No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Ten: It’s all About the Institutions! 235 came up with would not permanently stick. In fact, it came loose rather easily, without damaging the item it was attached to. Ten years later, 3M brought to market another use for this failure, and now Post-it® notes are one of the most popular office products. DISPERSED VS. CENTRALIZED KNOWLEDGE Learning occurs as millions of market participants demonstrate their preferences by buying and selling at various prices. Until the market process begins, it is impossible to know individual market preferences; they are only learned as the process unfolds. In fact, they are developed as all market participants (to include the choosing agent) gain knowledge of actual preferences. Let’s say you go into Wendy’s for a tasty cheeseburger. Then you see a new fried chicken sandwich with spicy dressing and just the condiments you like—at an introductory price of just $2.49! So of course you order it. Wendy’s didn’t know your preferences, although they hoped to anticipate them. In this case they were successful. Likewise, your preferences were shaped and determined by the market process. What you thought was your preference (the cheeseburger) was in fact NOT your preference. The market process helped both you and Wendy’s “discover” your true preferences. If the sandwich turns out to match your expectations, it may become your new meal every time you go to Wendy’s. In fact, it may help you decide to dine at Wendy’s more often. Wendy’s certainly hopes so. These types of choices are being made by the millions every minute all across the world (cheeseburgers, blue jeans, iTunes songs, tractors, video games, cell phones, etc.). No single person or mind that is not omniscient could ever hope to know what the preferences are or will be. Without knowledge of actual preferences, no central planner could ever coordinate individual plans to ensure optimal production. Successful central planning would require not only full knowledge of all preferences, but full knowledge of preferences that aren’t even created yet! How will the central planner know that you will want that new spicy chicken sandwich? And without that knowledge, how will the central planner know how to shift the resources to ensure that scarce capital is not squandered by producing goods and services that are less desired by consumers? The beauty of the market process is no one individual has to know everything, which is a good thing since no individual can know everything. No one knows enough to make something as simple as a pencil (see the following video); so how can anyone know enough to manage an entire economy? Figure 10.2, Wendy’s Chicken. Are you hungry enough to “do what tastes right!”? The market process will determine whether you are or not…. [Photograph by Megan Haymond] I, Pencil