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Bad allocations

March 24, 2012 - Harry Eagar
In the comments to 'Why gas prices are so high” (March 21), I said that unregulated markets do a lousy job of allocating resources. Skipper responded that, “Free markets more efficiently allocate resources than anything else ever tried.”

I could write a book about why I'm right, but let's take two examples for empirical examination, a local, restricted one, and a wider, more general one.

Utah Lake is one of the largest bodies of freshwater in the most arid region of the country. A valuable resource, one might think.

However, if you wanted to run a steel mill in Utah County and make a profit, you would not want to spend any money protecting Utah Lake. The mill is long gone, the dirty water remains.

The most obvious, and probably the most damaging misallocation of resources by the markets is child labor.

It may be (or may not be) the case that in traditional agricultural societies, child labor made sense. It doesn't in modern conditions, yet it persists (and some leading Republicans want to bring it back).

Consider two of the poorest countries in Europe 150 years ago. Sweden was the poorest of all, but for religious reasons it insisted that all children go to school. Because of its high value human capital, within about a century it was the richest country in Europe.

Portugal was not quite as poor a Sweden and also partly for religious reasons, it made no effort to educate its children. Instead they were put to work, for example making toothpicks by hand for about 8 cents a day.

Despite being exempt from the socialist experimentation tried by Sweden and much of the rest of Europe, Portugal remains just about the poorest country in Europe.

The very strong tendency of unregulated managers to misallocate labor has long been noticed. As far back as 1970, Henry Hodges, in “Technology in the Ancient World,” wrote about the disastrous decline in innovation that began around 2300 years ago:

“A third contributory cause that historians have often ignored is the appearance of a very mediocre and often dishonest class of lower-grade administrators and civil servants into whose hands was put the running of industry, commerce and agriculture. Their business, as they interpreted it, was to see that the output of workshops and farms was adequate, and that any commercial enterprise such as shipping ran at an acceptable level of profit.

“These men were responsible for all the technological processes involved in the enterprises they were controlling, yet their recipes for increasing output were seldom other than to employ more labor. Thus, in a large-scale process such as the cupellation of lead ores for the recovery of silver, where because of lead poisoning, the life of a slave could be reckoned in months rather than years, nothing was done to improve the unhappy lot of the slaves, although the cost of replacing them was enormous and had to be borne against the profits of the process.

“It was in this lower order of administrators whose duty it was to understand the processes of which they in charge and it was from their ranks that new technological innovations should have come. Instead they behaved like perfect civil servants: they kept their businesses, their estates and their workshops in good order; asked no intelligent questions; and got, therefore, no intelligent answers.”


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