Monday, April 11, 2011

CHAPTER 11: Most mainstream textbooks talk about how "we" decide what to produce, how to produce it, and for whom to produce it.  According to METHODOLOGICAL INDIVIDUALISM this is a meaningless question .  A better way to phrase the question is who will produce what for whom and how. 

The first person to produce a new product or produce an old product in a new way is called an ENTREPRENEUR.  The word means risk taker in French but a better description would be discoverer. 

How does one know what products should be produced and how?  The answer is trial and error.  Complex adaptive systems have NEGATIVE FEEDBACK LOOPS.  When an entrepreneur decides to produce a product that costs more to produce than the revenue it brings in he will discover that he has made a mistake.  Remember the role of prices here.  Price>cost make money and produce it.  Price<cost lose money.  Do not produce.   

If he has any money left after this painful lesson he may be able to try again.  Trust me I know about this from experience. 

Of course things are constantly changing.  Once it was profitable (revenue>cost) to produce records and record players.  Now it's not. 

The system is dynamic.  New products and methods of production replace old ones.  This is known as economic development and is both a source of risk and reward for the entrepreneur. 

Profit and loss.  Success and failure.  The carrot and the stick.  The  important point here is  that all this is done without an economic czar.

Review Question:  Did the relavtive inefficiency of the economic system of the old Soviet Union compared to the economic system of the United States have anything to do with using hierarchy to organize economic activity rather than spontaneous order.  If yes, explain.

No comments: