictate coordination from above. (Downside — knowledge and agency problems and lacks the constructive gains from competition such as variation and benchmarks)

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