All Commentary
Tuesday, July 12, 2011

The Market: This Time It’s Personal

The Other Side of the Impersonal Market

Economics teaches us of the virtues of the impersonal market. Indeed, if we had to know everyone who helped to make our daily bread before we could eat it, we’d all go hungry. But at the same time, when we turn our attention from the marvelous operation of the economic system as a whole toward human action at the “micro” level, another virtue of the free market comes into view in the way it lets us create and destroy social ties. Without that ability, extensive voluntary trade would not be possible either.

Impersonality at the Macro Level

There is no better explanation of how vast, impersonal cooperation works than Leonard Read’s classic essay “I, Pencil,” in which he elegantly shows that no single person can know all that goes into the making of something as apparently simple as a pencil. That’s because a pencil is the tip of an enormous production iceberg, only one of whose roots stretches back, for example, to the iron mines that provide a single input for just one of the tools that go into manufacturing the saw that cuts the wood from which a portion of the pencil shaft is made. The real wonder in this, however, is that no single person has to know. Tens of thousands, probably tens of millions, of people who will never meet nevertheless work together to make a single pencil.

Prices that emerge from the buying and selling of privately owned iron, wood, labor, tools, know-how, etc., as well as the market price of the pencil itself, are key in guiding the decisions at each of the dizzying number of stages of production. Again, no one can know, and no one need know, all of these stages.

Still, each worker, investor, manufacturer, financier, etc., does need to know, and know with expertise, the people with whom she has to deal in the stages immediately upstream and downstream from her position in the process.

Getting Personal at the Micro Level

Most of us wouldn’t hire a plumber without the recommendation of someone we trust, much less make a major investment in a business or lifestyle without first consulting a number of friends, colleagues, and professional advisers of one kind or another. In our daily affairs the personal plays an indispensable role.

My father sold his farm produce to the same market in Phoenix for many years. I recall that while each delivery was being unloaded and weighed he’d sit and chew the fat with the owners and managers of that produce market, while I waited impatiently to start back for home. At the time I didn’t appreciate what an important part of doing business those few minutes of socializing were in maintaining trust, as well as keeping in touch with the latest business news and opinion—information that meant much more coming from those guys than it would have coming from some anonymous source.

At the macro level, which encompasses the entire production process of a pencil (or of green onions), markets are highly impersonal. But at each of the myriad stages of that highly complex process, between (for example) the buyers and sellers of the cedar or rapeseed or raw carbon, is a relationship that is necessarily personal to one degree or another.

Of course, voluntary personal connections alone cannot solve the enormous knowledge problem that F. A. Hayek and others have identified. At the same time, however, what individuals have to know at the local level, even with the aid of money prices established on free markets, is enormous. While this may be obvious to most of us, I think it’s especially important for those of us who are devoted to understanding and explaining the market process not to lose sight of it, as we are sometimes apt to do when we marvel at the impersonality of the market.

Now, competition, by constraining the proclivity of some buyers and sellers to act dishonestly, can relieve many of our day-to-day worries about the trustworthiness of those we have dealings with. And what Elinor Ostrom might call the “nonmarket bases of the market process,” such as norms of reciprocity, conventions of fair play, and the like, do much the same thing. But as the sociologists Nicolas Christakis and James Fowler have recently written, norms and conventions are transmitted and reinforced though social networks. Prices are too.

Social Networks and Economic Freedom

Informal connections like I’ve described can of course exist in less free, more regimented societies. It’s just that the freedom to associate with strangers, which is an important part of economic liberty, gives rise to so many more of those connections. True liberty means not only being able to form ties with new people and new social networks, however, but also having the freedom to cut ties to old business partners and customers, as well as to let go of old social networks, including those of friends, family, and community.

The ability to form and dissolve ties to social networks gives greater access to an existing array of diverse knowledge and tastes—much of which may not be useful but some of which undoubtedly is—while expanding the range of that diversity by stimulating new ideas in business, science, and culture. Liberty encourages economic progress and social diversity by giving each the freedom to move, not only from place to place but from one social network to another.

That freedom of movement, in physical and social space, is the essence of the free society.

  • Sanford Ikeda is a Professor and the Coordinator of the Economics Program at Purchase College of the State University of New York and a Visiting Scholar and Research Associate at New York University. He is a member of the FEE Faculty Network.