Knowledge And Decisions

Much of the Marxian tableau (and related social visions) depend, in a crucial way, on analyzing in retrospect only surviving and successful businesses. In this approach, the whole market process — risks, estimates, consumer validation, etc. — all evaporates, while the analysis concentrates on selected results in terms of theoretical examples of survivors. Because firms can survive only insofar as prices cover costs, this vision of survivors-only can proceed as if it is axiomatic that prices are somehow automatically suspended above costs, with the gap between them containing a profit to be siphoned off by those who happen to hold the legal title to the means of production — this arbitrary title being the economic cause as well as the institutional mechanism behind their proceeds. To generalize about any group from the experience of its successful survivors alone is often to miss the whole point of the process in which the group as a whole is involved. Using such an approach, one could, for example, prove that no one was killed in World War II.

Where such a vision of the market economy proceeds empirically rather than theoretically, it can appear plausible only for relatively brief historical periods. The great successes of one era tend to disappear into oblivion in subsequent eras — witness Life magazine, the Graflex Corporation, and W. T. Grant, all of whom were once giants dominating their respective fields. The disappearance of these once dominant enterprises within the past generation is part of a longer history of such disappearances. Virtually none of the top industrial giants of a hundred years ago are still with us today. Such disappearances are perfectly understandable in a vision of a risky process of estimation and subsequent validation. They are hard to explain in a vision of prices mysteriously suspended above costs for the convenience of “capitalists.”

A revealing episode in the early career of Walt Disney may illustrate the physical fallacy on a smaller and more human scale. Back in the 1920s, when Disney first emerged as a cartoonist, his early successes led him to found a studio and to employ other artists to draw the thousands of pictures required for animated cartoon movies. Disney Studios was particularly successful with an early cartoon character called Oswald Rabbit, whose copyright was held by a movie distributor rather than by Disney. This distributor decided to eliminate the need to pay Disney by hiring away his cartoonists and both producing and marketing the product. From the standpoint of the physical fallacy, Disney was superfluous. He neither drew the cartoons nor transported the films to theaters nor showed them to the public. The distributor, with the Disney staff and the copyright on Disney’s character, expected to profit from his coup — but without Disney’s ideas the previously valuable character suddenly became worthless as a money-maker at the box office. What had really been sold all along were Disney’s ideas and fantasies. The physical things — the drawings, the film, and the theaters — were merely vehicles. It was only a matter of time before another set of vehicles could be arranged and the ideas incorporated in a new character — Mickey Mouse — which Disney copyrighted in his own name.⁹

Many of the products which create a modern standard of living are only the physical incorporations of ideas — not only the ideas of an Edison or Ford but the ideas of innumerable anonymous people who figure out the design of supermarkets, the location of gasoline stations, and the million mundane things on which our material well-being depends. It is those ideas that are crucial, not the physical act of carrying them out. Societies which have more people carrying out physical acts and fewer people supplying ideas do not have higher standards of living. Quite the contrary. Yet the physical fallacy continues on, undaunted by this or any other evidence.

OPTIMALITY

Because each individual has his own set of preferences, there is no single standard of values by which one economic system might be said to be better or worse than another absolutely, or even to be better or worse compared to its own performance at some other time. How could an observer say whether more pineapples and less beer was better than the reverse, or whether more growth was enough to balance a reduction in employment? But because there is no absolute standard, that does not mean that there is no standard at all. Although we cannot reduce all the different sets of individual preferences to one set, we can conceive of an optimal performance by an economy as representing the satisfaction of the diverse sets of preferences to such an extent that no one could be made any better off (by his own standards) without making someone else worse off (by his own different standards). Economists call this “Pareto optimality,” after the Italian economist who conceived it and analyzed its implications.