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 avoiding 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 during the Great Leap Forward [1958-1961], during which an estimated 30 million Chinese died of starvation, and in 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 certain 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).

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 ofThe Godfatherfilms 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. And 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?

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?

 

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 an egalitarian distribution, an overly-generous welfare state is likely to yield only 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 reforms in 1994. Similarly-oriented proposals are being advanced in much of Europe–especially, Great Britain, Sweden, and Germany.

Misallocation

If government dictated production and consumption in detail, we could count on policymakers' preferences being reflected, but should not be surprised if there were only two sizes of everything–too big and too little. Government decision-makers face tough dilemmas even if they scrupulously try to mirror the desires of millions of consumers. People's subjective preferences are often idiosyncratic. A national vote to mandate what everyone will eat during Thanksgiving, for example, would ignore those who prefer roast beef or ham to turkey. Such decisions are more efficiently left up to individuals and their families so that each family can have its first choice.

 

Another problem is that most people work better when their expertise is valued and they are rewarded for good performance. Workers who feel powerless tend to perform lethargically, and may indulge in sabotage. (As a youngster, were you ever tempted to break dishes in hopes that your parents would take over your chores?) The quality and amount of output suffers when rigid decisions emerge from distant managers unaware of local conditions–a common failure in all bureaucracies (large organizations), including government. Bureaucratic decisions often fail to allow workers latitude to make intricate decisions that yield high-quality output.

 

Landscaping a building located on uneven ground, for example, requires adjusting for soil quality and knowing how much moisture, sunlight, and fertilizer suit different plants and trees. These factors will not be reflected in blueprints intended for thousands of buildings and mandated by a "Landscape Architecture Commission" that never visits the specific site. The point here is that government decision making is often crude relative to the fine-tuning made possible through individual choice (a) in consumption, when people have differing preferences, and (b) in production, when policies specified centrally are not attuned to local conditions.

 

 

 

You can probably identify situations in which each of the preceding allocative mechanisms seems to work. Most economic decisions in the United States rely on markets in which prices and productivity largely determine what is produced and who gets it. One important exception is the family, whose decisions are based on varying degrees of command, tradition, and communal sharing, whether equally, by need, or based on some other criterion. Government is the second most important mechanism for decision making in our mixed economy; taxes, regulations, public spending, and transfer payments have all grown rapidly in recent decades.

 

The past decade or so has seen government's size and scope shrink in countries where it dominated economic decisions for decades–or even centuries. Paradoxically, government has grown most rapidly in countries that historically relied more on markets. We need to explore how the balance between governmental decision-making and decision making through the market system differs between economic systems.