Recently I finished reading James Halteman’s The Clashing Worlds of Economics and Faith published in 1995. It is a revised and expanded edition of his book Market Capitalism and Christianity, which I read in grad school back in 1988. It is written from an Anabaptist perspective and while I disagree with him at various points in the book, overall it is a helpful book.
One of passage I liked was Halteman’s discussion of the importance of markets versus other economic allocation processes. He writes:
“Picture yourself as owner of a gas station in a town bracing for a hurricane. You have only one hundred gallons left in your supply tank, and ten cars are lined up, each needing fifteen gallons.” (24)
What will you do? Haltemnan suggest six possible options:
First, you might use a first-come, first-served method. You could simply keep pumping until the seventh car exhausts the supply of gas. The remaining three cars get nothing. Whether the tenth car is an ambulance, or a police car, or driven by someone on their way to the hospital for emergency care, it will not be serviced. The first come first served method places the highest value on being early. People with a low cost of time can afford to line up early for the fuel.
A second system might be to allocate resources based on need. In this case you would ask all drivers how they intended to use the gas and then decide, either by yourself or through democratic process of voting or polling, how the gas should be divided. This system assumes that people have a generally accepted view of what need is and are prepared to live with the consequences of the allocation. Under this system, everyone has an incentive to appear most needy. If need is related to low income, there is incentive to be poor or at least to appear poor.
A third method of allocation is simply to give everyone in the line ten gallons of gasoline, irrespective of their place in line or their need. This system puts a high value on equal treatment of everyone, so there is no reason to be early in line or to project a position of need. But the system also faces the difficulty in maintaining equality when, after serving one customer or more, someone new joins the line.
A fourth way of solving the problem is cronyism. In this system, the supplier identifies his regular customers or friends and gives them fuel. This gives people incentive to seek friendships with people of power and wealth. Political patronage and conformity to the wishes of those with resources characterize a system based on cronyism.
Another allocative process is open conflict. If the people waiting for gasoline became irate and feared losing their source of transportation, fights could erupt and the victor could have the fuel. This chaotic approach usually erupts when a society’s institutional structures are so weak or unfair that people take matters into their own hands.
One other approach to resource allocation is the auction method, in which those who bid highest get the most gasoline. In this system, it is important to have enough money to bid to the level required to get the desired quantities of gasoline. Except for cases of inherited wealth or unmerited windfall income, one bids with money that comes from wages in the labor auction. Thus one’s work effort is directly related to the amount of gas one can buy. This link between allocation and production is unique among all the methods discussed.
In any large economy, virtually every method described above is used formally or informally. However, in an overall economy, one method or another dominates economic exchange. In the United States, the auction method prevails. The fact that bidders and sellers exchange freely makes this method appealing to a democratic tradition. In other parts of the world, where populations lack the sophistication and social support structures of low-cost communication, information, transportation, and political stability, the auction allocation mechanism works far less effectively. In societies with a tradition of centralized governmental power or a dominant leader, a method that relies on the leader’s choices – what we described as cronyism – is common.
No matter what system a society uses, it must deal with the forces of supply and demand. If an auction isn’t used, the people who wait in line pay in money plus time rather than just money. The king who allocates to his cronies pays in reduced political support from the masses, who pay in reduced political and personal choice. In short, a price is paid whenever scarce resources are allocated, though the effects differ depending on the method used. We generally prefer a system that minimizes this cost. (24-26)
A helpful feature of this thought experiment is that it shrinks the issues down to a problem we can easily get our heads around. Most would agree that the “first come, first serve,” “equal treatment,” “cronyism,” and “open conflict” options do not lead to an efficient or just distribution. But repeatedly people are drawn to attempts to substitute the “need” option for the market “auction.” Here, shrinking things down to ten people can radically understate the challenge of the “need” option. It is conceivable that we could get ten people together and work out who needs how much. But multiply that times millions of people. How could anyone possibly assess the ever fluctuating need for gasoline and allocate it justly? Now multiply these millions of people by millions of different products. There is no “Great Mind” or supercomputer that can know needs, much less adjudicate between them.
The most efficient and just allocation system is for people to take responsibility for themselves, earn an income, and bid for what they need in an auction system. That brings what they need to their door. The changes in bid prices also inform the suppliers on what to produce. No other system can match the coordinating information system the auction creates.
Yet the market auction is not perfect. There are reasons why market intervention is needed. Stay tuned.