We Steel Ourselves for the Newmarkalanche

Thanks to NC State economist Craig Newmark, the FLUBA Shadow Sowell Committee was reminded that it had been awhile since it last visited the Minneapolis Fed's Region Interviews:

REGION: I'd like to address one of your books again—Knowledge and Decisions...

SOWELL: One of the most important issues to be dealt with in any economy is the issue of knowledge. ...

So one of the ways of looking at economies is the extent to which they make use of the existing knowledge in the society, which, as Hayek and others have pointed out, is scattered in tiny fragments among millions and millions of people. And when you have pricing systems, then those people coordinate their activities. Nobody can keep track of 24 million prices. If you have 100 million people and each one keeps track of a handful of prices that are relevant to what he is doing, then it's manageable.

One of the other things that became clear to me when I did research for Basic Economics, is that knowing knowledge with insight, knowing what the knowledge means, how to apply it, that varies enormously. And in a market economy whoever has that insight—if he's right—it really doesn't matter that the other side may be better organized or even financially better off.

I think a classic example was the creation of chains of department stores in the 1920s, that Sears and Montgomery Ward had been going on for decades as purely mail-order houses, and they were the biggest retailers in the world and very successful. But as the society becomes more urbanized, the point is reached where more people are living in the cities than in the country, and therefore it's cheaper to deliver to those people through department stores than through mail-order houses. Now neither Sears nor Montgomery Ward wanted to believe this. Along comes some guy from a little town in Wyoming, named J.C. Penney, and he believes it. It doesn't matter that he's a nobody and these people are the leaders of the world. He starts putting this into practice. And by 1920 he has 300 stores, and Sears and Montgomery Ward suddenly find themselves with millions of dollars of red ink. And as the years go by, they are finally forced against their will to start opening department stores, otherwise they're about to go under.

And think of someone like Henry Ford, as I mention in the book, who was so poor that he had to walk eight miles to Detroit to look for a job. But when he had the idea of mass production and got it under way, it didn't matter that he was nobody. What mattered was he could produce cars cheaper than anybody. But when you have a system that is socialist or run by any kind of centralized group, maybe a political party or royalty, whatever, then the only insights that really matter are the insights of that small in-group at the top. And they are necessarily very limited, as any similarly sized group of people would be. But in the market, whoever has the bright idea—it takes off.