Consider this an addendum to Nate’s post on the catastrophically large amounts of information needed to plan an economy.
Suppose that you are in charge of allocating a set of goods and services among a group of people, and you wish to do so in a way that is best, whatever definition of best you wish to use. God, for example, acts so as to bring about joy and eternal life. And so let us take that as our goal; we wish to allocate resources in a way that maximizes the number of people in the group who will be exalted and joyful. So, for example, we give them food because eating makes people happy, and we give them land so they can avoid idleness, and we give them extra stuff so they can choose to give it to the poor and they can consume it. Now imagine a function that takes as input how many goods a person is given, and then delivers a number that, for example, indicates the propensity of that person to achieve exaltation and happiness. We’ll call this function J(X), where the X is the list of stuff we gave them. Our goal is to maximize these J(X)’s across people. So now we’re ready for the fun stuff:
“It’s fun to have fun, but you have to know how!”
J(X) takes as input a huge list of possible goods. Thus for each of those goods we wish to give someone, we need to know how giving more or less of it affects their joy function J(X). So let’s index the function so that each good has an assigned index number from 1 to N. If I write J’(2), let that be the amount that one unit of “good 2″ increases my propensity to exaltation or happiness. We also need to keep track of the fact that this function varies by person. So now J’(2,Frank) is the added benefit from good 2 for Frank. Now consider a simple version where my wife and I are allocating household resources. To achieve a maximum in an economy composed of just Frank and Carrie only, where I simply am trying to sum their propensities to exaltation and happiness*, I need to pick an allocation such that the following is true:
J’(1, Frank)/J’(2, Frank) = J’(1, Carrie)/J’(2,Carrie)
Essentially it says that at the maximum, the relative benefit of good 1 to good 2 has to be equal across Frank and Carrie. That must be true, not just for goods 1 and 2, but for every pair of goods. And, for a real economy, this needs to hold not just for Frank and Carrie, but for every pair of people. And, by the way, the numbers in this equality are not constants that can be learned once, they change every time you change the set of goods you give a person. So there is a tremendous amount of information required here. For those of you who are married, imagine the difficulties of allocating family resources, multiplied by, for the U.S. economy, 300 million. Then square it.
So far I have ignored where these goods came from. There is a symmetric allocation problem on the production side, where you must know how each input affects each plant’s productive capacity and they must each fall into a ratio similar to the one above in order to achieve the most production at the least cost.
Well, obviously, no mortal has anywhere close to that much information about everybody else. It is just pie in the sky theory to think that one could ever get this to all work, right? For a mortal social planner, that is absolutely right.
The Price Genie
But it turns out that if each firm knows their own cost structure and each person knows their own J(X) function and seeks to maximize it, then one can achieve the theoretical optimum just by establishing a market and enforcing contracts. Because Frank’s attempts to make himself happy are equivalent to him finding a point where J’(1,Frank)/J’(2,Frank) equals the ratio of prices for goods one and two. And so on for each other person. And since each person moves to the price ratio, they all equal each other, and one achieves the optimal allocation. This is true across all goods and, on the production side, it is true for all production decisions.
Thus prices are the information signal that move society as close as possible to the best of all possible worlds. The information requirements, though still large, are clearly way less than before; because now you only need to know about yourself and the prices. True, people make mistakes and there are cases where this doesn’t work, but mistakes and problems happen under any system. The information requirements of a free market are orders of magnitude smaller than in a planned economy simply because the prices naturally keep track of all the information about other people for us.
Consequently anything we do to mess with the prices, like taxes or minimum wages or price subsidies, will mess this relation up and move us away from the optimum, by corrupting the information signal available in prices. There are all sorts of problems that one has to deal with in a competitive market, but the advantages of having informative prices are so huge that it really is worth a lot of effort to (very carefully!) tweak the system into working well, before trying to reinvent the wheel and do central planning.
Speaking of mistakes, some people are lousy at choosing what makes them happy and exalts them. That is pretty much the basis fo the missionary program. But God lets them make their own choices anyway. A market economy has the nice feature that it encourages individual accountability in a parallel way to how God does. In this sense it is similar to Mosiah’s teachings about the evils of a monarchy, given the possibility of a wicked king. It means we receive wages of him whom we listeth to obey. And each man is rewarded according to the desires of his heart; not the desires his heart should have.
Retreating to simplicity
Could this information problem be solved by retreating to simplicity, as Nate discusses? A retreat to simplicity is essentially saying that some set of goods will just not be offered, and thus they carry an infinite price. This lowers the information hurdle of pricing the other goods, but arbitrarily setting the price of some goods to infinite does not change the fact that those goods would have made people happy. It just means that those participating in the planned economy have to give up those goods from day one. Thus you will still have problems of black market entry or those who abandon the faith because the price of membership is so high. Or, if there is no competition from the outside world, this means that one is giving up higher J(X)’s in exchange for the rather dubious benefits of having a central authority run people’s economic lives. If that is God’s will, I’m fine with that. But there is little evidence that it is.
The Amish presumably face this modernization problem all the time. They know those modern goods are available, and the price of those goods is relinquishing membership in their congregation. I would guess that this issue is never far from their minds, and leads to a fair amount of membership loss. On the other hand, barriers to entry in religion can be quite important for maintaining group solidarity…
To maintain those infinite prices we would have to expend a tremendous amount of energy in preaching and doctrine, for a decidedly uncertain benefit. In the early days of Utah, when the economy did not function well due to lack of currency and no access to capital, and there were only a few goods to deal with, it is possible to imagine real gains from the centralization of the economy. But as we got our feet under us, those benefits dissipated pretty fast. Thought about this way, it is quite possible that Brigham Young’s centralized control was not a quirk of Brigham Young so much as what was needed at the time to get things moving, before the market instututions could be developed and put into place. Just as from Nephi to Mosiah there were kings, until the people were ready to take care of themselves and have judges.
It is, therefore, not surprising which direction the Church moved over time.
* Here I am ignoring another set of sticky allocation problems.