A real market economy ensures that greed is good | Financial Times https://www.ft.

com/content/01f74164-40fc-11e1-b521-00144feab49a

Opinion USSR
A real market economy ensures that greed is good
Our intuitions about scale and centralisation are generally wrong

JOHN KAY

John Kay JANUARY 17 2012

Sixty years of division of the Korean peninsula has created two states with very
different standards of living in one country. The Korean example is pathological. The
division of Germany resulted in two states, both functional in economic terms, but
one far richer. The less noticed comparison between the modern economic histories
of Finland and Estonia had the same outcome.

There are few controlled experiments in economics, but these are as close as we get,
and the results were clear. They were also unexpected. Hard though it is to believe
today, in the 1960s many serious commentators on left and right believed that
Russian economic progress threatened western hegemony. Those on the left were
naively credulous and those on the right victims of paranoid fantasies.

A perhaps apocryphal story tells of a Russian visitor, impressed by the laden shelves
in US supermarkets. He asked: “So who is in charge of the supply of bread to New
York?” The market economy’s answer – that not only is no one in charge, but it is a
criminal offence for anyone to seek that position – is surprising. In the words of the
economists Kenneth Arrow and Frank Hahn, “the immediate common sense answer
to the question ‘what will an economy motivated by individual greed and controlled
by a very large number of different agents look like?’ is probably ‘there will be chaos’.”
Our intuition is that a centrally planned allocation of resources will be more efficient
than an uncoordinated one. In a market economy, that error constantly leads us to
overestimate the economic advantages, and longevity, of large companies.

Our intuitions about the merits of scale and centralisation are generally wrong, partly
because a price system can co-ordinate the decentralised decisions of many small
companies and households well. Adam Smith’s insight about the invisible hand is
often interpreted in this way and modern mathematical economists have established
that proposition more precisely. But if co-ordination were the only strength of the
market economy, a computer could do that job equally well. Computers are very good
at processing information.

1 sur 2 16/09/2021, 10:52

A real market economy ensures that greed is good | Financial Times https://www.ft.com/content/01f74164-40fc-11e1-b521-00144feab49a

But the prices and entrepreneurs of the market economy are much better at eliciting
the information, on preferences and products, needed to make the calculations.
Prices, and entrepreneurs, manage the market’s process of discovery. A functioning
market economy allows endless small-scale experimentation. When such experiments
succeed, they are quickly imitated: when they fail, as experiments usually do, they are
abandoned. Centralised economies, lacking this disciplined pluralism, experimented
too rarely: when they did, they typically implemented on too large a scale. They often
lacked honest feedback on performance. Subordinates had good reason to tell the
great leader what he wanted to hear. We see the same mechanisms at work in our
large corporations.

But what of profit? North Korea is hardly free of the profit motive. The Kim dynasty
and the cliques around it may profess disdain for capitalism, but they understand the
goal of personal enrichment as well as any Wall Street Master of the Universe. The
difference between North Korea and the US is not that one society offers more scope
for greed than the other. In both countries, as in many others, there are greedy people
and many who are not, and those who are greedy are disproportionately represented
in the controlling elite. The difference lies in the channels of greed – the degree to
which the quest for profit is directed towards the creation of new wealth rather than
the appropriation of wealth already created by other people.

A successful market economy emphasises the former and restricts the latter through
rules and institutions, in a structure that has evolved slowly and requires constant
defence against those who would use economic and political power to subvert it.
Success or failure in that endeavour is the central explanation for why some societies
are rich and others poor. Crony capitalism is very different from the market economy.

Copyright The Financial Times Limited 2021. All rights reserved.

2 sur 2 16/09/2021, 10:52