The biggest problem in human history is the organizational challenge of providing the millions of goods and services necessary to modern civilization, in the quantities necessary, at costs that do not leave people starving, as we discussed in the last post. To solve this problem requires a superintelligence, and we don’t have a giant computer millions of times smarter than any human.
What we do have is a market.
The market (in the economist sense of “the entire system of trading assets,” not the everyday sense of “the place you go to buy your groceries”) is not principally about making money or investments: it’s about allocating goods and services. So, take an unpleasant but necessary job: maintaining the sewers. We very much need people to maintain our sewer system. It is no exageration to say that civilization would collapse without advanced sewers. But the grunt work of keeping the pipes unblocked is unpleasant manual labor, subterranean, and, of course involves a certain amount of dealing with shit. Very few little children grow up thinking, “Some day, I want to maintain sewers!”
So it might be reasonable to assume that it would be difficult to find people willing to do this job. And here we see the two tools of the market, the carrot and the stick.
The carrot is, “If a job is essential, and people are reluctant to do it, the amount of money that they’ll pay you to do the job increases.” This is the demand side of supply and demand, and it means that if nobody is willing to be a sewer engineer, well… which would YOU rather do? Pay a few dollars more for your sewer fees, or drown in your own excrement?
The stick is, “You have to have some job, or else you’ll starve to death on the streets.” In a pure market system, lots of basic necessities are costly. If you’re someone who is otherwise unemployable, you will literally starve to death if you aren’t willing to take an unpleasant job. Which would you rather do, sewer maintenance or starvation? (Of course, if the pay for sewer maintainer is low enough that it won’t stop you from starving, maybe you don’t bother.)
And between the carrot and the stick, you end up with a dynamic equilibrium where there’s some amount of money which we can offer which will find people willing to maintain our sewers (and do back-breaking agricultural labor. And work in mines. And, conversely, do mind-numbing data entry work. And the million other jobs that are not filled with fun and excitement that none the less are necessary for civilization).
As we can see, the market ends up solving this extraordinarily large problem pretty well. Not perfectly, but pretty well. Which is remarkable! We’ve always known that complex and seemingly intelligent systems can come out of relatively simple interactions, but the market is unique in how much some simple core transactions have built up into a system that’s shockingly vast and complicated. The market performs as an intelligence-aggregator, meaning that when many people interact with a marketplace, the market allows them to build on each other’s successes, and points out the failures relatively early, and punishes them. Think about the last time you were in a meeting with, say, ten people in the room (even smart people). Was the meeting aggregating the intelligence of the people in the room, or was it making everyone dumber than the smartest participant?
But of course the mechanism by which all of this is accomplished is by putting people at risk of being unable to buy basic necessities of life: by depriving at least some people of their ability to reliably get food, shelter, etc. And it rewards other people entirely out of proportion to the average: in a market, someone will be very, very poor (struggling or unable to buy food), and someone will be very, very rich (perhaps to some degree through merit, though we can never discount luck entirely). This is intrinsic to the functioning of the market; it’s the mechanism by which the market aggregates intelligence, the carrot and the stick.
Reasonably enough, lots of people aren’t too thrilled with the idea of people starving, and of other people having enormously more resources (while the first group are starving, even!). And so there have been various schemes to mitigate the collateral damage caused by markets. Which we will discuss in the next post.