PartII. Institutions The great conflict between capitalism and communism is over. Communism has collapsed; capitalism has won. Or so we think. But if you take a closer look at the structure of these victorious capitalist nations, it is not clear just how "capitalist" they are. In Canada, government spending adds up to well over 40 per cent of GDP. Universal social programs protect the weak, the sick, and the disabled. Government pensions have generated huge reductions in poverty among the aged, and public education provides a wide range of opportunities for the economically disadvantaged. If the core principle of capitalism is survival of the fittest, we seem to have strayed a long way from the true path. There is a temptation to view economic arrangements of the type that prevail in Canada as a sort of uncomfortable hybrid, anunstable compromise between socialism and capitalism.Welike the wealth that a capitalist economy produces,but we are uncomfortable with some of the other consequences, such as social inequality.So we have grafted awelfare state onto the market economy in order to redistribute some of this wealth and make the consequences of the capitalist order less unpalatable for those on the bottom.Wetalk about a"third way" betweencapitalism and socialism.But it is unclear whether such apath actually exists,or whether weare simply trying to take two different routes simultaneously. This is all amisperception.There is athird way. It's the paththat we've been following for quite some time.The key concept is efficiency.The primary function of the Canadian welfare state is not to redistribute wealth it does almost none of that.Government is involved in the economy because,in many cases,the state is able to deliver goods and services more efficiently than the market.From highways and pest control to healthinsurance and pensions, government is able to get thejob done better.Thus the welfare state, far from being anunstable compromise betweencapitalism and socialism, is a perfectly logical arrangement one that is designed to promote the overall efficiency of our economy. TTQ 877311 The Efllclent Society, Why Canada I. A. Close To Utopla A. It Get: Joseph Heath How I Learnedto Stop Worrying andLove the Market We live in a capitalist society. This means that the major decisions about what we should produce, how much we should produce, where and when we should produce, are made not by a central authority, but by private individuals or associations. The conditions under which these decisions are taken are established by a set of markets. The task that these markets are assigned is to adjust these conditionsmost importantly, the prices at which goods and services tradein such a way that the decisions taken by these private agencies will be the right ones for society as a whole. When the right decisions are made, it means that we will spend our time producing things that we need in approximately the right quantities and at approximately the right time and place. Markets work sowell that it is easy to forget how tricky the task is that they perform.Think for a moment about all of the resources that are needed to run acomplex operation such asanairport. In order to function properly,anairport requires pilots and flight crew,air traffic control,refuelling,fuel storage, aircraft maintenance,baggage handling,seat reservations and ticketing, food services in the terminal and on planes,timetables for aircraft and personnel,maintenance of buildings and run-ways,weather forecasting, emergency services,etc. This means that, asasociety,if we want airports,weneedto make a sufficient quantity of all these resources available. If any of these components are missing,then the whole thing grinds to a halt. When you stop and think how diffith i t can b et oget a group of, say, six people to choose a restaurant,you start to realize what a minor miracle it is that any airplane ever makes it off the ground. And in fact, there are plenty of societies around the world that just can't get it together for longenough to produce anairport that works properly.It is aconsiderable organizational achievement. Step back from the airport now and consider the case of the entire economy.An airport requires the co-ordination of maybe one hundred or so major resources.Around the time of its collapse,the Soviet economy producedapproximately twelve milliondistinct types of products.The task confronting their planners was to decide exactly how muchof each good to produce,when to produce it, and where to ship it.Such aproblem is,in principle, solvable. But this is a mathematical curiosity more than anything else, since the calculations required to solve it are of such staggering complexity that even if wethrew all the computing resources in the world atit, centuries would pass before we could come up with even a vague approximation of the correct answer.And by that time our needs would have changed. The consequences of this computational problem,however, are more thanjust acuriosity. If we can't calculate exactly what we need to produce,then weare bound to produce alot of the wrong stuff. Producing the wrong stuff means that people will waste their time consuming energy and raw materials,producinggoods that no one wants. It means that society will beusing its resources inefficiently. In a moral economy,people have very little choice but to work out a planned solution to the question of what to produce,how muchto produce, and where to produce it.The moral economy is just a somewhat expanded version of the type of economic institution that roommates or families create when they sit down to work out a chore list.Because the chores are assigned directly to individuals,the group has to first sit down and decide collectively what needs to bedone. The difficulty in collecting and processingthe information needed to make such a decision is what places the ultimate constraint on the growth of moral economies.The reason that large-scale industrial societies have not appeared until quite recentlythe last two hundred yearsis not that people lackedthe resources neededto build them, but that they lacked the organizational machinery neededto achieve co-operation on such alarge scale. The piece of organizational machinery that was missing was the market. There is a tendency in our society to overestimate how easy it is to put together a market.We are sometimes told that markets will spring up naturally whenever people are left free to trade. Nothingcould be further from the truth. Markets are extremely sophisticated legal constructions.Furthermore,getting them to work properly requires people to think about their society in a very counter-intuitive way.As aresult,markets represent avery unobvious and improbable TT Q 8 8 8913" The Efl'lclent Society, Why Canada Is A: Close To Utopla A: It Get. Josech Heath institutionaldevelopment.(Ifthey weren't sounobvious people would have thought of them ages ago.) The central virtue of markets is that they allow individuals to organize productive activities using far less information than any other type of economic institution.They allow us,in a sense, to solve the basic problems of our economy without actually working out a solution. Precisely how they do this is the question that has fascinated economists for the last two hundred years. W0 Unfortunately, economics is a discipline with a public-relations problem. And for good reason. My first economics class ranks up there as one of the biggest disappointments in my life. I took it as a summer class atMcGill University.Initially,things looked good. The location of the class was close to idyllic. It was held in a charismatic old wood-panelled classroom in the Arts building. This building is in many ways everything that a university building should b e a beautiful old stone mansion, set just high enough on Mt. Royal to afford a stunning view of the downtown. It even has ivy growing on it. During the warmer months, the front steps were the place for students to hang out, talk, and smoke. I couldn't imagine a better way to spend my summer. Sowhat was the big problem?To put it briefly,the professor was a right-winghack. There we were in 1988,still caught in the cold war, that epochal conflict between two rivaleconomic systems.All of us were eager to get the straight dope,the inside story.Wewanted to really understand what the economic issues at stake were. That was why we had signed up for an economics class. On the first day, however,our professor explained to usthat we were going to be studying only capitalist economies,not communist ones.The primary difference between the two systems, he went on to say,is that capitalism motivates its workers by offering them rewards,while communism motivates its workers through threats of punishment. While we were still trying to figure out why unemployment, starvation,and freezing to death on the street did not count asforms of punishment,hethen launched into adiscussion of how markets 55 TTQ miraculously balance supply and demand, without addressing any of the more fundamental questions, such as"What about the 'demands' of people with no money?"By the end of the hour,it was difficult to avoid the impressionthat "economics" was nothing more than crude right-wing ideology.It took meyears to overcome this first impression. What really set meonedge in the class,though, was notjust the right-wing ideology.What botheredmeeven more was asense that lying beneath the surface of these remarks was a form of moral bankruptcy much more profoundthan anything I had yet encountered.This early impression,initially quite inchoate,was gradually confirmed asI learned more about the discipline. In fact, a number of studies have since shown that studying economics can actually make you abad person. The most widely publicized study was conducted by ateam at Cornell University who compared the behaviour of first-year graduate students in economics with students from other disciplines. Students were given a sum of money to invest in one of two accounts, one "private" and the other "public." The money in the private account went directly to the student at the end of the term; the money in the public account earned a much higher rate of return,but the proceeds were divided equally among all the students. A classic prisoner's dilemma. Economics students contributed on average 20 per cent of their funds to the public fund, while students in other disciplines contributed 50 per cent. In a more general set of studies,economics students were found to adopt free-rider strategies in prisoner's dilemma games 60 per cent of the time versus 39 per cent for students in other disciplines. The reasons for this are not hard to find. Economics departments are dominated by a peculiar strain of utopianthinking,according to which markets eliminate the need for morality.As a result, economists persistently equate rational action with the pursuit of self interest,narrowly construed,and regard moral constraints as irrational or inessential. In fact, many professionaleconomists take perverse pleasure in "exposing" supposedly moral actions asmerely covert self-interest. Of course, anyone impressedby this sort of view will therefore beless likely to cooperate in aprisoner's dilemma. The 8991 i311 The Efllclent Society, Why Canada In A; Close To Utopla A: It Get: Joseph Heath consequences of this, however,are quite outrageous.Economics is, if anything,the science of efficiency. And yet the way economics is taught has atendency to subvert precisely the sort of co-operative impulses that are needed to secure efficient outcomes in many circumstances.Economists are often their own worst enemies. In point of fact, the central "discovery" that ledto the development of the market economy is not that one can do without morality but that one can permit a selective decline in morality without having society fall apart.This is why markets are anunobvious institutional arrangement. Anyone who has the slightest bit of experience in human affairs knows that when individuals disregard the interests of others in order to further their own,they are unlikely to promote harmony or general happiness.Because economic activity throughout most of human history has been organized asa system of moral obligations and entitlements,people have had, and still have,an automatic tendency to assume that some sort of shared values are essential for the maintenance of social order. If there was one lesson to belearned from history,it seemed to bethat duty, honour, loyalty, and obligation were the glue that held societies together. Sowhen economists came along claiming that people much like themselves rich,well-educated menshould begiven free reinto pursue their own interests with the assurance that it would all work out well in the end, many people quite naturally assumed that it was some kind of trick. All of this is quite tragic, not because what the economists are claiming is false, but because what they say is true. Markets really are efficient, vastly more efficient than any other form of economic organization. The pursuit of profit,under proper conditions, does generate collective benefitswin-win outcomes. Markets are quite amazing.But because this sounds sounlikely,the fans of global capitalism have hadamarkedtendency to overstate their case. After all,it is hard to imagine that haggling,price-gouging,profit-seeking, personalenrichment,usury,or any of the other rough-and-tumble practices of the marketplace have beneficial social consequences. Self-interest is usually bad.Why should this beany exception? As a result,proponents of the market have been very reticent to admit that the market pattern of organization has any flaws or limitations.When is TTQ combined with the utopian streak of many right-wing economists, this has given the debate over markets unnecessarily ideological and often quasi-religious overtones. Setting aside all this hyperbole,one important fact remains.What capitalist institutions manage to do when they function correctly is harness the free-rider incentive that in the state of nature serves to worsen the humancondition, and use it to increase both the productive capacity and the distributive efficiency of the economy. The "race to the bottom" is thereby transformed into a "race to the top." The way the system accomplishes this is very clever,and understandinghow it works is absolutely fundamental to understandinghow the explosion of wealth and prosperity that created modern societies came about. Understandinghow markets work is also essential for understanding how the personal freedoms we now take for granted came to be institutionalized.The fact that our society is able to get along with less morality means that we are able to live with significant disagreements over substantive questions of value. This is one of the reasons we are able to accommodate such unprecedentedlevels of cultural and religious pluralism.It is therefore impossible to have aserious discussion about how our society works or should work without first establishing adeep appreciation of the contribution that markets make to its organization. Wt) There's alot more to markets than just trading. Adam Smith's throw away line about the "propensity to truck and barter" has misled an awful lot of people in this respect. People have been trading for ages without it having any revolutionary consequences for society as a whole. Trade alone doesn't bring capitalism. What makes a market economy a market economy is that trade is combined with competition. This is the explosive mixture. While trade generates efficiency gains, competition introduces the dynamic that forces the system to constantly increase the level of efficiency. Both these elements needto be in place before the whole thing can take off. While the various components of the capitalist system are asold as the hills,the idea of combining them in the particular way wedo is 9193f311 The Efl'lelent Society,Why Canada I: A: Close To Utopla A: It Get: Joseph Heatn not.Canadians know this from their high-school history lessons. (StudyingCanadian history,for those who haven't had the pleasure, involves spending animplausible amount of time hearing about the vicissitudes of the fur trade.) In the seventeenth century, asthe story goes,the Europeans wanted to buy lots and lots of beaver pelts to make hats.(For a longtime I was confused on this point,since I had trouble imaginingwhat sort of hats they could bemaking,and I didn't remember seeing too many pictures of Europeans mnning around with bigfurry hats on.The secret, it turns out, is that beaver fur was used to make felt, and the felt was usedto make hats.) In order to get all the pelts,they set upavast system of trade routes and then licensed corporations to operate them. But it never occurred to them to allow more than one corporation into anarea. That's why the Hudson's Bay Company is called the Hudson'sBay Company (also why the East IndiaCompany was called the East India Company, etc.) Each company was granted anexclusive right to operate in a particular region.Soeven though the British knew all about trade and were anxious to achieve any gains that they could from it,they did not take it asobvious that trade should beruled by competition. Part of what this illustrates is that you don't need to have full blowncapitalism in order to get some of the benefits of markets; you don't even need to have full-blown markets. It is possible to realize efficiency gains through trade alone or from competition alone. Similarly,there is noreason that the entire economy has to be organized through markets.They can be, and have been,introduced piecemeal.The average first-year economics textbook starts out with ahighly idealized picture of athoroughly capitalist economy,with perfectly competitive markets,perfectly rational individuals and firms. It then turns out surprise, surprisethat such a system will also beperfectly efficient.It takes avery peculiar sort of mental deficit to think that this is a useful conclusion. It is more helpfulto take a look at how each of the pieces of the market function, independent of one another, before taking a look at how they can be combined to generate increments in the efficiency of a society. is TTQ The past decade has seen a huge amount of excitement about globalization. While protestors battle it out with riot police in the streets, international think-tanks with vaguely conspiratorial names have lined up to offer their opinions about the perils and promises of the new global society. Promoting international competitiveness has become a key policy objective of many Western governments. According to one influential study, this competition is a "major source of wealth generation" and "one of the driving forces behind technological innovation and productivity growth." Competition is even credited with having "lifted human aspirations" around the world. This is all nice,but in some respects quite unhelpful.Throughout all this discussion,there is a sort of persistent vagueness about where exactly the benefits of competition come from.All the talk about "promoting excellence" does not really explain why competition is needed to promote excellence.Can't you just go off by yourself and beexcellent? Compounding the puzzle is the fact that while co operation is designed to deliver win-win outcomes, competition is specifically designed to deliver win-lose outcomes. After all,it's not a very good competition if noone ever loses.But if efficiency gains are win-win transformations, then how can competitiveness possibly deliver increased efficiency? The answer is actually abit complicated. In itself,competition is generally abad thing. This is why people hate it when their friends or co-workers start to "get competitive" with them. Competition is also associated with certain forms of characteristically obnoxious male behaviour.Conan the Barbarian summed up the competitive mindset quite nicely when he described the "good things" in life asbeing "to crush your enemies,to see them driven before you, and to hear the lamentation of the women"a sentiment that probably,despite protestations to the contrary, still resonates with alot of men. Anyhow, not many people want to work with abunch of little Conans,and for good reason.What could the benefits be? The primary advantage of competition,it turns out, has nothing to do with its intrinsic merits. Competition is good when it is able to generate beneficial side-effects.The most important characteristic of acompetition is that in order to win, you have to bemore thanjust 9395i311 The Elflelent Society, Why Canada It Al Close To Utopla A. It Get: Joseph Heath good, you have to be better than everyone else.This forces all of the competitors into aconstant escalation of individual effort.A good competition is one in which the net outcome of this combined effort has beneficial consequences that outweigh the suffering of the losers. This is how it is able to improve efficiency. In fact, the escalation of effort induced by competition can help usto escape from various collective action problems. WC) One of the areas in which our society actively cultivates competitive impulses is in the field of sport. Just as gifts are a symbolic remnant of a practice that once served an important social function, sports are also a symbolic re-enactment of what was once a very important practice. This can be seen most clearly in the case of the Olympic games. Consider the following completely fictionalized account of the origins of the Olympic games: The first Olympic games were heldin 776 b.c.in Greece. One of the most important developments in Greek culture at the time was the discovery of specialization.Previously,the most celebrated virtue in this civilization was versatility. The hero Odysseus,for example, is described throughout Homer's great epic as"the man who was never at aloss"ajack of all trades, the MacGyver of the ancient world. Citizens of the various city states were expected to cultivate more or less the same qualities sothat they could work the fields in the morning,go to war in the afternoon,and discuss theatre in the evening. One of the most formative discoveries in ancient Greece,however, was that one or two full-time soldiers,properly trained, could easily take out adozen irregular,militia-styletroops.This lesson made specialization all the rage in ancient Greece (which hadenormous consequences for Western politics right down to the present age. Plato'sRepublic,for instance,is governed throughout by the view that society needs to bestratified into different classes of specialists, each of which would make aunique contribution to the harmony and prosperity of the city.) More specifically,the discovery of specialization ledto the development of standing armies throughout E TTQ the Mediterranean world. Insteadof expecting farmers to drop their ploughs and take up swords every now and again,cities began to employ full-time military professionals. Standing armies, however,can be very tricky to maintain.It sounds strange,but one of the most serious problems with standing armies is that they may suffer adecline in the overall physical fitness of the soldiers. After all, it is a structural feature of standing armies that they spend a lot of time just standing around.Farmers have to spend their days in the fields working,but professional soldiers have nothing to do but loiter around the barracks,waiting to be called into action.As a result,they tend to get out of shape. One might imagine that the prospect of beingcalled into action would give each soldier anincentive to stay fit. After all, no one wants to wind up short of breath when hacking atthe enemy or fleeing anassault.Unfortunately,soldiers are confronted with a massive collective action problem.Your own personal levelof physical fitness is unlikely to have any significant impact on the overall performance of your army. And whether you live or die depends almost entirely onhow well your army asawhole does.This creates afree-rider problem.If all the other soldiers are going off to practise their spear-throwing, you might want to use this opportunity to catch up on some lost sleep. After all,how well you throw your spear is notreally going to affect your chances of emerging from a baffle unscathed. Of course, while noparticular soldier's fitness level has much impact on the outcome of a battle,the average fitness level of the whole army has an enormous amount to do with how the battle turns out.This was especially true in ancient Greece, when warfare involved manually dismembering your opponents.Sosoldiers can get stuck in ahuge multi-personprisoner's dilerrtrna. They would all be better off if they stayed fit, but none of them have anincentive to actually do so. The standard strategy for counteracting this tendency was to impose anextremely strict disciplinary regime onthe military.This solution to the collective action problemrelies upon a mixture of moral constraint in the form of classic martial virtuesand liberal use of sanctions,the strict military code of discipline.The overall 9597f311 The Efllclent Society, Why Canada It A: Close To Utopla A: It Get; Joseph Heath outcome is then more efficient from the standpoint of all members of the military.The soldiers should be happy doing their exercises, knowingthat when everyone exercises, they are all more likely to survive their next military encounter. But the Greeks were very clever people.Using strict discipline to maintain fitness is still animperfect solution. In particular,it encourages the soldiers to do something that economists call "satisficing." It is in the interest of each soldier to doexactly what is requiredof him,but no more.Thus discipline alone can guarantee a certain level of fitness, but it doesn't maximize fitness. There will always beroomfor improvement.Unfortunately,it's hard to know just how muchroom for improvement there is, and it's even harderto motivate people to attain it. One can imagine anancient general mullingover this problem, looking for possible solutions.Suddenly,the answer hits him like a ton of bricks. Take the standard military exercisesrunning, wrestling, spear-throwing,etc.and organize acontest to see who can do them the best. Offer something quite valuable to the winner, such asagold coin (andmaybe something abit less valuable to the runner-up,such asasilver coin). Organize a giant festival and invite everyone to come view the events. In this way, the Olympic games were born. Of course, we are all used to these games, so it is easy to overlook just what a fiendishly clever invention they are. As soon as the commander offers the gold medal to, say, the soldier who can run the fastest, the soldiers are confronted with a new type of collective action problem. In general, they would rather lounge around in the barracks than do sprints around the camp. Training for arace is hard work. But because each competitor also wants to win the gold and is willing to put in abit of work to improve his chances of winning, training now acquires the structure of a prisoner's dilemma. Imagine that you are a soldier and that you are in a two-person race. Here are the likely scenarios: 1.You train; your opponent doesn't. Chance of winning: 75 per cent 2. Neither of you trains. Chance of winning: 50per cent 3.Bothof you train. Chance of winning: 50 per cent 4. Your opponent trains; you don't.Chance of winning: 25 per cent Consider what happens if the two of you develop an informal agreement that you will not train: "We'll both keep lounging around," you say, "and then when the day of the competition comes,the medal will just go to whoever happens to befastest." This agreement sounds fine, but it ignores the fact that both of you have a free-rider incentive. If one of you is going to lounge around the barracks, then the one who sneaks out and trains on the sly will be very likely to win. But if one of you is going to be training, then it is essential that the other train aswell, just to have a fighting chance. So either way, both of you will be better off breaking the agreement and training. In terms of your preference for leisure over training, the outcome that results is worse for both of you. If you both sneak out and train for two hours, the effects of the training will cancel each other out, and neither of you will improve your chance of winning the race. However, instead of spending a pleasant afternoon playing cards in the barracks,you will bothbe out sweating on the track. Not only does the competition generate acollective action problem,it even sets off arace to the bottom. If your opponent is going to train for two hours,then it is in your interest to put in abit more time, say three hours.Training one hour more than everyone else will improve your chances.But because this is true of everyone, everyone can be expected to train three hours instead of two. But then to get the advantage, you need to train four hours instead of three. Eventually,everyone winds up spending all their time training (which is why in many sports people have to give up their entire lives to become Olympic-calibre athletes). Sothis competition is clearly bad for the competitors from their own point of view. But the result for society at large is excellentthe city gets aslim and trim military whose legendary speed and prowess will deter any invasion.The competition thereby harnesses the incentive structure of the prisoner's dilemma and uses it to provide a social good.Better yet, it arranges things so that people try to outdo each other in providing this good. Thus "healthy" competition creates acollective action problem among the competitors, sothey can't stop 1'T Q 9798 1311 The Efl'lelent Society, Why Canada In A: Close To Utopla A: It Get. Joseph Heath themselves from doing something that is uncomfortable for them but generates benefits for the rest of society.In the end,even the soldiers wind up happier.If they win the Olympic games, their neighbours may be scared off and simply not attack them. That way they don't have to risk their lives fighting at all. Cw These examples illustrate the point that there is nothing specifically "capitalist" about competition. Competition is a generic institutional mechanism that can be used to spur people on to greater effort. This can be quite useful in the economic sphere, regardless of how the economy at large is organized. For example, workers on a collective farm, instead of just heading out to harvest their crops, might organize a com-picking competition with special prizes for the person who is able to bring in the most. This has the effect of restructuring everyone's incentives sothat instead of wanting to hide out in the field and shirk their responsibilities, each will try to outdo the others in pickingasmuch aspossible. It is acommon feature of ancient economic systems that alongside the production of everyday goods there is also a"prestige economy" governed by competitive production.Certain goods are accorded higher status,and the person who produces the most or the best is rewarded with special honours,gifts, or privileges.As aresult,the prestigeeconomy has an internal structure that gives each producer an incentive to work harder,to produce more,and to improve quality. In this way, competition is used to overcome the classic problem of economic co-operation. Competition is also used extensively within bureaucracies.The military is,after all, one giant bureaucracy.Competition for promotion creates extremely important incentives within most hierarchically structured organizations. This is why wefind competition everywhere, notjust in capitalist economies.It's an invaluable organizational tool. Eventhe Girl Guides have acontest to see who can sell the most cookies. However,because competitionfigures soprominently in muchof the popularplaudits for capitalismas if capitalism alone were able as TTQ toharness the raw energy of humancompetitionfor along time it was anobject of deep suspicion on the political left.What this amounted to was asort of moralutopianism,the view that moral incentives alone could be sufficient to overcome the collective action problems that typically afflict all economic activities. This was an important sentiment in the 19605,particularly during the salad days of Che Guevara and the Cuban revolution,when a very ambitious attempt was made to restructure the Cuban economy to eliminate individual material incentives. In fairness to idealists of the left,it is worth noting that in times of crisis people quite often demonstrate aphenomenal level of spontaneous social solidarity. Duringthe ice storm of 1998, thousands of Quebecers voluntarily took complete strangers into their homes,sometimes accommodating them for several weeks. Similarly, during the 1997 Manitoba floods, people dropped everything in order to help lay sandbags, evacuate their neighbours,and soforth.All sorts of collective action problems disappeared because people simply chose to set aside their self-interest in favour of the common good. This can be abit misleading,though. Revolutions are essentially a type of crisis, and they often inspire exactly the same type of spontaneous solidarity that people show in the face of natural disasters. Unfortunately,many revolutionary socialists have been misled into thinking that this kind of spontaneous solidarity can be maintained in the longterm, or worse, that it can be used asan organizing principle of the economy. The problemis that people's willingness to disregard their own comfort and satisfaction seems to last about two days,after which time all the usual bitchingand griping starts to set in againabout how So-andso isn't doing his fair share of the work, or about how people need to worry about their own children's future, and soon. Everyoneis quickly plungedback into the old collective action problems,unless something can bedone to keep them sufficiently pumped up.(This goes alongway towards understandingthe kind of mass psychoses that communist regimes often sponsored, such asthe Cultural Revolution in China.) There was some hope that people's tendency to revert to this set of 98-1001311 The Efl'lclent Society, Why Canada I: A: Close To Utopla A: It Get: Joseph Heath fairly parochial concerns was itselfaproduct of capitalism, and so could be solved by the revolution itself. Hence all the talk about the "new socialist man" who would be, in effect, invulnerable to collective action problems.Unfortunately, such aperson has yet to appear,despite many good-faith efforts to summon him. In the 1970s,in the face of growing inefficiencies in the Cuban economy,the government made a significant move towards the reintroduction of personal incentives for workplace performance. Fidel Castro described this asanattempt to "correct idealistic mistakes" that were made early on in the revolution.Competition would be introduced aswell although not the "bad" type of competition that characterized capitalist economies, but a new,more fraternal type of competition,officially referred to as"socialist emulation." Work crews and factories would compete with one another to see which could produce the most prizes would go to the winners. All this was tacit acknowledgement that love of country or service to the revolutionwere not enough to sustain efficient levels of co-operation in the longterm. Che Guevara, characteristically,put the matter more bluntly. "Competition," hesaid,"is aweapon to increase production." Wt) Of course, even though competition can persuade people to sacrifice their own comfort in an effort to resolve collective action problems, this isn't what actually motivates the competitors. Their goal is to win, not to generate beneficial byproducts for others. The trick to designing a successful competition is to arrange things so that this private interest coincides with the more general public interest. While competition has the capacity to generate efficiency gains, it certainly does not guarantee them. Competitions need to bedesignedjust right. They can easily degenerate into unproductive personal vendettas. Many more are just pointless. Who has the nicest lawn? Whose car can go from zero to one hundred the fastest? Who can name the 1974 Grey Cup champion? Who cares? These sorts of competitions generate no external benefits. The situation is quite different in the case of trade. Trade generates efficiency gains almost by definition. When two people voluntarily exchange goods, it means that one personwanted what the other had more than what she had,and the other wanted what she had more than what he had.After the exchange is concluded, both of them should behappier.And since no one else is affected by the trade, the transaction represents aPareto-efficiency gain for society asa whole. If the parties involved have no regrets afterwards,then it is a win-win transformation. There is a subtlety here that is often lost in popular discussions. Through trade it is possible to increase the efficiency of the economy without increasing its actual productivity.The amount of physical stuff that our economy generates can be quite irrelevant.What matters is that we produce the right stuff, and that it end up in the right hands.There is anenormous tendency to think of the efficiency of our economy in very material terms. A firm is efficient, it is sometimes thought, because it produces a lot of output,usingthe minimal amount of input.But efficiency is only concerned with the amount of usefldoutput. If we can reorganize things sothat the same amount of stuff becomes more usefulto people,then that represents anincrease in efficiency. Again, aneconomy that produces one million left shoes and no right shoes is grotesquely inefficient compared to one that produces even one hundredpairs of shoes. Thus the efficiency gains that come from trade can bequite intangible. Increasingthe efficiency of a society is not at all the same asincreasingthe wealth of asociety, since it is possible to increase efficiency while keepingwealth constant (or even while decreasing it).Trade makes everyone better off simply by shuffling around the existing goodsnot by actually producing anything more.As a result,trading can generate efficiency gains in any economy, regardless of how its production is organized. Consider the case of a gift economy.One of the paramount mles of gift-giving is that you are not allowed to treat agift like any old commodity. Not only is exchanging,or refunding,gifts frowned upon,but "regifting" is strictly prohibited.(This is aSeinfeld expression. It refers to the practice of passing along gifts that you don't like to others asgifts. Clearly,it does happen.I read somewhere that the average fruitcake is given away seven times before it is TTQ 100102J'311 The Efl'lclent Society, Why Canada In A: Close To Utopla A: It Gets Joseph Heath actually consumed.) The morality of gift-giving requires that the recipient keep the gift, even if it is not something that heparticularly wants. This is why we all have closets and cupboards full of useless presents that we hold onto out of politeness. This is,needless to say,inefficient. It is especially sowhen two people receive gifts and each one likes the other's more than his or her own. If they were to swap gifts,both of them would behappier. Such exchanges are a sufficiently obvious source of improvement in the quality of life that even completely moral allocation systems, such asgift economies,will tend to generate "black markets," in which people surreptitiously exchange goods. But this does not show that there is some natural human "propensity to truck and barter." Even in our own society,the situations in which goods can be freely exchanged are quite sharply restrictedby social norms. For instance, most people are highly reluctant to swap food from their plates in restaurants,or buy leftover wine from people at the table next to them. The result is that restaurants throw away an enormous amount of perfectly good food. Thinking about the amount of readjustment it would take to get restaurant patrons to freely resellfood is helpful in trying to imagine the way our ancestors initially responded to the suggestion that other kinds of goods, such asland,should bebought and sold in markets. The basic reason for the discomfort people feel about trade is that the practice contains avery strong element of self-interest.When you exchange agift, you are,in effect,assigning greater significance to your own happiness than the feelings of the personwho gave it to you. Similarly,when you make atrade you are not really responsible for the ultimate satisfaction of the personwho buys from you. Your job is to look after your own interests; hisjob is to look after his.As a result,within "high trust" relationships and communities,trade has traditionally occupied avery marginal role. Merchants have,until recently,always beenviewed asindividuals of somewhat dubious character. As a result,trade has developed primarily as away of dealing with outsiders. Generally speaking,people are heldto a muchhigher standard of conduct when dealing with friends and neighbours than when dealing with strangers. This means that a "low trust" E TTQ relationship such astrade is much more appropriate asaway of establishing co-operative relations with people down the roadthan it is with people in one's own village. Historically,the development of the market economy involved the importation of trade practices from external relations into internal affairs.The greatest obstacle to the generalizing of these practices was the sense that trade was morally suspect. In particular,it conflicted sharply with the old-fashioned honour ethic, which emphasized generosity and high-mindedness,not penny-pinching.Up until the late nineteenthcentury,the "spirit of commerce" was still seen asanobject of contempt and derision.As Nietszche observed,in the marketplace "[t]hey punish you for all your virtues. They forgive you entirelyyour mistakes." W) Faced with a choice between making an advantageous trade and suffering a serious loss of face, many people throughout history have chosen to save face. The gains from trade were simply not sufiiciem to motivate people to disregard other social virtues. Part of the reason is that while trade generates efficiency gains, trade alone has no tendency to maximize these gains. In other words, there is no guarantee that when you trade you will get an especially good deal. This can make the appeal of trade only lukewarm. When trade is governed by competition, on the other hand, the situation changes entirely. Competition has the capacity to maximize the efficiency gains realized through trade. This means that it is able to ensure that all parties to the exchange get the best deal possible. When two people trade goods,it suggests that one person values these goods more than the other does.The other day I sold my old motorcycle helmet to an acquaintance for twenty dollars.Both of us were happy about the trade. This means that the friend who bought it from me wanted it more than I did. In a sense,the helmet was worth more than twenty dollars to him,and it was worth less than twenty dollars to me.This is why the trade made usboth happy. But how did this particular price come about? Ever since wegot rid of the family motorcycle,the helmet has been completely useless 102104f'311 The Efllclent Society, Why Canada In A; Close To Utopla As It Get: Joseph Heath to me. I would have been willing to give it away. Similarly,if I hadn't come along,my friend would have hadto buy one from a store, which would have cost himat least fifty dollars. Soat any price between zero dollars and fifty dollars,this would have been a mutually advantageous trade. I could have held out for fifty dollars, and heprobably would have gone for it.Similarly,hecould have offered meone dollar, and I probably would have settled. Of course, because we are acquaintances,both of us felt morally prohibited from making serious lowballoffers. But between strangers, no such constraints apply. This is why trading in amarketplace between individual buyers and sellers often involves anenormous amount of posturing.There are ahuge number of prices at which individuals may bewilling to exchange goods. But because neither party knows exactly how high or how low the other will go,the exchange becomes a game in which each one tries to convince the other that he will not accept anything lower (or higher,asthe case may be). Since there is aclear conflict of interest between the two parties when it comes to fixing the price, both sides will try to holdout for the best deal possible. This is why sellers often start out claiming that "all prices are firm." When they start to negotiate,they will then make alot of "take it or leave it" offers.Eventually,they will start to complain about the rent,the number of children they have to feed, and soon.All this is designed to convince the buyer that the seller could not possibly, under any circumstances,accept a lower offer.And since the trade is mutually advantageous at pretty much any price near the zone of negotiation,once the buyer becomes convinced that the "final offer" is,in fact, the final offer, she will take it. A seller who is extremely good at this game can get very high prices.These prices may besohigh,in fact, that atthe end of the day hewill have unsold goods.This can beperfectly rational for the individual seller, because it is possible to make more money selling small quantities at high prices than large quantities at low prices.But it is not good for society asa whole, because it is asource of inefficiency.The unsold goods go to waste. This means that the economy would have been more efficient hadthese goods not been produced,or had they wound up in other hands. This is where competition comes into the picture.As soon asthere is more than one seller or one buyer,it becomes impossible for anyone to "hold out" for the best price. If one seller demands a price that is too high,the buyer can simply threaten to go to the shop next door.This completely undermines the seller's negotiatingposition. When the asking price is too high,not all the goods that are available to besold will actually get sold. Someone is going to wind up with excess inventory atthe end of the day.When there is more than one seller,the question becomes who will wind up holdingthe bag at the end of the day.If all of them charge the same amount, then they will all wind up with excess inventory.However,if one of them lowers his prices somewhat, then he should be able to clear out his entire stock, leaving his competitors with unsold goods. But here is the catch: it may be less profitable for all to sell atthese lower prices,but the free-rider advantage of clearing out one's inventory may offset this reduced profitability,thereby makingit in each seller's interest to lower prices. This is what makes it acompetition.The two sellers are caught in a prisoner's dilemma. They would like to charge high prices.It's in their collective interest to charge high prices.However,they each have anincentive to "free-ride" off the other's pricing strategy and clear out their own inventories. Suppose that you and your competitor each are holding substantial quantities of some good. If you both charge six dollars per unit, buyers will purchase 100 units total, probably 50 from each of you. However, at a price of five dollars, buyers would be willing to purchase 120 units. Suppose that your cost is three dollars per unit. Here are the possible scenarios: 1.You lower prices; your competitor doesn't. Sold: 1..0@$5. Profit: $240. 2. Neither of you lowers prices.Sold: 50 @$6. Profit: $150. 3.Bothof you lower prices.Sold: 60 @$5. Profit: $120. 4. Your competitor lowers prices; you don't. Sold: 0. Profit: $0. Whether you are chasing after windfall profits or simply trying to avoid getting frozen out of the market, your best strategy is to lower 'rT Q 1041061311 The Efl'lclent Society, Why Canada I: A: Close To Utopla A: It Get; Joseph Heath prices. The same goes for your competitor. As a result, you will both lower prices, and so instead of making profits of $150 each, you will make only $120 each. It is clearly not in your interest to pursue this competition,but you don't have much choice. This collective action problemis also quite likely to degenerate into a race to the bottom for the sellers. If you are both charging five dollars and everyone still has unsold goods,then everyone has an incentive to lowertheir prices further. This process stops only when the prices get low enough that all the inventories clear. This is why they say every free market is but afailed cartel. Of course, the opposite side of this equation is that if prices get too low,it means that there will not be enough of the good to go around. Not everyone who wants to buy it will beable to find it,and sothe buyers will start to compete with one another and bid the prices up.In the very tight Toronto housing market,I've seen people offer landlords more than the asking rent in order get anapartment downtown,just ashomebuyers will often bid up the price of a house to above what the seller is asking. It is not in the collective interest of buyers to do this either, since it means they all wind up paying more. But they'd rather pay a bit more than live on the streetsor worse, in the suburbs. While these competitions are bad for both sellers and buyers,they have side-effects that are beneficial for society asa whole. The prices that eventually get fixed in acompetitive market represent an equilibriumbetween the needs of buyers and sellers. What is unique about this equilibrium is that, under properly structured competitive conditions, it generates aperfectly efficient use of resources. Since there are no unsold goods at the end of the day, it means that from the perspective of society asawhole, nothing has been wasted. Exactly the right number of goods were produced. This is why society tolerates unbridled self-interest and competitiveness in the marketplace.The people involved don't benefit from beingpermitted to pursue their self-interest. In competing with one another, sellers and buyers are actually harming themselves. What matters is that they are harming themselves for the benefit of society asawhole. 1'T Q Wt) Of course, it is not entirely obvious that competition plays such an important role in our economy. Most of us work in very large organizationsbureaucraciesand so are not involved in selling things on aday-to-day basis. Our primary form of engagement in the marketplace is asconsumers. Here we find very few circumstances in which we actually compete head-to-head with other consumers or negotiate prices with sellers. Auctions and big-ticket items, such as houses and cars, are the rare exception. No reasonable person goes into the Gap and tries to talk down the price of khakis with the clueless teenager behind the counter. This has led some people to doubt that competition plays much of arole in our economy.Prices seem to be dictated to usby big corporations. But this is more the appearance than the reality.Hang out around the street vendors in some Third World country and you will see hard-core negotiation.In our society,the competition is still there, but it is a great deal more sublimated. The fact that consumers are constantly in competition with one another is something that struck mequite forcefully when I moved from Montreal to Toronto. I lived in Montreal through ten years of fairly constant, self-induced economic stagnation.Shopping for clothing at the time was a very relaxedbusiness. If you spotted something you liked,the best thing to do was hangloose for afew months,then goback and buy it atthe store's liquidation sale. Stock just didn't move, and soeverything eventually went on sale. Moving to Toronto, where people have real money,was quite a shock. I started working my usual laid-back approach to shopping.I soon discovered that upon returningto stores after a suitable delay, everything I liked was longgone.The sale racks contained nothing but weird, ill-fitting,ugly,or otherwise offensive garments.All the good stuff had been snapped up longbefore it became a candidate for the sale racks. Pretty soon I started to feel the pressure.See something you like? Better buy it right away,because it won't be there tomorrow. The net effect is that in Toronto I wind up paying full price for 1061071311 The Efl'lclent Society, Why Canada In A; Close To Utopla A: It Get: Joseph Heath things. If I don't, other consumers will snatch them up.Of course, by paying full price,I amjust intensifyingthe competition.It is not in our interest as consumers to be doing this. If we alljust heldoff, eventually retailers would have to put things on sale.Thus the primary form of competition among consumers in our society involves buyingthings before they go on sale. Each consumer who holds off on a purchase in order to wait for a sale generates a slight benefit for all other consumers in the form of increased pressure on suppliers to lowerthe price.Similarly,each supplier who delays puttingthings on sale produces abenefit for other suppliers in the form of increased pressure on consumers to buy at that price.In both cases, this generates a free-rider incentive consurners may break ranks and buy at full price,or suppliers may break ranks and have a sale.The consequence of these two collective action problems will bedownward pressure onthe price of plentiful goods and upwardpressure on the price of scarce goods.The only equilibrium will bethe point at which the amount of each good exchanged is just right.Inventories will clear, and the resulting allocation will bemaximally efficient. To see what an achievement this is,it is helpful to put it in more concrete terms. Part of the task assigned to clothing manufacturers in our society is not just to produce garments,but to produce the right number of garments in the right sizes.This is a very complicated problem,since people come in all shapes and sizes. The most direct approach to this problem would be to go around and measure everyone and figure out on average how many size twos there are, how many size threes, etc. This is more or less how the military does it.The problemis that, unlike the military,where each individual is simply issued a fixed number of garments, in society at large there is enormous variation in the number of outfits that people feel a needto own. Some people want ten pairs of shoes,while some would rather spend their money on something else. Once this demand-side variability is factored in,the problemof calculating how much of what to produce becomes extremely difficult. The marketplace,however,quickly solves this problem. If there aren't enough size threes being produced,all the size threes will sell out right awayat full price.And if there are too many size sixes, E TTQ these will need to be put on sale. As a result, stores will put in orders for more size threes and will bewilling topay morefor them. And this makes it in the interest of manufacturers to supply more clothes in these sizes. Thus the prices at which goods sell form something like animage of what the population needs. Insteadof having to go out and actually measure the population,you canjust let people measure themselves, then compete with each other for clothes that fit them. Once the dust settles,you can look atthe sale racks and the inventory logs of clothing retailers to see what kinds of clothes people need. m This market mechanism is more than just a neat trick. Let me draw attention, once again, to the fact that we have produced more goods in the past one hundred years than the rest of humanity produced over the entire course of human history. Human beings are, to put it mildly, not organizational geniuses. If it is difficult to collect information about what people want, it is even harder to get people to do what they are supposed to do. Markets make it possible to collect information and coordinate interactions in a way that is truly effortless by comparison. Thus the attraction of the market economy is not that it promises big gains in efficiency but that it promises huge gains in efficiency. It 's the difference between livingin the Middle Ages and living in the twenty-first century. Once the blueprint has been laiddown, it's not hard to see why people around the world have wanted to restructure their societies in order to realize these gains. Imaginethe following scenario. You live in asmall village community that grows all its food in alarge,collective vegetable garden.All the produce is harvestedin the fall, and one person is assigned the task of distributing it to the members of the community. This year it is you. Being scrupulously impartial,you decide to give everyone exactly the same amount.Soyou assemble abasket of vegetables for each person,puttingexactly the same number of carrots, potatoes,corn, and soforth, in each. But then,just before handing out the baskets, you ask yourself, " Have I done agoodjob 107109f311 The Efl'lclent Society, Why Canada I: A; Close To Utopla A. It Get: Joseph Heath here? Is this the best way to distribute these vegetables?" You then realize,with a sinking feeling, that the allocation of vegetables you are about to implement is inefficient.It would be possible for you to change the allocation in order to make some people better off, without making anyone worse off. What made you think of this is your recollection that Fredhates potatoes,and that Susan is allergic to carrots. You could give Susan's carrots to Fred,and Fred's potatoes to Susan,and they would both be better off. Once you start thinking this way, you realize that everyone has slightly different vegetable preferences,and so, if you want to make everyone ashappy aspossible,you will have to give them each a basket that is specifically tailored to his or her particular needs.So you handout alittle questionnaire,asking people to rank all the vegetables in order of preference.However,when you get the questionnaires back,you realize that you now have a bewildering amount of data,and that figuring out how best to satisfy each person's preferences is going to involve solving avery complex set of linearequations. By the time you do the math,the vegetables will have gone bad. But your trusted adviser, who has been dabbling in foreign trade, makes anattractive suggestion. Traditionally, people have felt obliged to eat whatever they are given in order not to seem ungrateful.Your adviser suggests that you give everyone anidentical basket of goods,but then encourage them to trade with each other, exchanging anything they don't want for something they do. That way, Susan canjust exchange her carrots for Fred's potatoes, and you don't have to worry about it. Insteadof having to figure out who likes what, you canjust let the people sort it out themselves. That way no one needs to collect informationabout who likes what.The people, without even knowingit,can do yourjob for you. Suppose that you proceed with this suggestion. A market for vegetables soon appears. Once this market is in place,patterns begin to emerge in the prices at which vegetables trade. These patterns may turn out to reveal interestingthings. For instance, suppose that even though the garden produces exactly the same amount of potatoes as carrots, a pound of potatoes sells for twice the price of a pound of carrots. This must reflect the fact that, on average,people like E TTQ potatoes more than carrots. (A taste for potatoes makes them less willing to sell their share,thereby reducingthe supply,but also more eager to buy them, thereby increasing the demand.) Thus using a market to allocate goods creates a set of prices that reflect the underlying system of needs.The key difference is that while needs are unobservable,prices are publicly available.Prices are therefore like a visible image of an invisible preference structure (just asan infrared photograph uses the visible spectrum to represent light waves that we cannot see). Now that prices have made this information available, a new opportunity for improving the well-being of the village presents itself.You beginto think,"Perhaps we don't need to grow so many carrots. Maybe we should plant more potatoes next year." Exchange may improve allocative efficiency,but this does nothing to improve productive efficiency.Redeployingthe resources used to grow carrots into potato productioncould make everyone better off. However, deciding exactly how much land should beswitched over can bea tricky matter, involving a complex set of calculations. Once you start thinking about it,you realize that not only the village land,but some of the other resources may bemisallocated as well. For instance,everyone in the village takes turns working the whole field, but some people are better at some jobs than others. Despite the fact that Susan is a very good potato-digger while Fred has a way with carrots,both of them are taking turns doing bothjobs. It would be better to have Susan focus on potatoes and leave the carrots to Fred.But deciding who is better at what, and dividing up the work to everyone's satisfaction, would also be a costly and time consurning business. Again, your economically sophisticated adviser intervenes. "Instead of managing the allocation of resources for the whole farm," she suggests, "then giving everyone anequal share of the vegetables, why not give everyone anequal-sized plot of land? Take the collective farm, divide it up into individual plots,and give it away. This will involve some paperwork, and you will have to set up alegal system to keep track of what people own and regulate disputes over what they have exchanged.But once this is done, you can let people grow whatever they want on their own plots and then exchange their 109111f311 The Efllclent Society, Why Canada I. A; Clone To Utopla A. It Get: Joseph Heath TTQ produce asthey see fit." Underthis new arrangement,when the price of some vegetables is high,this gives everyone an incentive to grow more of those vegetables (either to sell them or to avoid having to buy them). If some people are especially good at tending particular crops,they can specialize in that area,then exchange their produce with others. Everyonecan do their own cost-benefit calculation to see how much of each type of vegetable they should grow. People may grow vegetables for their own consumption,or they may grow vegetables that they intendto exchange.As long aseveryone is trying to get the most that they can out of their plot,i.e.,to get the best possible bundle of vegetables for themselves that they can, then the resulting levelof consumption will be both allocatively and productively optimal. All the resources will be put to their best use, and all the goods will be in the hands of those who want them most. What the adviser has just suggested is the basic structure of a laissez-faire economic system the state assigns property rights ,then leaves everyone free to make their own decisions about what to do with their share. The "moral economy" is eliminated notjust from distribution, but from production as well. Without even realizing it, you have now introduced full-blon capitalism into your village. And you did it not because you stood to gain from it personally or because you felt like promoting greed and avarice ,but because you wanted to make sure that everyone was happy,that everyone got the bundle of vegetables best suited to their tastes. Of course, despite these good intentions, you may someday come to have second droughts about your decision

1. A sentence stating the author's central claim (what is s/he trying to prove?)

2. A few sentences outlining the argument's major steps (don't repeat or quote; summarize)

3. Two questions concerning anything you find

• unclear in the text
• unconvincing in the argument
• in need of further discussion

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