30 December, 2007

Markets and Local Knowledge

Slightly old, but an epic post from Henry Farrell arguing for a trade-off between markets and "local knowledge":

rad is a fan of markets, and believes that they contribute in very important ways to human freedom. I agree with him on this. But I think that Brad sometimes underemphasizes the real trade-offs that markets may involve, and overstates his criticisms of people who are concerned with these trade-offs. Sometimes, perhaps often, these trade-offs are relatively slight – as Brad says, many forms of redundant local knowledge can be discarded without compunction. Sometimes, these trade-offs are real, but still worthwhile – while we should acknowledge the costs of markets, we should acknowledge that the benefits of introducing them are higher. And sometimes they are not worth paying – there are areas of social life where marketization has more downsides than advantages.

Here is how I interpret his point. Markets require some level of standardization. For example, agricultural futures markets only took off when they figured out how to standardize a particular level of quality. Now you can buy one ton of grade A corn and it will be the same no matter who you get it from. Without this, abstract trade in corn is not possible. This standardization leads to more efficient markets, specialization, and cheaper goods. However, it also destroys local forms of knowledge, like which farmer produces the best corn. It doesn't matter since it is all mixed together.

This local knowledge is valuable because things produced with specific knowledge are better than things produced with abstract knowledge. Farrell argues that tomatoes in Italy are superior because they are acquired through multifarious informal social networks amongst small-scale producers and distributors. Put another way, your Grandma's bread is better than Pepperidge Farm. But Pepperidge Farm is a lot cheaper.

So, faced with a choice, most choose Pepperidge Farm. For each individual, the cost of lower quality product is outweighed by benefit of having more to spend on other things. As more and more choose the mass-produced option, local knowledge disappears, driving the price of Granny's loaf even higher: a vicious circle. The question is then, is society better off with everyone eating cheaper, crappier bread or with everyone eating more delicious bread and having lower real incomes? It's sort of like the Prisoner's Dilemma. Everyone would be better off in the latter situation, but no one is willing to choose it.

First, I think we should recognize that this is something we can only discuss because we live in countries that have already gone through a process of market abstraction, which has dramatically increased our income. This is not a realistic choice for, say, a poor African nation, because the increase in real standards of living that abstract markets provide is vastly more important that preserving local knowledge. In retrospect, we can look back and say "too bad about that", but ex ante there is no choice at all. Can we even imagine a situation in which this choice would be relevant?

Second, this choice may be false in the long run. Another benefit of living in a post-industrial economy is that we now have the luxury of buying organic chicken from the farm up the river or beer brewed down the street. There is nothing our upper-middle class love more than locally-produced items. Think Alice Waters and her Slow Food movement. We can spend our time and money on these local items because we now have plenty. The plenty was produced by abstract markets.

This is perhaps the central question in evaluating capitalism (or other rationalizing forces like Soviet-style communism). On some level it's also the central question of reality and of personal existence.

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