Competition and Coordination: The Invisible Hand

Competition and Coordination: The Invisible Hand

Microeconomics: Chapter 9

February 22, 2007

I. Introduction:

According to the text Understanding Capitalism, “markets provide a way for individuals and firms to organize some aspects of their interdependence; as they do this, markets coordinate the many complex activities that make up the economy, with no one in particular directing the process” (200). The topic discussed addresses coordination by rules, coordination by command, the invisible hand, and the dimensions of market failure.

II. Coordination:

Coordination refers to a horizontal dimension of economy. Rather, “a circulation of goods, services, and people is called the horizontal dimension because from this perspective things and people do not move �up’ or �down’ in the economy…they move �across’ from place to place” (200). This dimension allows the movement of things from one place to another, initiating self-sufficient individuals and cultures. Coordination allows individuals, and families to specialize; causing them to engage in a type of exchange between different units. The specific methods of this type of economic coordination are: caste, custom, plan, gift, theft, and tribute. This traditional means of coordination is what makes up markets and planning in today’s society.

The text addresses how coordination can be achieved. Most commonly it occurs by rules and by command. Coordination can occur, “with no one dictating anyone else’s precise behavior, but everyone observing a set of rules, or with someone directing the behavior of others”. First, coordination by rules occurs when interactions are governed by general principles of behavior; obeying orders. A rule specifically addresses behaviors that are appropriate to a situation without specifying behavior. For example, you are obeying a specific set of rules while driving in a car; however, you are not intending to obey a certain behavior. An order, on the other hand, specifies behavior. The second form of coordination is by command. This occurs when interactions are governed by orders specifying exact behavior. Economist Adam Smith supported coordination by rules and the invisible hand, because he felt that coordination by command allowed the government too much control over the self-interest of individuals. Smith felt, “the individuals giving the commands (the planners) may not have enough information to do the job well, and those who are supposed to carry out their commands may have little motivation to do so”(202). The lack of motivation would result in a spiraling effect causing the task/job to remain incomplete.

There are additional criticisms and problems with coordination by command. The text states that in a large centrally planned economy, it is not a lack of information that exists; it is not having the relevant information readily available to those who plan, who are essentially the decision makers. Information may be kept from the planners or there may be a lack of motivation from both sides, resulting in little incentive to make any decision. This causes an ineffective form of democratic control, which is an ideal that benefits most of the people most of the time. Adam Smith supported coordination by rules as long as two rules govern the economy: competition and private property. Private property establishes market prices and quantities and private property means that there are specific ways to acquire something rightfully: by labor, purchase, or by gift. The problem with this type of coordination is that in order to acquire the object or item an individual needs to make or purchase it. Private property exists, “if gifts meet few of our needs, and if most people are not self-sufficient, then market activities—buying and selling—will have to play a major role in the economy”(204). The rules and command of coordination depend on the existing knowledge of individuals within a society, the government, and the disposal of knowledge that these individuals have to the economic information and markets within their culture.

In an article from the New York Times, coordination by rules and command is exemplified by employers who are offering their employees free drugs in order to improve their health to result in a more efficient and effective working environment. Employers like Marriott International, Pitney