Knowledge And Decisions

Because economic transactions often involve repeated satisfaction of the same desires, there is continual feedback from those most knowledgeable about the extent to which a given product or service is satisfactory — namely, the consumers. Moreover, this is not merely abstract knowledge but knowledge conveyed in a monetary form, conveying persuasion as well as information.

Economic transactions, whether through formal or informal processes, have as a serious disadvantage the possible disregard of affected interests not party to the transactions. A sale of coal to an electric generating plant may represent a mutually advantageous transaction from the point of view of the coal company and the electric company, and yet create millions of dollars worth of costs in dirt and lung disease which are not represented in the decisions as to the kind of coal to use, the location of the plant, or the presence or absence of devices to reduce harmful emissions. Theoretically, with a perfectly functioning and costless legal system, all these costs would be felt in the form of damage liabilities, which would be foreseen at the time of the economic transaction — leading to the same kinds of decisions as if the excluded third parties had in fact been included.¹¹ The external costs in some economic processes, and the high transactions costs of organizing thousands of scattered individuals, create special problems for affected third parties. Viewed as a social process, the problem with such economic processes is that the transacting parties are not coextensive with the affected parties.

Another problem with an economic system is that different people have varying amounts of money with which to convey their consumer preferences to producers. For many social critics, this invalidates any hope of an optimal use of resources via market processes. However, this may be a more formidable problem in theory than in practice. When groups of consumers compete for the same products, each of the competing groups usually includes a wide range of income levels, so that a rich-versus-poor competition need not be involved. Moreover, even where such a competition is involved, lower income consumers often bid goods and resources away from the affluent, through sheer numbers, even if not to the theoretically optimal extent. Much of the outcry against middlemen (“developers,” “commercial interests,” etc.) who would redirect resources from a “higher” to a “lower” use is implicitly a protest against large numbers of lower-income people whose collective wealth is bidding shoreline, forest, and lakeside property away from a use favored by higher-income people to uses more consonant with the tastes and individual resources of lower-income people: typically higher density use, substituting apartment buildings for individual houses, hotels for rustic cabins, automobile access roads for backpack trails, etc. The middlemen, as such, typically have no bias toward any particular use, but only toward making money — a charge bitterly made by critics, despite the inconsistency of that charge with blaming the middlemen for a particular end result.

POLITICAL INSTITUTIONS

Political and legal institutions provide the rigidities — “rights” — people want in some vital areas of their life, where they reject both the transactions costs and the indignity of having to submit to, or negotiate with, those who might challenge or threaten their possession of their home, their children, or their life. Constitutional systems attempt to sharply demarcate these areas of basic rights from other areas in which the discretion and flexibility of individual choice and interpersonal negotiation may achieve whatever arrangements are deemed mutually satisfactory by the individuals concerned. In short, Constitutional political and legal systems attempt to limit their own scope to areas in which they have a relative advantage as decision-making processes, leaving other areas to other decision-making processes, whose advantages may be either in the quality of the decisions or in the personal dignity implied by free choice.