Knowledge And Decisions

Forcibly precluding competitors means either threatening violence one’s self (as in some labor disputes) or having the government threaten violence by passing a law or issuing regulations. Government edicts without a threat of violence are mere suggestions, and suggestions by themselves (“jawboning”) have a notorious record of ineffectiveness in the economy. The fact that actual violence does not usually occur in no way undermines the crucial importance of violence in the outcome. Most armed robberies also do not lead to actual violence: common sense usually causes the victim to turn over his money without a fight and causes the robber to take the money and go. Yet no one would deny that the prospect of violence is central to armed robbery, even if in retrospect it turns out that there is seldom actual violence in the commission of that crime. The government’s threatened violence is not direct corporal punishment for violating laws and regulations. Rather it is a threat to take assets by force — either in money (“fines” or “damages”) or in kind (legal rulings restricting the behavior, including the continued existence, of the firm in question). It is violence in the same sense in which armed robbery is violence. The power of the government is so overwhelming to the private individual or institution that it is seldom necessary to add that defiance of the government rulings will cause policemen or soldiers to forcibly drag the offender away to jail.

The role of prices as transmitters of knowledge is more readily seen in a changing economy than in a static one. If the economy maintained the same technological capabilities at all times, and tastes were unchanging and population size stationary, one way or another most of the essential knowledge about how things ought to be produced would eventually percolate through the system. When all these (and other) variables are changing constantly, however, the knowledge problems become staggering — if viewed from the standpoint of a given individual trying to understand it all. But if, for example, new deposits of iron ore are discovered at a time when there is a growing demand for office furniture and a declining supply of trees, all that the stores that sell office furniture need to know is that the wholesale price of steel desks, tables, and cabinets is falling relative to the wholesale price of the same items made of wood. They may do no more than reflect these relative price relationships in the retail prices they charge for steel and wooden office furniture. Those consumers who absolutely swear by either steel or wooden office furniture may just continue their respective preferences, but others, who are either more flexible or more pressed for cash, will tend to substitute the material that is getting cheaper for the material that is growing more expensive. The net result is that the economy as a whole incrementally substitutes the material that is becoming more abundant for the material that is becoming more scarce, without either the consumers, the retailers, or even the wholesalers necessarily understanding why prices are changing the way they are.

In short, nobody needs to know the whole story in order for the economy to convey the relevant information through prices and secure the same adjustments as if everyone had known. Someone somewhere far back in the production process undoubtedly knows why iron ore is becoming more abundant, but he may or may not know the relative scarcity of wood, and it is doubtful if he has concerned himself with anything as remote or as specialized as the market for office furniture. Yet his knowledge is transmitted through prices to people with whom he has no direct contact.

Economic optimality is not moral justification. This is especially so in a changing economy, where rewarding “merit” may be incompatible with reallocating resources in accordance with changing technology and changing tastes. In a totally unchanging economy, it is conceivable that the hardest working, most foresighted, imaginative, or skilled individuals would end up with earnings reflecting these valuable characteristics, so that economic efficiency and morally justified rewards would both result. In an economy constantly changing in technology and taste, however, rewarding “merit” and efficiently re-allocating resources are often contradictory goals.