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Experiment away

  • Published at 12:54 am April 30th, 2017
  • Last updated at 02:55 pm April 30th, 2017
Experiment away
In an excellent piece by Adnan Akib, this newspaper introduced us to Mostafa Firoz last week, an inventive auto-rickshaw driver. It will sound a little extreme when I insist that the installation of a fan, a reading light, and a phone charger in his vehicle by Firoz is why the free market economy works better than any form of planned economy but that is so. What we in this business call a human interest story is just that, a minor proof of the great economic lesson of the past 100 years. Something which is worth pondering as we enter the run up to the 100th anniversary of that great disaster, the Russian Revolution, this autumn. A hundred years ago, it was a widespread belief that markets were inefficient. There was duplication, countless plans didn’t work out, competition meant too many people trying the same thing, and so on. If only we could or would move to some system of scientific socialism, where the people who really know tell everyone what to do, then the economy would be more efficient and everyone would thus become richer. We then conducted what I like to call the greatest natural experiment in all of economics, the 20th century. Some quarter to half of the world used that scientific planning as a method of running the economy, the other rich parts continued to use markets. Yes, obviously, there is some form of planning everywhere but the differences were more than just a matter of flavour. And when we went around to have a look at the results come 1989 or so, the differences were stark.
It’s entirely true that an auto-rickshaw having an umbrella is a trivial thing at one level. But at that is the entire point of what makes us all richer over time. It’s the experiment that matters and experiments are the one thing for which markets do so well
There are two ways we can get economic growth. In the jargon, we can increase inputs or we can increase total factor productivity. The first just means we’ll use more stuff to make stuff. The second means we’ll add more value to whatever stuff it is that we use. Both will contribute to growing GDP and both will mean that we’re getting richer. In the 70 years of its existence the Soviet Union did, indeed, become richer. But it did so purely by increasing inputs. More people worked, those people were better educated, they dug up more iron ore, more coal, and so on. But they managed not to increase the efficiency with which they added value. At the same time those market economies were increasing resource in the same way, but also adding to that efficiency growth -- TFP -- by 1-2% a year. And thus the stark divides in living standards when the Wall came down and we could all have a look. East and West Germany were both bombed flat in 1945 and by 1989 the West was twice as rich, at least, than the East. Many economists would argue, as would I, that four times is more like it. We can see very clearly the result of that experiment that is the 20th century: Markets rule. But why? The answer being that the free market is really an experiment machine. We have two ever changing sets in the world. One is what people would like to have. Yes, we can say with some certainty what people would like in general -- enough food, a roof over their heads, that their children will do well, and so on. But once we get into any more detail we do get rather lost. What’s the mix between white, dark, rye, and corn bread that should make up that food supply? It’s rather one of those things that we’ve got to go and try to find out. The second is what is it that is possible for us to do? Technology continually moves on and so the combinations of what we might be able to make expand into a vast universe of possibilities. We therefore need some method of sorting through what we can do and see where that intersects with what people want to have done. Which is where markets really do rule. Instead of the wise men sitting in their ivory towers (or, worse, government offices) and making what they think that we might want we just let any and every one get one with trying to make whatever they wish. We then, the consumers, get to pick and choose among the productions and that’s how we zero in on meeting those two criteria. That’s how we decide among those things which can be made and also should be. There is no bureaucracy that would zero in on making Facebook, for who would have believed that two billion people would want to send cat pictures to each other? Yet it appears that we do want to and someone lucked into the idea that we would. It’s entirely true that an auto-rickshaw having an umbrella is a trivial thing at one level. But at that is the entire point of what makes us all richer over time. It’s the experiment that matters and experiments are the one thing for which markets do so well. Please do note that this has nothing to do with capitalism or communism, arguments over who owns what, or where the profits go. This is markets against planning and the results of the grander experiment which mean market economies get richer, non-market ones do not -- just because everyone, not just the cab driver, can and does experiment. Dhaka Metro Tha 14-2609 is indeed just an auto-rickshaw serving the city. It’s also the example we need to be able to understand the results of the 20th century. Left alone to do as we wish, we will try things out and some of them will work. The more freedom we have to try, the more things we’ll find and the richer we’ll all be.   Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.