Allocative Mechanisms

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Human society is a blend of cooperation and competition. The form competition takes is shaped by such allocative mechanisms as markets or government. Some mechanisms alter overt behavior, but self-interest appears to be a universal motive that can be channeled, but not eliminated. For example, punishing a child for not sharing toys may yield more sharing, not because the child has learned to enjoy sharing, but because it self-interestedly avoids punishment. Policies intended to stamp out self-interested behavior have uniformly failed in tragic ways (e.g., China from 1948 until the death of Mao–especially for the estimated 30 million Chinese who died of starvation during the Great Leap Forward [1958-1961], and Kampuchea [Cambodia] in the 1970s).

Every allocative mechanism we will discuss is used in some situations, and in all countries. Thus, societies everywhere have mixed economic systems. But people try to "beat the system" no matter which mechanism is used. Each mechanism may work well in some circumstances, but improperly applied mechanisms can be disastrous.

The Market System

The market system is the dominant device used in the United States and, increasingly, across the globe, to address economic problems. Every market is somewhat unique, but all share two characteristics: (a) buyers who demand goods or the resources that produce them if prices are acceptable, and (b) suppliers who make products or resources available if the price is right. Private buyers and sellers trade money for resources or goods in a market economy.

Markets enable buyers and sellers to transact business so that people can share in the gains possible through specialization and exchange according to comparative advantage. Markets range from commodity exchanges where millions of bushels of grain change hands in thousands of daily trades to markets where one huge transaction requires years to complete (huge construction contracts). Markets also range from geographically limited (corner delis) to global (international diamond markets). Some deal in a single type of good (bricks), while others offer thousands of products (shopping malls).

Much of this book describes how markets allocate resources and distribute income and production. But before we investigate supply and demand in the next two chapters to see how markets resolve economic issues, we will look at some non-market methods of choosing.

Brute Force

Brute force is a way to decide who gets what. You may risk losing your life, limbs, or loved ones by defying a bully’s demands. Thugs might view brute force as a fine system–but parts I, II, and III of The Godfather films illustrate how violence often inspires cycles of violence (and how successful films inspire sequels).

Brute force also wastes resources. The arms race between the United States and the USSR from 1945 to 1990 absorbed mountains of resources that could have been used to improve standards of living in both countries and elsewhere. Another concern of brute force returns to the issue of self-interest; will people strive to produce if most their output will just be seized?

Queuing

Queuing (lining up) is another way to decide who gets what. First-come, first-served systems operate for mining claims or purchases at bookstores. Queuing can sometimes be efficient. For example, there is a trade-off between time you spend in a grocery checkout line and time cashiers would wait for customers if enough checkout lines were always open to provide instant service to everyone. (Your time is costly, but so is theirs.) But if queuing were the dominant allocation mechanism, so much time would be spent in lines that little production would occur–and you would be forced to be very selective about which long waiting line you chose. Should production be oriented toward goods with the longest queues? It’s hard to say, because people’s priorities change. Snowboards and skis are a hard sell in July, unless there’s an incredible sale!

Random Selection

What if all economic questions were decided by random selection? Once again little production is likely. For example, if your job were assigned by throwing dice or other games based on pure luck, you probably would lack ambition, and the bulk of the potential gains from specialization would be wasted. Many of us would be round pegs in square holes. Young men are now required to register with the Selective Service. Would using a lottery to determine who will serve in the Army be fair? Is a draft efficient? Would you want college degrees, new cars, or medical care to be allocated by lottery? But even random selection can be efficient. The system is used quite effectively in the American judicial system where a “jury of peers” is selected at random from the general public to try a case. For either the defendant or the plaintiff to be able to pick and choose exactly who rules on a case would be a very inefficient way for the judicial system to function.

Tradition

Tradition may also be used to resolve economic questions. Feudal European monarchies operated largely on this basis, and the caste system in India still does. In our society, women and members of minority groups have often been pushed into low-paying jobs because tradition restricted access to better positions. Most of us reject the notion that only senators' children should become senators, or that garbage collectors' kids should necessarily haul tomorrow's trash. Resources and human talent are wasted when tradition alone rules.

There are cases, however, where tradition merely codifies efficient modes of resource allocation. For example, the carnage on U.S. highways would be far worse if people failed to follow the convention of driving on the right side of the street. This tradition enhances efficiency. Laws and government regulations often reinforce such efficient traditions.

Government

Government plays a dominant role in resolving some issues, but how should policymakers decide? Even if everyone agreed that a democratic government should resolve every issue, we would still face the questions of who should be given what and how to produce the things to be distributed. Among the criteria policymakers might use to distribute production are equal shares and need.

Equal Shares

An egalitarian approach entitling everyone to equal shares might seem a fair way to distribute goods, but equal amounts of food may be more than can be eaten by a 100-pound jockey, yet a starvation diet for a 250-pound all-pro linebacker. Should we all be issued equal paychecks and identical housing and clothing? Egalitarianism, moreover, offers few incentives for production. Why should an American farm family work hard to produce wheat if its share is only 1/92 millionth of farm production? Many argue that one of the main reasons communism collapsed in Soviet Russia and why it’s giving way for more capitalist tendencies in China is because the system of equal shares is essentially flawed.

Another problem arises because policymakers are as self-interested as any of us. If you could decide what is equal or fair, you would probably give yourself and your friends the benefit of every doubt. Egalitarianism may regress to the state of George Orwell's Animal Farm: "All animals are equal, but some animals are more equal than others."

Need

An alternative is for government to distribute goods according to need. Unfortunately, it is difficult for anyone to judge someone else's needs. Distribution according to need is inherently costly and imprecise, and causes people to exaggerate their needs. For example, beggars in underdeveloped countries sometimes cripple their children so the children will appear more pathetic to compassionate strangers.

The 1950s TV game show "Queen for a Day" was less brutal. Contestants told tales about emergency operations, unemployed husbands, and foreclosed mortgages. The woman drawing the loudest audience applause was crowned "Queen" and awarded a washer and dryer or trip to Las Vegas. Might you have stretched the truth if you had been a contestant? Do you think even well-intentioned decision-makers might become calloused to the plights of the truly unfortunate and especially sensitive to their own material needs if all allocations were based on need?

Still another difficulty is that distribution by need causes special-interest groups to devote resources to lobbying to make decision-makers aware of their special needs. And what better way to make your needs known than through hefty campaign contributions? The potential for graft and corruption is enormous–few politicians can be expected to be Good Samaritans. Finally, as with egalitarian distribution, a welfare states promotes minimal production. How many people would exert themselves to produce things if all of it were going to be redistributed to the "needy?"

Despite the drawbacks of needs-based redistributions, no compassionate society ignores the problems of the truly destitute. Much of our welfare system is based on criteria thought to be related to needs. Examples include Medicaid, unemployment compensation, Social Security, food-stamps, Aid for Dependent Children, and housing subsidies. Few people are so hard-hearted that they willingly tolerate poor people starving or remaining homeless for long periods. But many Americans now seem convinced that our current welfare system creates poverty because some able-bodied people who could work choose to be "on the dole." The continuing growth of this perception partially motivated ambitious welfare reform proposals unveiled by the Clinton administration in 1994. Similar proposals are being advanced in much of Europe–especially Great Britain, Sweden, and Germany.

Click on the link for a short exploration into misallocation.

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Author: Ralph Byrns

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