From Each According to his Ability to Each according to his Needs

Though it stems from former socialist writers, the statement in today’s title has been widely attributed to another famous socialist Karl Marx. A broader statement would include these three points which I stole from Wikipedia (https://en.wikipedia.org/wiki/From_each_according_to_his_ability,_to_each_according_to_his_needs )

I. Nothing in society will belong to anyone, either as a personal possession or as capital goods, except the things for which the person has immediate use, for either his needs, his pleasures, or his daily work.
II. Every citizen will be a public man, sustained by, supported by, and occupied at the public expense.
III. Every citizen will make his particular contribution to the activities of the community according to his capacity, his talent and his age; it is on this basis that his duties will be determined, in conformity with the distributive laws.

While all of us would agree that this statement is highly utopian it does express some values that we all might share. It is nice to think of us giving what we are cable of giving and taking only what we need; sharing the rest. It is like the experience of being on a college basketball team. Clearly some guys are taller than others; some faster; some better shots. They each contribute in different ways. They each get a similar scholarship. They share in the glory when they win. Go team!

From this start you might think that this posting is about socialism. But it isn’t directly. In our seemingly reasonable request to make things more fair today we have lost sight of another dimension of society. Fairness and equity are critical as are clean air and freedom from fear. This list of social desirables is important and long. But in focusing so hard on these requirements of society we sometimes forget and perhaps do not even know about the main lessons and real constraints of economics.

Yes, economists are probably at fault for not teaching and spreading their ideas better. So let me give it a try. I am out of JD and I need to do something.

Let’s start with that college basketball team. The team and its many loud and obnoxious supporters,  followers and mascots want to win. Players do not put in all those practice hours and risk life and limb for the fun of it. They want to win. And to win they have to play like a team. And that means they should make use of the best talents of all their players. But it does not usually mean that all players get treated exactly alike. The star gets dates with the best looking cheerleaders and sometimes gets a free steak or expensive automobile from an overzealous fan. In some schools the star player forgets to attend classes and somehow all that is overlooked despite being labelled a “student”. 

The best high school players are recruited and while they love to play basketball, being on a winning team is what the best ones desire. They want to be stars and get all that goes along with that.

Glad I got that off my chest. You might be wondering how this relates to economics. Imagine that you were one of the first persons to see the world and there were no stores and no factories and no means to easily get things. Yet, you have to live. You have to survive. So you and your buddies design a system so you can eat, have shelter, warmth, protection, watch porn channels, and so on. This is the challenge that economics deals with. How do people get what they need and want? There are a bunch of resources lying around out there. Like the basketball team players you want to find the best way to achieve these goals. You want to get the most consumption with the least amount of effort and/or cost. In other words, why be wasteful? Get what we need in the best possible way.

Economists call this efficiency. And like Marx, economists concerned with efficiency want people to use their highest skills. But unlike Marx, market economists do not assume that people will employ their skills fully unless they are rewarded to do so. If society wants more bananas, then we want more pickers working on banana trees and fewer working on guava trees. If most of them are hanging around the guava fields (or Truffles Bar), an announcement that they would earn more income picking bananas reallocates pickers to bananas away from other work options. Firms can pay these workers more because they can pass along the higher labor costs to the consumer who is willing to pay a higher price to get more bananas. Workers do not usually do this and undergo all the costs of change out of the goodness of their hearts.

Let’s suppose workers hate banana trees or that they have to undergo special training to pick bananas. Inasmuch it might take large increase in wages (or benefits) to attract the resources into bananas. Accordingly prices of bananas would have to push even higher.

Later, when we decide we want to have i-phones, a similar process attracts more labor and capital into producing funny little devices that allow us to tweet inane messages as we peel bananas…at the expense of perhaps fewer hoppy beers.  

Notice that as long as workers (and other resources) are freely mobile and firms are free to switch products and keep the proceeds of their labors, this process works – and it works fluidly. It does not take any one single person to make it work. Hey dudes, Charlie’s Banana Farm is looking for workers and they are giving your kids free kindergarten if you work for Charlie. If information is free and if firms and workers are free this system is on autopilot.

This quick discussion of economic efficiency has two points related to our economy. First, efficiency does not require a central planner. Second, the process of efficiency demands unequal rewards.

There is a lot more to say but let’s stop here with one more point. No, market efficiency does not always work perfectly. Evil lurks in capitalism But whatever the negatives arising from such evil they must be compared against the mistakes made by sometimes evil and misguided central planners. Fairness sells in the political marketplace. Efficiency puts the food on the table.