Theologians & Economists: Division of Labor and Trade Transform the World (2)

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Trade (Continued)

(Yesterday, we quickly highlighted the impact of the division of labor and how trade creates wealth. We continue with the second feature of trade that is too frequently invisible.)

Information and Incentives

The second thing trade does is create an information and incentive system, coordinating economic activity for millions of people.

Take the lowly no. 2 pencil.* Nobody (no one body) knows how to make a pencil. Raw materials must be extracted to create graphite, graphite transformed into graphite rods, trees grown and harvested, lumber processed into wooden cylinders that will hold the graphite, tin extracted from the ground, raw tin processed and rolled into tiny cylinders for eraser holders, raw materials extracted for the eraser, eraser heads processed and shaped, dye created that will go into the paint that will go on the pencil … getting the picture? Different people in various locations are accomplishing all these tasks. But we aren't done.

Consider that sophisticated machinery is involved at every step in this process. Each of those machines contains countless parts made of a myriad of materials. Each raw material had to be extracted, processed into components, and assembled. These machines are also part of making a pencil.

We can go deeper beyond this to the machines that created the machines to create components for the pencil … but we haven't even touched on the transportation infrastructure that allows us to move these components from place to place. There is much more. I'm radically simplifying the process of pencil production!

Buyers are weighing the demand for their product as they determine what they are willing to pay suppliers. Suppliers weigh what buyers offer as they decide how much to supply at each tiny step in this dance of decisions. Price communicates the demand for a product and the willingness of suppliers to supply it. If the price for a product is going up, the suppliers are incentivized to produce more and the buyers to economize. If the price goes down, the suppliers have an incentive to cut production and buyers to buy more. (It isn't quite this simple in all markets, but the general idea holds.)

In all this, no one knows how many pencils are needed. No pencil czar monitors the need for pencils and assures that they are supplied. Most participants in this pencil-making process have no clue that they are contributing to the ultimate creation of the pencil on my desk. Yet through independent responses to dynamic information and incentives, a sufficient number of pencils appear at a reasonable price every day.

Now look closely at some items around you … maybe a stapler, a book, or a roll of adhesive tape. Pay attention to all the materials and processes that have created those items. How about your cell phone? It is humanly impossible to visualize how these things came to be, and we use them daily without a thought. Markets are the information and incentive network that brings all this about.

Market Challengers

This information and incentive system explain why communism and socialism have been so ineffective. No person or entity can possibly know how to match supply and demand at any given moment, much less when the balance changes by the nanosecond. Without a real-time feedback loop, there is no way to coordinate what needs to be done. Excesses of one product appear along with shortages of another, sometimes with tragic consequences.

This should also highlight why calls by theologians like John Milbank for a gift economy … where markets are eliminated, and we give to each other as needed … is misguided. While this might be practical among a face-to-face community, it would end coordinated economic behavior beyond the community. There would be no information to coordinate our projects.

Similarly, there is a movement by some to return to local economies. Revisit the process of making a no. 2 pencil and imagine a person or team collecting all the resources themselves without trade (assuming they are locally available) and processing them into a no. 2 pencil. Think of the hours of labor required to bring it all together into a product that could have been bought for pennies in seconds, along with other items at the store. Now take that image through the production of food, clothing, medicine, hygiene products, housing materials, etc. Living standards would revert to bare subsistence if local economies were genuinely embraced.

Finally, as I noted yesterday, many theologians are blind to production issues. They talk as if the goods we need are just there. The issue is how to distribute them. A corollary to this belief is that wealth is a fixed quantity. Absent any sense of production, wealth is a preexisting fixed amount. That means economics is a zero-sum game. If I have more than the average person, it comes at the expense of those who have less. I recently came across a blog by a caring person who praised the observation, "You cannot abolish poverty unless you also abolish affluence." That is zero-sum thinking in a nutshell.

What could we say about markets from inside the view that sees a fixed amount of wealth and goods? We would say that trade is competition where people try to get more than their fair share. Someone wins at the expense of someone losing. Instead of accepting the abundance God has given us, we covet others' goods out of a false sense of scarcity. As Adam Smith taught, it's all based on selfishness, right?

The essential coordinating function of information and incentives is invisible because the origins of goods and wealth aren't asked. The awareness of people expanding wealth by transforming matter, energy, and data from less useful forms into more useful forms and by participating in mutually beneficial market exchanges that coordinate an incomprehensibly complex economic system is lost. I'm persuaded that this is a near-Copernican-like paradigm shift for many. Economic justice and efficiency do not orbit the distribution of a fixed pile of wealth and goods, but rather distribution orbits the vitality of a just and well-coordinated productivity … without this productivity, there is nothing to distribute.

We turn to the issue of "self-interest" next but let me close by noting what I hope is obvious … what I've said in these two posts is a 50,000-foot view of the historical landscape, pointing out only two significant features that serendipitously emerged over centuries before coming to fruition in the past hundred years. Furthermore, let's keep on the record that markets function far from perfectly and depend on other institutions and values. We will talk about addressing market problems later, but what should not be lost is that when it comes to the need for information and incentives, we have no legitimate alternatives!

(* Some will realize I'm channeling I Pencil.)

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