Tuesday, May 31, 2005
We started this morning looking at how markets induce cooperation between people. One reminder is that buyers compete with other buyers, not with sellers, and vice versa. This explains much of business behavior in terms of advertising but also in trying to monopolize or cartelize markets. We'll talk more about this later this week.
We also talked about the value of markets in expanding the circle of potential borrowers. A question in the text asks, why is it easier in a barter economy for the toilet paper manufacturer to meet his or her demands than an electric guitar manufacturer. There were stories in Armenia that many times workers were paid with some of their products. There are two major manufacturers there: a brandy plant and a piano manufacturer. Getting paid in brandy is not nearly so onerous as it is transportable and desired by more people. Pianos are hard to transport. Many simply burned them.
I told them a story from my time in Ukraine, where I had a central bank official offer me data to help him understand the coal industry. It was balance sheet and income statements for each coal mine in the country ... collected weekly. So much data, and yet they had no idea what to do. This reminds us of the economic calculation debate and whether socialism could ever fix this problem. The textbook says:
We are extremely dependent on changing money prices to secure effective cooperation in our complex, interdependent society and economy. When prices are not permitted to signal a change in relative scarcities, suppliers and demander receive inappropriate signals. They do not find, because they have no incentive to look for, ways to make accommodations to one another more effectively. It is important that people receive some such incentive, because there are so many little ways and big ways in which people can accommodate--ways that no central planner can possibly anticipate, but which in their combined effect make the different between chaos and coordination. Changing money prices, continuously responding to changing conditions of demand or supply, provides just such an incentive.
Scarcity is inevitable; it's simply a question of what you use as a rationing mechanism.