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Everything We Don’t Need to Know about How the Economy Works


By David Boaz, Cato Institute


In a piece at the Atlantic titled “Americans Have No Idea What the Supply Chain Really Is,” Amanda Mull writes, “Americans are habitually unattuned to the massive and profoundly human apparatus that brings us basically everything in our lives.”

Indeed we are, and we might say that’s the beauty of a well‐​functioning market economy: We don’t need to know how it works. We know our own little bit – what wages are like in our community, and what we could do to earn more; what customers tend to order on weekdays and weekends; what’s happening with condo and single‐​family prices in our area. But we don’t really need to know why.

Economists, especially of the Austrian or market‐​process variety, have often made similar points. In his classic essay “The Use of Knowledge in Society” the Nobel laureate F. A. Hayek writes of the work of the entrepreneur:

There is hardly anything that happens anywhere in the world that might not have an effect on the decision he ought to make. But he need not know of these events as such, nor of all their effects. It does not matter for him why at the particular moment more screws of one size than of another are wanted, why paper bags are more readily available than canvas bags, or why skilled labor, or particular machine tools, have for the moment become more difficult to obtain. All that is significant for him is how much more or less difficult to procure they have become compared with other things with which he is also concerned, or how much more or less urgently wanted are the alternative things he produces or uses. It is always a question of the relative importance of the particular things with which he is concerned, and the causes which alter their relative importance are of no interest to him beyond the effect on those concrete things of his own environment.

So how do businesspeople get the information they need? Sure, they may read newspapers and trade journals, they talk to customers and suppliers, they observe. But mostly the price system conveys essential information. Hayek went on, “It is more than a metaphor to describe the price system as a kind of machinery for registering change, or a system of telecommunications which enables individual producers to watch merely the movement of a few pointers, as an engineer might watch the hands of a few dials, in order to adjust their activities to changes of which they may never know more than is reflected in the price movement.” The grocer doesn’t really need to know why oranges are getting more expensive; maybe there’s a freeze in Florida, maybe consumer demand is rising, maybe it’s inflation. But when the price goes up, she and her customers can make adjustments.

Leonard Read also illuminated this point in his famous essay “I, Pencil.” He pointed out, in the voice of the pencil, that “no single person on the face of this earth knows how to make me.” Many of the people involved in making a pencil, from the tree grower to the copper miner, have no idea that their work will end up in a pencil. But each of them pursuing his own interest is led by the price system to produce what others need.

Now, to be sure, it’s a problem for our political economy when people are completely unaware of what a marvel the market system is and how easily government intervention can reduce the abundance it produces. So it’s a good thing at least a few people study economics. And if you do want to know more about supply chains and why they seem to be faltering these days, you can read Ms. Mull at the Atlantic or Scott Lincicome on the Cato website.


David Boaz is the executive vice president of the Cato Institute.