Economic Ways of Thinking, Part 7; R. Nash

prospect of a picnic with his new friend has become more important than watching the Cubs play the Cardinals. The major reason why certainty in eco nomics, indeed, why certainty with regard to human action, is impossible is the fact that all economic value is subjective. The value that different people place upon dif ferent economic goods, upon various choices open to them, varies from person to person. It also changes for the same person at different times. People's value scales are personal and different. People value things differently for a vari ety of reasons which include: (1) different tastes; (2) different perceptions of available opportunities; (3) different interpretations of other people's actions; (4) different inter pretations of current events; (5) different expectations about future events and peo pie's future actions; and (6) different degrees of alertness to previously unrecognized op portunities.

Because economic value is subjective or imputed value, it follows that economic knowledge is always incomplete, limited, and fallible. None of us can ever know all that we need to know about the subjective value that other people impute to their options. Indeed, we have enough problems attaining this kind of knowledge about our156 selves. None of us can attain perfect knowl edge about the future. While it is often possible to make some estimates of what will happen, certain knowledge about the future is unattainable. Longtime investors in the stock market will vouch for this, as will anyone who has ever tried to start a business. One corollary of our limited knowledge about the future is the possibility that the economic value of things will change in unpredictable ways. Natural catastrophes may make some resource more or less valuable. Human tastes, customs, and fash ions may change. New highways may change traffic flows. Huge new shopping malls may lead people to develop new shop ping habits. Inner cities may decay as people move to the suburbs.

In all such changes, some people will win and others will lose. The scarcity of infor mation means that economic decisions must always be made with some caution and tentativeness. Noone, not even the largest and previously most successful businesses, can be completely sure what the future holds for them. Each morning, when the owners of any enterprise open for business, they can never be certain what the market will do to them that day. After what is often a huge investment of money, time, and labor, it is always possible that the business person might discover on a certain day that no one was interested in what he had to offer. The frightening prospect is that the Maytag re pairman of the familiar television commer cials could be anyone of us. But isn't everything said thus farjust plain old common sense? It is, save for all the people who seem to forget the lessons in this month's principle, usually at the worst pos sible time. What is most interesting about the fact of economic uncertainty is its con temporary relevance for several theoretical issues in economics.

Economic Uncertainty and Entrepreneurship An entrepreneur is someone who believes he sees an opportunity that others have not 157 yet recognized. The key to understanding economic competition is recognizing that no one knows everything, different people have different information. One thing the market process does is gather and communicate information about the most important wants of buyers and sellers. As astute entrepre neurs pay attention to information provided by changing market prices, they often come to recognize new opportunities. These new opportunities may take the form of new products or services that consumers want or of new ways of using scarce resources. As entrepreneurs recognize hitherto unseen op portunities and assume risks in an effort to maximize their own wellbeing by taking advantage of those opportunities, their ac tions result in significant benefits to large numbers of people through the creation of new jobs along with the provision of new goods or services.

Economic Uncertainty and Socialism Without question, the most significant consequences of economic uncertainty af fect socialism. Socialism is an economic system in which commands flow downward from the small number of economic planners at the top. In order for such a system to work, the planners at the top must have knowledge about what goods exist and in what quantity and location, and also about what economic goods consumers want and at what price. The big problem for socialist planners is the fact that it is the market that supplies this information and socialism is incompatible with markets. The most important way in which people can acquire knowledge about the subjective value that individuals place upon various economic goods is to study changing prices. Prices are determined as prospective participants in economic ex changes buy or refuse to buy in response to their personal assessment of their opportu nities. As countless individuals, each acting in line with their subjective value scales, exchange units of goods, services, and money, market prices evolve.

158 THE FREEMAN • APRIL 1994 The degree to which an individual wants some good or service will have an obvious effect on the price he will pay to acquire it. The more he wants something, the higher price he will be willing to pay. Since the key to understanding the wants and preferences of consumers is market prices and since market prices are unavailable in a system like socialism that abolishes markets, the socialist planners are in obvious trouble when it comes to supplying the wants and needs of consumers. Of course, when eco nomic socialism is married to political tyr anny, the desires of the individuals forced to live under such a system do not matter. But economic planners in a socialist sys tem have other problems. They are cut off from the information required to set rational prices for the goods they sell. Imagine that you're the manager of a factory operating under a socialist system. Suppose your factory produces 1,000 widgets a day. One of your problems is to decide what price to charge for your widgets. But to do this rationally, in a non-arbitrary manner, you must first have access to various kinds of information. You can hardly know what selling price to place on each widget until you first know how much it cost to make it.

But under socialism, such information is not available since the government owns the land, the raw materials, the machinery, the factory, the utilities, and everything else. Under such a system, it is impossible to know the cost of producing economic goods. And if you cannot know the cost, then you cannot know what price to offer the good at. What industries located in socialist states typically do is investigate ,vhat similar products are selling for in non-socialist economies. Economic Uncertainty and Capitalism Rational economic activity is impossible without certain kinds of information. Ac cess to that information is hindered by the fact that economic value is a function of the subjective value that individual people im pute to economic goods. One of the more important functions of a market system is the steady supply of information it provides about these subjective preferences by means of rising and falling prices. One of the ironies of socialism is the fact that socialists need capitalism to survive. Once we recog nize all this, we can more easily understand not only why socialism does not work, but also why it cannot work. 0 New!

A Classic Reprint from FEE ... Essentials of Economics by Faustino Ballve S ubtitled A BriefSurvey of Principlesand Policies,Dr. Ballve's Essentialsof Economics is a concise, authoritative primer of economics written in language easily under standable by the intelligent layman. Dr. Ballve, a native of Spain, emigrated to Mexico in 1943,where he wrote Diez lec cionesde economia,which was subsequently translated into French as L' EconomieVivante. The English-language edition, translated by Arthur Goddard and published by Van Nostrand in 1963,was reprinted by The Foundation for Economic Education in 1969. In reviewing Essentialsfor The Freeman,John Chamberlain advised readers: "If you want instant enlightenment, Henry Hazlitt's Economicsin One Lessonis still the desired text. If you want enlightenment in great depth, there is Mises' HumanAction. But if you are look ing for something in the 'in-between' category, EssentialsofEconomicsis your meat."

109 pages, $9.95 paperback THEFREEMAN IDEASON L1BER1Y WHyWAR? by Bettina Bien Greaves "There never was a good war or a bad peace." -BENJAMIN FRANKLIN in a letter to Josiah Quincy, September 11, 1773. A t 7:55 A.M. Hawaii time on Decem ber 7, 1941, the first Japanese bombs fell on the U.S. Fleet at Pearl Harbor in Hawaii. At the time, the United States was officially neutral. Japan was attacking a peaceful country without warning. People in the United States were outraged. Their immediate response was anger; they were more than eager to avenge the attack and go to war against Japan. As Japan was allied by treaty with Germany, Germany soon de clared war against the United States. Within a few days the United States found herself allied with Great Britain and the U.S.S.R., which had been attacked by Ger many on June 22, 1941,and at war with both Japan and Germany. (France had been de feated earlier by Germany and was out of the war.) What had been a European war be came almost overnight a world war. The United States would soon be fighting Ger many in the Atlantic, Europe, and Africa, and Japan in the Pacific and southeast Asia.