AN OVERVIEW - Part 8

Moreover, changing circumstances would almost inevitably be known first to the local managers on the scene and often much later, if at all, to the central planners, who had far too many industries and products to oversee to be able keep up with day-to-day changes for them all.

A price-coordinated economy may have no more total knowledge than a centrally-planned economy, but that knowledge is distributed very differently, as is decision-making power. When the owner of a gas station located on a highway in a capitalist country sees that the highway is being torn up for repairs, he knows to order less gasoline than usual from his supplier, because there will not be nearly as much traffic going past his station as before, at least until the repairs are completed.

This local gas station owner does not need the permission of anybody to change how much gasoline he orders or what hours he will stay open. The knowledge and the power are combined in the same person. Moreover, that person is operating under the incentives and constraints inherent in the prospect of profits and the threat of losses, rather than under orders from distant bureaucrats. Nor is this peculiar to gas stations. The same instant and local decision-making power by those with the facts before their eyes is common throughout a price-coordinated market economy. That is one of its key advantages over a centrally-planned economy and one of the factors behind the enormous differences in results between the two kinds of economies.

Agents

As a scarce resource, knowledge can be bought and sold in various ways in a market economy. The hiring of agents is essentially the purchase of the agent's knowledge to guide one's own decisions. Real estate agents commonly charge 6 percent of the sale price of a home and literary agents typically charge 15 percent of a writer's royalties. Why would a writer surrender 15 percent of his royalties, unless 85 percent of what the agent can get for him is worth more than 100 percent of what he can get for himself? And why would a publisher be willing to pay more to an agent than to a writer for the same manuscript? Similarly, why would a home-owner accept 6 percent less for his house when sold through a real estate agent, unless the agent could either get a higher price or a quicker sale, both of which amount to the same thing, since delay and its accompanying stresses are both costs to the home-owner?

Let's go back to a basic principle of economics: The same physical object does not necessarily have the same value to different people.

Add comment


Security code
Refresh

Copyright © 2019 TheoryBiz.com. | "The Theory of the Business"