"Capitalism Without Romance"

It's an old point, but it's beautifully made again by Jeffrey Friedman. What is a huge advantage of decentralized decision-making over centralized, top-down control?

In unregulated markets, this diversity of viewpoints is precisely what makes capitalism work. One capitalist thinks that profit can be made, and loss avoided, by pursuing strategy A; another, by pursuing strategy B. The heterogeneous strategies of different capitalists compete with each other, and the better ideas produce profits rather than losses.

In a complex world where nobody really knows what will succeed until it is tried, competition that pits people’s ideas against each other is the only way to test these ideas. Competition among capitalists spreads society’s bets among different, fallible ideas about where profit—and loss—might be located. For this reason, herd behavior among capitalists may cause systemic risk. But regulations, by their very nature, homogenize the behavior of those being regulated, automatically increasing systemic risk. . . .

The reason is the competitive nature of the capitalist system; the motives of individual capitalists are irrelevant. Competition puts capitalists’ different motives and ideas to the test of consumer satisfaction. This tends to give consumers what they want—and it diversifies a capitalist society’s investment portfolio. Capitalism thus mitigates both human greed and human fallibility. This is an amazing achievement, but there’s nothing magical about it.

Now consider the alternatives that liberals tend to favor—either the regulation of capitalism or its replacement by something more democratic.

Since regulators’ and citizens’ ideas are imposed on the whole system at once, they can’t be put to the competitive test. If their ideas are good, we all gain; if they are bad, we all lose. The whole system crashed when the financial regulators’ ideas turned out to be bad, but this is inevitable unless modern societies are so simple that solutions to social and economic problems are self-evident to a generalist voter, or even a specialist regulator. . . .

The question is how best to guard against human frailties: by putting all our eggs in one politically decided basket? Or by hedging our bets by setting fallible ideas into competition with each other?

Comments

[whosonfirst]

The liberals position can be (and has been) ridiculed in three simple words - Hillary knows best.

[david foster]

This principle also applies *within* a large corporation. If the organization design is strictly functional (sales, marketing, engineering, manufacturing) then basically all product strategy decisions are probably being made, or at least approved, by the VPs of marketing and engineering...and if they're wrong, the company is in bad trouble. OTOH, if the company is organized into business units (Widget product business, Gerbilator product business, etc) then there is much more chance for successful "experiments."

GM apparently understood this when they started the Saturn unit, but then backed away under pressure from the functional barons.