Sunday, June 21, 2009

The State and the Economy, Part 1 of 94

Apologies for my recent blogging silence, I'm afraid I've been a little distracted of late and not found the time to blog, anyway, I'm back and I'd like to write about the role of the state in the economy. I've got two reasons for this; firstly, because it's often said that we lefties have statist bias (guilty as charged I'm afraid, but I'd like to put a little effort into explaining why) and second, because I've just read a great book by Ha-Joon Chang on the subject (apologies if it gets a bit geeky).

Anyway, I'd like to start by talking about coordination, the idea that in order to accomplish certain tasks, or produce certain goods a number of tasks of no obvious individual value need to be carried out in a coordinated fashion. The ultimate goal being to achieve a state where resources are coordinated in such a way that they are directed towards their most productive uses.

It's worth explaining at this point about the different ideas of unconcious and concious coordination. Take for example a dressmaker and a cloth factory. In a market system, coordination happens unconciously, the dress maker would contact the factory and ask to buy cloth, this additional demand would lead to an increase in the price of cloth which would signal to the factory that it should raise it's output. A system of concious coordination would see the factory ordered to increase it's output to match the demand's of the dressmaker.

Now, although in my example above a market driven system of unconcious coordination is likely to be the preferred system, it's worth pointing out that much of the activity of individual firms is in fact heavily planned and coordinated. As an example, take the first chapter in Adam Smith's Wealth of Nations. In this chapter, Smith talks about the division of labour used in the manufacture of a pin and explains that the process can be made more efficient if workers each perform a single task within the larger manufacturing process (making wire, cutting the pins, pointing them and adding the head).

The point here is that the firm is a clear example where conciously coordinated activity delivers a better outcome than unconciously coordinated activity. If it works at the level of the firm, we really need to ask ourselves whether the same applies at the level of the state.

In my view, the state should plays a key role in the economy by acting to prevent failures of coordination. A strong industrial policy is vital to this, the exact detail as well as the political justifications I'll cover in future posts.

1 comment:

macy said...

The government can prevent failures of coordination if the economy is stable, but due with today's unstable economic state that is hardly to be effective. Even famous fashion houses such as Christian Lacroix, which was able to survive with just several major retailers, is now facing bankruptcy. If this happens to Adar scrubs, even the common nurses, who only need uniforms, will have to deal with the problem. And I'm afraid the government might be powerless to turn the situation.