The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design. –F.A. Hayek
In one of my favorite books, Basic Economics, economist Thomas Sowell tells the story of former Russian president Boris Yeltsin’s experience visiting an American grocery store. The story perfectly captures the wonders of the unplanned economy that we so often take for granted.
In 1989, Yeltsin was on a diplomatic visit to the Johnson Space Center in Houston, Texas. Underwhelmed by the space station, Yeltsin asked to be taken on an unscheduled trip to a real quintessential American institution: the local grocery store. One can only imagine the looks on the faces of the dignitaries and the secret service, but visit Randall’s grocery store they did. It changed Yeltsin’s life and worldview.
Yeltsin described the experience as both benign and overwhelming. He was overwhelmed by the quantity of food, neatly stocked and organized, just waiting for customers. He was shocked that Americans seemed to meander through the store and not marvel at its abundance.
Possessing the eyes of an outsider, Yeltsin discovered something that we often forget: grocery stores are amazing wonders that should not be taken for granted.
At one point during the visit, Yeltsin asked the manager if he had to have special training to work in a grocery store. This question makes sense from a Soviet perspective; for much of the twentieth century, the Soviet Economy was run by “experts,” based on the idea that we can manage economies — as if they are jigsaw puzzles that need to be fitted together.
Imperfect Knowledge about the Future
You know what’s so great about a jigsaw puzzle, even the really difficult three-dimensional kind? You always know what the end product is supposed to look like. Think of the first thing you do when you start a puzzle: You open up the box, prop the cover up on the windowsill for reference, and make sure all the pieces are picture-side up. Then you get to work.
As the puzzle assembler, your job is to follow the master vision set forth by whoever designed the puzzle. The pieces of the puzzle are pre-cut, and the outcome is predetermined.
But life is not jigsaw puzzle, and neither is the economy. Even in our own daily lives, we know little about “what finished looks like” when we awake in the morning. We may have ideas for what needs to happen in a productive day: finish my project, read three chapters in my book, make dinner, exercise, and take my kids to the zoo. These ideas are based on many assumptions about what I think I can do and many guesses about what external events may or may not occur. We know our own preferences better than any other person, and we still can’t perfectly plan our day.
The reason for this uncertainty is that we have highly imperfect knowledge about the future. I may plan to have grilled chicken for dinner, but another better and unforeseen opportunity to grill burgers with friends arises. I may be determined to finish a project with a specific thesis when some unexpected information arises that makes me go in a different direction. And maybe this new direction is better and improves the project!
Unforeseen events can be good or bad. They can help us progress towards our goals, hinder our progress, or force us to find different goals altogether. The point is that we aren’t even puzzle assemblers in our own lives. We don’t have precut pieces that we put together perfectly.
The Economy Is No Puzzle
The implication of uncertainty in our own lives is clear. If we face challenges planning our own lives productively, how can anyone else plan for us, especially on a society-wide scale? It’s impossible.
Because of the planning problem, we need a social order that helps us overcome our limitations in both our knowledge and our capabilities. Markets do just this. A market is a process where individuals who have highly imperfect knowledge and are limited in what they can do (but know better than anyone else how to improve their condition), can exchange with one another to get what they want and need despite their deficiencies in knowledge and ability.
In the market for breakfast cereal, there is no pre-determined picture of what a “good” breakfast is for any of us. No one master planner could ensure that we all get the breakfast that meets our own unique desires and tastes. There is no human puzzle master. We work together, through production and voluntary exchange, to meet each other’s demands.
The economy is simply a market on a large scale. We need to be very aware of this when we hear political rhetoric that would suggest that the economy is a puzzle that needs to be fitted together by “experts,” like in Yeltsin’s Russia. History shows that when we put smart people in charge to manage or assemble economies, we get sparsely shelved supermarkets. The road to flourishing is charted when each of us can use the limited knowledge at our disposal to better ourselves and serve each other.