Free Markets Are Built on Free Labor

Choosing labor is itself labor, and has a high, but maybe dwindling, cost.
April 7, 2018 (economics, decisions)

Free computational labor, that is. Which may decline in importance.

Let’s briefly look at why that is, how important that is, and what situations make that more or less true.

Imagine you’re in charge. There’s a bunch of people, they can all do various things with various levels of competence.

You can tell them all what to do, so what do you tell them? Well, one pretty good strategy is to let each one figure out for themselves. You have one brain and a few facts, they have hundreds of millions of brains and detailed knowledge of their own situations. Will they get it perfect? Well, no, but you weren’t going to either. Can you trust them to make good choices? Well, probably not entirely, but let’s say you pay them for how good their choices turn out, so they at least have a reason to make an honest effort.

That’s a free market.

When does it really shine?

It really shines when people have diverse options, and they are many many times more efficient at some roles than others, and people are also substantially different from each other. You lose a lot of productivity if you mess up and Bill Gates doesn’t end up doing things with computers, because presumably

- making Microsoft is much better than many other options he had.
- he's much better at making Microsoft than he is at doing other things.
- other people aren't nearly as good at making Microsoft as him.

When any of those things isn’t true, then free markets are less good.

If lots of people are good at making Microsoft, it doesn’t matter if Bill Gates does it or someone else does.

If Bill Gates is as good at everything as he is at making Microsoft, then he can just make Apple instead, or discover DNA.

If Bill Gates grows up as a peasant in the 1300’s, he’s not going to make Microsoft no matter what, so you lose less by having him just be a farmer.

In particular, when a lot of work that needs to be done is more basic, like “grow lots of food” (like you might see in a developing country), or “make lots of guns” (like you might see during a war), there’s less benefit to free markets, and you might expect to see more central planning in those scenarios - and in fact you do.

This time it’s different

Here’s another scenario in which a free market is less useful. If computers get good enough at allocating humans, then there’s less need (efficiency-wise) for the humans to do that. Note that this isn’t the same as computers doing everyone’s job for them. Bill Gates can still found Microsoft, with his own fully-human decision-making - he just doesn’t have to be the one to decide that he will.