Complex Systems Work Only Through Long Chains of Incentives

One of the many arguments in favor of free markets is the decentralization of knowledge. Perhaps the best illustration of this is Leonard E. Read’s essay “I, Pencil”.

In it, he basically shows how no one man can make a pencil. An object seemingly so simple actually requires the diverse knowledge and cooperation of millions of people, most of whom who have never even seen each other.

But it occurs to me that no less important than the knowledge of how to make a pencil is the motivation it requires. Incentives. Think about the fairly routine task of buying something in a shop. Odds are, it wasn’t produced in the shop itself, but was delivered. Sometimes across half the world.

The only way this works is because everyone along the way, from the truck drivers and delivery people to the people who built their trucks and their roads, is self-interested. They don’t care about your pencil, but they do care about eating, and sleeping under a shelter. And on a free market, those come only through the creation of value for others.

The labor of countless millions is embodied in a single, simple transaction of buying, say a pencil. Or soap. Or pretty much anything.

Think for a moment how difficult it would be to make something of value from scratch. From scratch! No tools, no materials that anyone else has made. Nothing. Most people would be utterly stumped. Perhaps only some survivalists would know how to make some basic things using their hands and whatever they can themselves fashion.

So when someone, say a petulant meddling bureaucrat, comes along and intervenes, disrupting this long chain of incentives, things go very, very wrong. Further laws are then passed to rectify the failures of the initial intervention, and this continues until the entire complex system is so disrupted and perverted that it no longer has any resemblance to what it would look like on a free market.

Then, opponents of free markets take this broken system, and present it as a failure of free markets. And that’s pretty much the entire section on “market failure” in modern economics textbooks. Talk about straw man arguments.

The economic systems that provide us with all the wonderful things we are used to are so complex and inter-related that no amount of modelling or simulation is possible. The free market must either be left as is, or be disrupted and savaged by useless busybodies in government and their legions of fans outside it.

Markets are both fragile and not. Even the smallest intervention will disrupt them and cause unintended consequences, but even the most insanely tyrannical one will not stamp them out completely.

In the end, markets are only as bad as the government legal framework makes them.

2 thoughts on “Complex Systems Work Only Through Long Chains of Incentives”

  1. WannaKnowMorePlease

    “They don’t care about your pencil, but they do care about eating, and sleeping under a shelter.”

    Interesting example. How does this situation create the conditions for a “voluntary transaction”?

    Either the transaction is voluntary or it is coercive. If your survival is conditional upon your participation, it is not voluntary.

    Much of the Libertarian and Free Market economic theories seem to be centered around an ideal “voluntary transaction”, but many real world transactions can be highly coercive because they involve basic human needs.

    Adding competition into these types of transactions does not change the coerciveness of the transaction. Even if you add choices – “Would you like to eat carrots or potatoes?” – you never have normal voluntary choice to opt-out of the market without starving.

    Can free markets truly operate in marketplaces like these where many transactions are coercive?

    1. We are all of us subject to certain needs that come from the human condition. We require, at the bare minimum, warmth, shelter, food, and water.

      If rather than making or procuring all of these goods yourself, you choose to specialize in one field and exchange the surplus of your production for the product of others, you are in no way being coerced. Unless you would consider the requirements of human nature themselves to be coercion, in which case your complaint is with the genetic code that makes us mortal – not with other humans.

      Basic human needs are not coercive. Not the way that word is usually used, and certainly not the way I use it. If you wish to use the word coercive to describe human needs, then you effectively destroy the meaning of the word.

      For example, the difference between voluntary sex and rape is coercion. Using your reasoning, since sex is a requirement for procreation, which is a requirement for the survival of the species, then sex becomes inherently coercive too, because we’re “forced” to have sex or die out as a species.

      You are, in fact, using the same definitions of freedom and coercion as I have heard many people from the USSR use. Soviet propaganda destroyed the concept of political freedom by defining freedom as freedom from need, not from oppression. Thus, freedom became an impossible pipe dream, since humans can never be free of needs.

      Language is very important. We think through it. Be very careful with how you use your words, or you will fall into the traps set by propagandists, demagogues, and all those who seek power over both your body and your mind.

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