Polanyi

There has been both agreement and disagreement regarding Polanyi's argument that science is like a market.  There is one dissimilarity and one similarity I wish to emphasize.

First, as has been pointed out there is no "profit motive" in scientific discovery.  There can't be, since there is no supply and demand and hence no prices.  This does not mean there is no self-interest (there is).  Rather, as Polanyi himself points out, the specific institutional framework for the transmission of knowledge and information is what differs.

How then are they the same?  What Polanyi is trying to bring out is first that both are feedback mechanisms and second the nature of the feedback mechanism. Both science and markets depend upon feedback.  This feedback must be in the form of other individuals (or decision centers) that are free to decide for themselves what feedback they will give.  In this respect, the argument is similar to arguments concerning the benefit of free speech.  We allow people to speak freely because this is the best way to uncover the truth.  It is in the process of arguing that the truth comes out.  Polanyi adds to this argument that there must be a framework for this feedback.  In science it is universities and journals.  In markets it will be the institutions that give rise to prices.  These institutions are what transform the cacophony of everyone talking at once into useful information.  Otherwise it is just noise.

Furthermore, we sort of see in Polanyi what will be explicit in Adam Smith: The larger the feedback framework the more useful it is.  This is why the Ghemawat video is so important.  Many assume that the market loop is already at a maximum (the globe) when it turns out that most markets fall far short of global feedback.

The underlying assumption here is that larger loops are better.  It is not until we read Smith and Hayek in week three, though, that we get specific arguments as to why larger loops are better in the market.

Mill and Economic Liberty

This is originally all one paragraph but I am separating out here three sections

1) Again, trade is a social act. Whoever undertakes to sell any description of goods to the
public, does what affects the interest of other persons, and of society in general; and
thus his conduct, in principle, comes within the jurisdiction of society ...

2) But it is now recognized, though not till after a long struggle, that both the cheapness and the good quality of commodities are most effectually provided for by leaving the producers andsellers perfectly free, under the sole check of equal freedom to the buyers for supplying themselves elsewhere. This is the so-called doctrine of Free Trade, which rests on grounds different from, though equally solid with, the principle of individual liberty asserted in this Essay.

3) As the principle of individual liberty is not involved in the doctrine of Free Trade, so neither is it in most of the questions which arise respecting the limits of that doctrine: as for example, what amount of public control is admissible for the prevention of fraud by adulteration; how far sanitary precautions, or arrangements to protect work people employed in dangerous occupations, should be enforced on employers. Such questions involve considerations of liberty, only in so far as leaving people to themselves is always better, cæteris paribus, than controlling them: but that they may be legitimately controlled for these ends, is in principle undeniable.

John Stuart Mill, On Liberty, Chapter V Applications

#1, As has been pointed out by many before me, applies to almost any action. If that is all it takes to nullify the "principle of liberty", then it seems almost everything comes under the jurisdiction of society.

#2, Mill continually argues that his moral theory is based on calculations of utility. How is it that any bona fide "principle" rests on different grounds?

#3, Mill is in line with other economists like Sidgwick who allow for a list of regulations. These lists are are much longer than those of the radical capitalists; it is the legitimacy of control that radical capitalists will challenge.

Division of Labor and Market Size

I remember when I first read Smith's account of the size of markets and how it relates to the cost of transportation. Zzzzzzzz

Yet, every time I revisit that section, it becomes more interesting. For instance, Jared Diamond in his book "Guns, Germs, and Steel" attributes a great importance to the size of a population. If you look at it, though, he never really defines what a relevant population is, except to say that populations are historically defined by serious natural borders like mountains, deserts, and oceans. That is, the boundaries of a population are where transportation costs become too high. Diamond's account of population fundamentally depends upon the Smithian analysis of the size of the market.

I have also recently wondered why businesses do not attain some size, or market share, that is in reasonable equilibrium and stop there. Why always talk of growth? Then it hit me. The greater the extent of the market - the greater the extent of the division of labor. Smith's argument applies to individual businesses as well. A small hospital serving a small town will have a few generalist physicians. A large hospital serving a large population will have those plus many specialists the small town/market could not support. Grow the market and you can increase the division of labor within the firm to, hopefully, yield even greater returns.

Just a thought.

BK

Smith and Markets

In the first three chapters Smith talks about the division of labor, why we trade and the extent of markets. This entire discussion assumes we know what a market is and that one is in place. Smith does not tell us, though, what a market is. This is why we have read Hobbes, Locke, and Hume.

From these readings we can plausibly construe a market as a place where:

1) There are enforced property rights. This enforcement comes from both other individuals and the state.

2) Enforced contracts. This enforcement comes from both other individuals and the state.

3) Trading, where what is traded is not simply a good or service, but the rights to these goods and services. These rights are protected in 1 and 2 above.

4) Some claim to the protection of life and limb. We find this mainly in Locke and Hobbes. It would do us little good to have a market where people could not steal from us, but could kill us then take the "ownerless" goods.

At the very minimum, then, a business must work within the framework of 1-4. This does not tell us everything a business is, but it does establish a fundamental framework. Anything that violates any one or more of 1-4 above is not business.

BK