Man-of-System Madness!

Merch madness…

(Don Boudreaux) Tweet Every Spring in the U.S., many Americans are tuned in to what is called “March Madness.” (This madness usually occurs in early April, but because of Covid-19, it actually is occurring in 2021 in March. In 2020 it was cancelled by Covid Craziness.) Sixty-four – well, now more, but traditionally 64 – college basketball teams are invited to participate in the NCAA Division I basketball tournament.

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Café Hayek isn’t a sports or betting blog; it’s an economics blog.

Here’s the relevance.

Production involves matching different inputs together in ways that generate outputs that are useful to human beings. And production is ‘better’ the more useful are the outputs produced relative to the value of the inputs used to produce these outputs. If McDonald’s produces one million Big Macs this year using only half of the inputs that it used last year to produce one million Big Macs, there are more resources available this year to produce goods and services that last year were too costly to produce. McDonald’s improved efficiency at producing Big Macs makes increases the wealth not only of McDonald’s shareholders but of countless people who have nothing at all to do with McDonald’s, either as owners, workers, or customers.

And so we, simply as denizens of the modern economy, should care how well different inputs are combined with each other to produce outputs. Suppose that $X value of some good can be produced in one of two ways: (1) by combining input A with input B; or (2) by combining input A with inputs C and D.

Which is the better way? The answer is easy: the one with the lowest cost. If here using inputs A, C, and D costs less than using inputs A and B, we should all want this good produced with inputs A, C, and D.

Nothing is easier than to write ‘We should produce as efficiently as possible’ – which, in effect, is just what I wrote. The challenge in this complex reality of ours is to actually achieve production that is as efficient as possible.

To the extent that we let government override market decisions and processes, we let government do the equivalent of trying to fill out a perfect NCAA tournament bracket. The actual play of each game determines which team, at least under the particular circumstances – and at the particular times – of the games, is the best team. Likewise, the actual play of market competition determines which particular combination of inputs is the best way of producing some (given) output.

It would be folly to think that we can eliminate the need to actually carry out the competition of tournament games by having some ‘experts’ fill out the brackets in order to determine which teams are best. It would be even greater folly to think that we can eliminate the need to actually carry out market competition by having some ‘experts’ write down ahead of time which is the ‘best’ method of producing some (given) output.

The latter folly would be greater than in the basketball-tournament case for at least two reasons. First, unlike in the basketball-tournament case, in the economy we must also somehow figure out what is the best combination of goods and services to produce. The ‘best’ outcomes in the basketball tournament are simply those outcomes that emerge from the playing of the games fairly. In the economy, though, the relative ranking of ultimate outputs – of consumer goods and services – must be made such that all production effort is geared to producing those goods and services.

Second, there are only 64 teams in the NCAA tournament, with only one eventual ‘winner’ (which can be thought of as a final consumer good). In the economy, there are literally trillions of resources and hundreds of billions of ‘winners’ – that is, final consumer goods and services the production of which justifies using inputs. The complexity of the economy is untold magnitudes greater than is the complexity of the NCAA basketball tournament.

Source: Man-of-System Madness!