Learn Liberty recently released a video titled “What if There Were No Prices? Railroad Thought Experiment” with Professor Howard Baetjer of Towson University. The video argues that market prices communicate the value of goods and services in the economy so that those goods and services are allocated to their most productive (and value generating!) uses. And the market does this better than a central planner ever could. The YouTube comments section (usually a treasure trove of thoughtful and respectful academic discourse) blew up, and Professor Baetjer took the opportunity to address some of the more thoughtful questions and responses to the video. Here they are…
One of the points the video makes is that central planning fails because planners simply do not have access to the vast stores of information necessary to make decisions about where goods are most productively used. To this point, YouTube commenter IamRayson asked:
IamRayson: Would Artificial Intelligence solve the knowledge gap problem?
Howard Baetjer: This is an important question. We’re pretty sure the answer is no because the needed information about people’s preferences (as consumers) and judgments (as businesspeople) about how the relative usefulness of different (combinations of) inputs to their plans cannot be communicated to the AI any more than it can be communicated to a central planner. The key difficulty is not the central planner’s processing power, it’s his (or its) access to the specialized, local, changing KNOWLEDGE of the millions of individuals in the economy. Is this persuasive?
IamRayson: I am a libertarian, so I need no convincing about the superiority of a free market over central planning. I was merely curious how a communist would try to get around the knowledge gap. So theoretically, if AI could frequently collect surveys from people with modern electronics (and I don’t see why not, given communist have no trouble mandating stuff onto unwilling subjects), then could they possible overcome the knowledge gap?
Howard Baetjer: I don’t think so. I think by its nature it’s impossible to overcome. Here are reasons:
“Frequently” would be critical, wouldn’t it? Prices in the real world reflect people’s changing judgments as soon as those judgments change (e.g., a contractor decides which of several bids to accept, a farmer decides to buy a new harvester, a speculator decides to sell half his stock of soybeans…or maybe just a quarter). Any central planner would make those decisions, or adjust prices based on them, later than “the man on the spot” would.
And the surveys would have to be remarkably well thought-out to get at just what aspects of value, cost, or uncertainty about the future the “men on the spot” believe relevant.
And the planner or AI would have to decide how to weight the different survey answers from different people. Those weightings would of course need to change with changing situations.
Maybe the most insuperable problem, in principle, is that often people truly do not know for sure whether they value one thing more than another until an actual moment of decision. I don’t think the planner or AI could do as well as a free market price system unless it could faithfully represent all the different judgments of all the different agents in their actual circumstances, and decide for them as quickly as they could decide for themselves. If that’s true, we may as well just go with the distributed system we’d be trying to emulate.”]
Professor Baetjer then engaged with a commenter on the issues of consumerism and caring for the earth’s natural resources.
Bruno Ferreira: Capitalism, as we know it, is based on consumerism. That in itself produces a giant amount of waste and mismanagement of resources. New phones are constantly being produced. Minerals being mined and all the electronic capital that comes with it. It is only build to feed the “engine” of consumerism in order to keep the whole system afloat. It does not uses resources as society values the most since its values are skewed and not optimal for long term planning.
Howard Baetjer: Bruno, wouldn’t capitalism, in the sense of free exchange based on private ownership, be desirable even for people who eschew consumerism? If people had much more limited wants, the price system that arises out of private ownership would still allow for those limited wants to be satisfied with the smallest sacrifice of other wants. You seem more discontent with other people’s values than with free market pricing.
Bruno Ferreira: Howard, my only criticism is to the claim that free market pricing uses resources that society values. Since their values are manipulated by corporations it creates a new set of pricings that not reflect the real cost of the resources required. Please remember we live in a scarcity minded capitalist system with no real account (or measure) of earth’s mineral resources.
Howard Baetjer: I see two points here: 1) The people in society do not really value things as their prices indicate because corporations manipulate people’s values, distorting those values away from their true levels. 2) A free market price system does not take into account the actual scarcity–the ultimately hard limits–on “earth’s mineral resources.”
I concede that 1) might be true in some abstract sense; certainly people are constantly trying to influence others’ values. But I would deny that corporations can control people’s values: Blackberry could not maintain users’ loyalty when faced with the iPhone; Kodak could not make people prefer to take pictures on film rather than digitally.
Point 2) I think is mistaken because the owners of limited mineral resources have such a strong incentive to price them right. In the limiting case where some resource for which there is no substitute is literally running out, its owners would have every incentive to charge a shockingly high price for it, a price that would indeed reflect its actual scarcity. We don’t see such prices in the real world, I submit, because human ingenuity is “the ultimate resource,” as the great Julian Simon put it, and human beings are constantly finding new sources of, and substitutes for, every physical resource.
Even if we grant that both these points are valid, however, is there a better alternative than a free-market price system for ascribing value to goods? Even with its admitted imperfections, is there anything better to put in its place? I don’t think so. To what could we possibly turn, valuations by select committees of very smart people with their own prejudices and limitations?”]
Now it’s your turn to voice your opinions on prices, railroads, or Russian commissars. Have at it in the comments section below!