Allocation of Limited Resources. Part 2 (Two Communities)

I wrote in the previous post that markets are the most just and efficient way of allocating resources in mass society. But as I noted at the end, markets are far from perfect. Neither are they appropriate for all forms of human interaction. I want to spend the rest of this series of posts discussing the limits of markets and exploring in what ways markets need to be supplemented.

We first need to acknowledge that markets are not appropriate for all forms of human relationships. We have a growing tendency to think about only two realities: Individuals and mass society. When I hear the word "we" among libertarians, I get a sense that "we" means the collective behavior of atomized individuals. When I hear "we" among liberals … as in I think "we" are obligated to care for the poor … "we" is frequently synonymous with "government." But "we" don't just exist as individuals or as mass society. We also exist as families, neighborhoods, worshiping communities, members of voluntary associations, and so on. These societal institutions are intermediate (bigger than the individual and smaller than society) and intermediary (they help connect and facilitate aspects of human existence.)

Going at least as far back as Adam Smith, there has been an awareness that we exist as members of both face-to-face community (FFC) and mass society (which, in economic terms, I'll refer to as commercial society (CS).) Early sociologist Ferdinand Tonnies wrote Gemeinschaft und Gesellschaft  (roughly "Community and Society") in 1887, attempting to work through the distinctions between the two. There have been many theorists sense who have characterized the two in various ways. In my estimation, much of it comes down to information.

The family is probably the most elemental FFC. Imagine a multigenerational family living under the same roof. There is a married couple with three children, ages 15, 12, and 6. The wife's widowed father and the wife's mentally impaired sister live in the home. The household's internal functioning will not be based on market transactions. Most of the members of this household are incapable of taking full financial responsibility for themselves. Most likely, the father and mother will be breadwinners for the household. The grandfather probably has retirement income and social security. There may be some government assistance for the sister.

Most living spaces will likely be shared communally, with each person assigned a private space according to their needs. Meals will like be prepared and shared communally. There will be a "needs" based allocation.

Parents will likely have chores for the kids, and completing those chores may be tied to an allowance. Certainly, a minimal standard of good behavior will be expected to receive an allowance. In other words, there will be "cronyism"… you have to get in the good graces of the one with the resources to get what you want.

Other models of allocation may also come into play. Unless prior arrangements have been made, the one who gets to the TV first may be the one who chooses what program to watch … "first come, first serve." Other resources may be divided by equal shares. There are many different allocation models like those we saw in the previous post that could apply in a family FFC for very legitimate reasons.

Now we could expand this model to three families living communally. But we can only expand this model so far. When a community begins to have more than a few dozen people, the FFC begins to break down. Essential to strong FFCs is the ability to have reasonably good knowledge about the other community members. Solidarity and accountability come through ongoing interaction. When more than a few dozen people are involved, having this level of intimacy is humanly impossible. Free riders begin to emerge who take advantage of the work of others. Knowing enough about others to justly allocate resources based on individualized needs is no longer possible. Some people become neglected.

Society can't function as a family writ large. So there are two options. One is for FCCs to become completely self-sufficient communities. While this may seem plausible initially, consider the creation of a simple pencil. If we are going to be self-sufficient communities making our own pencils, then we will need to find the graphite and process it into tiny graphite rods, collect wood and process it down to a pencil cylinder, find tin and process it into an eraser holder, collect and chemically process materials to form an eraser head, and then find the materials and dye to paint the pencil. Think of the number of hours expended by our small community to create the pencils.

Now multiply this by countless products vastly more complex than a pencil. The computer you are using now has components made from raw materials from as many as forty different countries. How will you make computers from local materials? And assuming you lived in one spot on earth where are all these materials are available, how likely is it that our tiny community would have the productive capacity to produce a computer … not to mention cars, medical devices, building products, power plants, and an endless variety of things we take for granted?

The only other option is for FCCs to trade with those outside the community. It is the only way to achieve this standard of living. How will that trade be coordinated? It means producing goods (or hiring your labor to produce) that can be sold to generate income to purchase goods from others. We each put goods up for sale in the auction, and then the supply and demand price mechanism provides a real-time feedback loop of how much of which things people want. Those that do the best at meeting demands get rewarded.

As noted, the auction method is the only allocation method that links production and allocation. If there were no market prices, and producers were not looking to make the best sell, how would we know how much of which things to make all across society? There is no practical alternative that works with any kind of efficiency and justice.

But to say that the auction, or the market, is the most efficient and just system does not mean it will avert all inefficiency or injustice. Far from it. So, what are the challenges, and how do we create greater efficiency and justice within markets? Stay tuned.

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Comments

[Brad]

Interesting topic, thanks. Perhaps this is chasing rabbits, but how does the breakdown of FFC's impact the allocation problem; e.g., the family you mention is exceedingly rare today. You are more aware than I of the issues such as increasing per capita income but flat household income which show families are imploding (what % of kids are born to unmarried couples - or couples at all?). Why does no one address this dirty little secret in terms of poverty and justice today?

[PamBG]

When I hear the word “we” among libertarians, I get a sense that “we” means the collective behavior of atomized individuals. When I hear “we” among liberals … as in I think “we” are obligated to care for the poor … “we” is frequently synonymous with “government.”

There are a number of other options beyond this dualistic characterization. But I think that the other options do require individuals to change their attitudes. And the other options require individuals to work together in society toward goals that extend beyond "my economic success".

For a start, we need to learn to stop thinking that there are some people whose full-time work does not deserve for them to be able to put a roof over their heads and eat.

[Michael W. Kruse]

Brad, I think there is a significant impact on social justice due to the breakdown of FFC's. Look at this post for an analysis of the impact that single parent homes are having on poverty rates.

I think you are right that too little attention is given to the decay of FFCs.

[Michael W. Kruse]

"There are a number of other options beyond this dualistic characterization. ..."

Yes, that is my point. FFCs are essential to a healthy and just societies but the frequently missing from the conversation.

"For a start, we need to learn to stop thinking that there are some people whose full-time work does not deserve for them to be able to put a roof over their heads and eat."

Just as long as the employee's work provides an economic benefit to the employer that economically justifies the wage. We are not in a patron/client society. It is not the function of business to supply peoples' basic needs. It is the function of business to efficiently transform matter, energy, and data from less useful forms to more useful forms and to coordinate the efforts people toward that end in mutually beneficial ways.

People who are unable to meet basic needs through the skills and abilities they bring to the workplace may need help from FFCs and government. Businesses, as acts of generosity, may choose to aid an employee beyond the economic value the bring to the firm, but it is not the role of business to act as patron for their employee.

[PamBG]

Just as long as the employee's work provides an economic benefit to the employer that economically justifies the wage. We are not in a patron/client society. It is not the function of business to supply peoples' basic needs. It is the function of business to efficiently transform matter, energy, and data from less useful forms to more useful forms and to coordinate the efforts people toward that end in mutually beneficial ways.

I'm going to push back on this. Unless I'm being impatient here and you're going to reveal all in further posts.

So far, a lot of what I've heard sounds exactly like what I hear from "Wall Street". These are standard, laissez-faire economic arguments. I'm still looking for the theological reflection and how you think that this connects with the teaching of Jesus and the witness of the Prophets in the Old Testament. Would you say that Amos was an unrealistic dreamer who didn't understand how the economy worked?

Also, economically, in some senses the balance between costs, margins and profits is a social agreement. As a small example, my husband is doing the same job for the same (US) company that he did in the UK. He is an excellent worker (yes, I know you could say I'm deluded about this, but I will need you to take my word for it). His hourly wage here in the US is 60% below what it was in the UK but the cost of living here is about 20% lower. Americans coming to the UK often wonder "How do people live?". The answer is that the expectations about how much people will consume are lower. We (in the UK) have made that trade-off between consumer choice /"how many things we expect to buy" and wages more in favor of higher relative wages. And up until a few years ago, there was not even a minimum wage in the UK. Much of this happened by social agreement.

[Michael W. Kruse]

Pam, I'll come to some theological issues at the end of the series but here is a preview.

Over the past couple of centuries, we've learned things from science that reshapes how we read Scripture, particularly the early chapters of Genesis. We've also learned something about the innate capabilities of women that challenges the implicit assumption of female inferiority in much of Scripture and explicitly teaching in the Church sense (which is now frequently couched in "roles" language.) Similarly, we have learned economic realities that would have been inconceivable to people living prior to the 18th Century.

Ben Witherington writes in his new book "Jesus and Money:

"... In biblical culture there was both low productivity and no notable means of increasing productivity over time. ... Given these realities, ancient peoples tended to believe that the goods of life hand been distributed, even distributed by God, and they could not be increased -- they were decidedly "limited." This in tun meant that if a person wanted something her or she did not have, they had to barter for it (or steal it.) It was not a matter of finding some way to make "more," in order increase one's income and spending power. ..." (46)

Economics was a zero-sum game ... whatever I have is at someone else's expense. One unit of labor is pretty much like any other unit of labor, just applied to different tasks. In a zero-sum game, then, the only way to help the poor is through generosity ... to balance out the distribution of the fixed amount of wealth.

Economic historians estimate that it took from 10,000 BCE to 1750 CE for world per capita income (using per capita GDP in 1990 inflation adjusted dollars) to increase from $90 a year to $180. From 1750 to 2000 it increased to more than $6,600 ... during a period of time when world population grew nearly sevenfold! The global GINI Index which measures income inequality has steadily fallen from .68 in the 1970s to .61 a couple of years ago. Historically, global life expectancy at birth was thirty years. Over the past century it has risen to nearly seventy years, again during an era of rapid population growth. Never in history has such a high percentage of humanity had such an unimaginable standard of living. The percentage is still expanding.

What we learned was that combing extensive division of labor, technology, and expansive trade, we can radically improve individual productivity, and thus wealth, by magnitudes. The economy is no longer a zero-sum game. Everyone can potentially expand their own wealth by improving their productive capabilities and then trading what they produce.

But we also learned something else. Until fairly recently, social thinkers have been trapped by the notion that an individual item and an hour of human labor has intrinsic economic value. They don't. They have whatever value someone is willing to trade for them. If I'm trapped alone on island with the Hope Diamond, of what economic value is the diamond? How much is that diamond worth if I'm in civilization? If I'm an expert on arctic survival how valuable will work as leader be to an expedition in Tahiti? How about to the North Pole.

Ancient pre-industrial agricultural societies were pyramidal structures. Elites owned or controlled land and doled out resources to their subjects that worked the land. The subjects were almost completely dependent on their patrons with no hope of economic improvement through economic action. The patrons rewarded loyal service with economic provision. Again, as one laborer was pretty much the same as the next, there was no connection between productivity and provision. It was the patron's responsibility simply to pay a living wage.

Therefore, scriptural teaching, coming from the ancient zero-sum game world, talks about modest consumption, being generous toward others, and not hoarding. While we might still embrace the first two, most people who are wealthy are not hoarders. Their amassed wealth is invested in productive uses. The teaching on hoarding doesn't directly apply they way it once did. But the critical issue is what should we do about amassing and employing productive capital to increase productivity? There is no biblical teaching to guide us because this was not in the realm of possibilities. Yet we have witnessed that division of labor, technology, and expanded markets through trade has done exponentially more to improve the material and physical status of humanity than has generosity.

We recognize that we can no longer apply instruction about gleaning in the OT to today's realities. Neither can we apply modes of addressing poverty in the zero-sum game world of the Bible directly to today. Massively redistributing productive capital based on some notion of generosity and anti-hoarding would have disastrous consequences for humanity. Treating the "business to employee" relationship as a parallel to the "patron to client" relationship of the Bible is equally disastrous.

What we have learned is that there is no intrinsic economic value to any good or to any unit of labor. And when we focus on creating goods that people economically value and we perform labor which is economically valued, and then exchange these in the market, we create tremendous widespread material prosperity. Businesses being obligated to pay workers a living wage is an anachronistic. That doesn't mean society doesn't have responsibility to those who for whatever reason are not capable of earning a living wage.

Finally, in economics there are three areas of justice:

Distributive - how should goods be justly distributed.

Commutative - truthfulness in the exchange of goods.

Remedial - being able to get just remedy when ones property rights have been violated.

The prophets preach against commutative injustice ... lying, using false measures and scales, bribing others for favorable treatment. They preach against remedial injustice - the poor are not heard in the "city gates" (where issues of justice were decided) and the powerful used bribes to pervert justice. The poor were tricked and defrauded by the powerful and the courts out of their rightful property. The prophets do not directly talk about wealth or income inequality except as the outcome of perverted commutative and remedial justice. (They do condemn callousness toward the poor and lack of generosity.) The presumption is that if commutative and remedial justice prevailed and generosity prevailed, distributive issues would be resolved.

So the question becomes what lessons do we take from this, as well as from Jesus, and apply them to a post-industrial market economy. We simply cannot uncritically apply ancient instruction on these matters to market economies without doing great damage to the material well-being of humanity.

[PamBG]

Thanks for your response.

[Mark Hughes]

Michael,
I have enjoyed reading your post and following the dialogue you are having with Pam. I'm looking forward to reading further posts. What you are hitting on is one of the key things separating us in a secular political sense, and in a church related theological sense as well (although I believe that disciples of Jesus have a very hard time separating these two!). Keep up the good work!

Mark

[Michael W. Kruse]

Pam

You're welcome. Thanks for the hard questions.

Mark

Thanks. There are few more posts to come.