Henry on “markets in everything”

But Hayek is remarkably incurious about the actual social processes through which markets work, and in particular the forms of standardization that are necessary to make long-distance trade work. I imagine Scott’s counterblast going something like this: It is all very fine to say that markets provide a means to communicate tacit knowledge, and it is even true of many markets, especially small scale ones with participants who know each other, know the product and so on. But global markets do not rely on tacit knowledge. They rely on standardization – the homogenization of products so that they can be lumped under the appropriate heading within a set of standard codified categories. Far from communicating tacit knowledge, the price system (and the codified standards that underlie it) destroys it systematically.

Here is much more, mostly on James Scott. 

I agree with the frustration about a lack of detail about markets.  Nonetheless, I am more optimistic than this.  Standardized products often fund a more general trade or communications infrastructure which the non-standardized products then piggyback upon.  Think of funding a port with oil shipments (by the way, how many grades of crude are there?) but at the margin using it to trade strange toys as well.  Alternatively, a highly standardized product can be communicating the (sometimes tacit) knowledge that liquidity and interchangeability and lots of direct competition matter more than does product diversity.

The Grossman-Stiglitz framework helps us think through the trade-off between the average and the margin.  Let's say that some trades shift into the more standardized, liquid market and out of the more idiosyncratic market.  Some knowledge is lost.  But at the margin, there is now a stronger incentive for information-gathering, or knowledge mobilization, in the less liquid market.  It will be easier to beat the rest of the market (price is not much of a sufficient statistic) and so people will try harder.

This topic is related to the current controversy over whether swaps contract will be overly customized (wider spreads and harder to monitor and higher regulatory risk?) or overly standardized (more liquid but less useful?).


ha ha, Tyler never loses a chance to throw in a "culture that is Japan."

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The linked Crooked Timber post is idiotic.

Henry quotes Scott talking about standardization in industrial processes. Henry then talks about how this standardization is driven by the pricing mechanism and long-distance trade. This is nonsense.

Standardization is driven by the desire for efficient production and operation, at any scale, regardless of trade considerations. A self-sufficient farmer who grew his own food and made his own tools would want to standardize, because he'd grow more food, make better tools, and have more free time.

Adding trade to the mix means that more people share the same standard. But it's not because they need to destroy information in order to use the pricing mechanism - it's because sharing standards yields benefits that are desirable in and of themselves. People engaged in the production of finished goods from inputs would develop widely-used standards even if the inputs were provided for free by the Raw Materials Genie.

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Hayek talks about standardization in his _The Constitution of Liberty_ and elsewhere.

The Hayek haters need to read some Hayek before showing off their scholary incompetence.

Among other thing, Hayek notes the role of government in facilitating uniform standards.

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I don't understand the reasoning. Standards do not destroy any information. Their function is akin to a notational convention in mathematics, focusing the discussion of valuation on what are widely considered key terms. No information is destroyed by standards or by market price signals, which are merely a record of what particular parties at a particular moment in time could agree was a fair price for exchange of particular goods in a particular place.

Yes, price signals are a compressed (hence, lossy) signal of value. But how are prospective buyers or sellers bound to that signal a way that would destroy their information about the value of their own particular goods? Rather than destroying information, the very mechanism Scott describes is the same responsible for providing incentives for new information to flow into the market price signals.

At bottom, it's almost as if Scott believes in an objective theory of value -- a fascinating mistake.

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Reading James Scott or Henry Carrell, you'd think that Western countries practice monoculture farming, even though it is more vulnerable to pests and less productive than intercropping, because of "high modernist ideology" or because market standardization "destroys local knowledge". There is a much more economically intuitive explanation: intercropping is much, much more labor-intensive than monocropping. For example, industrial farms rely on large combines to harvest corn. If you planted anything around that corn, it would get crushed by the combine. Monocultural farming substitutes capital for labor, which makes sense in countries where the opportunity cost for most workers' labor is high. If in the future there are significant agricultural supply shocks, then we might switch to more productive labor-intensive practices -- but this will have nothing to do with presence or absence of oppressive market standardization.

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