The Magic of Markets

pencilIn the early 1990s, the Soviet Union broke up and started making a transition from being a communist economy to a more market focused economy. At this point of time, a British economist named Paul Seabright came visiting.

He had a very interesting experience which Felix Martin recounts in Money—The Unauthorised Biography. The director of bread production of the city of St. Petersburg asked Seabright a very interesting question.

This gentleman was trying to understand how the new system (i.e. a more market focussed economy, which wasn’t like the old system) worked. He asked Seabright, “Please understand that we are keen to move toward a market system … but we need to understand how such a system works. Tell me, for example who is in charge of the supply of bread to the population of London?”

Now anyone who understands how a market works would know that nobody is really in-charge. It works because of the efforts of multiple people trying to further their own interest. As Adam Smith, the original economist, wrote: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”

And this best explains how a product is made and makes it to the market. In fact, even the simplest product involves many people working towards their interest and is beyond one individual. As Matt Ridley writes in The Evolution of Everything: “Among the myriad of people who contribute to the manufacture of a simple pencil, from graphite miners and lumberjacks to assembly-line workers and managers, not to mention those who grow coffee that each of these drinks, there is not only person who knows how to make a pencil from scratch.”

A pencil gets made because of the selfish interests as well as cooperation and knowledge of many people. Or let’s take the example of something as simple as ink. As Donald J Boudreaux writes in The Essential Hayek: “Consider the ink. Where does it come from? Its colour comes from a dye made from chemicals that were extracted from roots, berries, or bark. Who found those roots, berries or bark? That person had to know which specific roots, berries or barks to find. Most roots, berries, and bark won’t work. And just how are the colouring chemicals extracted from vegetation? Today the extraction is done through a complex process involving a mix of industrial chemicals and complicated machinery. The dye is then mixed with water, resins, polymers, stabilizers and preservatives.”

This is just one set of expertise required to make ink. Then you require people who can run machines who can extract the colourings. Another group of people to mix the extracted chemicals with other ingredients. Machines run on electricity, so you need electricians to equip the factory with electrical wiring. And so on.

The point being making even simple things is essentially a complicated thing beyond the capabilities of a single individual. As Bordeaux writes: “To make even one vial of the simplest and least-expensive modern ink requires the knowledge and efforts of many, many people…No single person knows more than a tiny fraction of all that there is to know about how to make ink.”

Many people specialise in many areas for a product to be made. And this specialisation leads to economic prosperity as well as innovation. As Ridley writes: “Specialisation, accompanied by exchange, is the source of economic prosperity…Leave people free to exchange ideas and back hunches, and innovation will follow. So too will scientific insight.”

The trouble is most governments do not understand this, given that it is not in their control. And they try to do too many things to create economic prosperity given that governments are meant to do things. What they do not do is to allow specialisation, exchange and innovation, to flourish.

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at vivek.kaul@gmail.com)

The column appeared in Bangalore Mirror on April 20, 2016

Advertisements

About vivekkaul
Vivek Kaul is a writer who has worked at senior positions with the Daily News and Analysis(DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System , the latest book in the trilogy has just been published. The first two books in the trilogy were published in November 2013 and July 2014 respectively. Both the books were bestsellers on Amazon.com and Amazon.in. Currently he works as an economic commentator and writes regular columns for www.firstpost.com. He is also the India editor of The Daily Reckoning newsletter published by www.equitymaster.com. His writing has appeared across various other publications in India. These include The Times of India, Business Standard,Business Today, Business World, The Hindu, The Hindu Business Line, Indian Management, The Asian Age, Deccan Chronicle, Forbes India, Mutual Fund Insight, The Free Press Journal, Quartz.com, DailyO.in, Business World, Huffington Post and Wealth Insight. In the past he has also been a regular columnist for www.rediff.com. He has lectured at IIM Bangalore, IIM Indore, TA PAI Institute of Management and the Alliance University (Bangalore). He has also taught a course titled Indian Economy to the PGPMX batch of IIM Indore. His areas of interest are the intersection between politics and economics, the international financial crisis, personal finance, marketing and branding, and anything to do with cinema and music. He can be reached at vivek.kaul@gmail.com

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: