Scott versus Hayek

by Henry on September 10, 2010

James Scott is at Cato Unbound this month, talking about problems with the state. I’d have much preferred to have seen him stirring it up a little bit, by arguing against markets along the lines that he does in a recent interview elsewhere on the internets.1

It seems to me that large-scale exchange and trade in any commodities at all require a certain level of standardization. Cronon’s book Nature’s metropolis, which is a kind of ecological history of Chicago, has a chapter on the futures market for grain. There exists a tremendous natural variety in the kind of corn, soya and wheat that were grown, but they all have to be sorted into two or three grades in the great granaries, and to be shipped abroad in huge cargo ships–the impetus to standardize in the granaries found its way back to the landscape and diversity of the surroundings of Chicago, reducing the entire region to monocropping.
It’s the same principle at work as I describe in Seeing like a State with regards to the Normalbaum in German scientific forestry. Agricultural commodities become standardized as they move and bulk in international trade. If you build a McDonalds or Kentucky Fried Chicken franchise, they tell you architecturally exactly how to construct it, you have to buy the equipment that is standardized, it all has to be placed in the same relationship to the other things in the floor plan, so it’s all worked out in detail, and it is worked out in such detail to produce a standardized burger or standardized fried chicken. And because it is standardized, the person who comes from the corporate headquarters can come with a kind of checklist in which every place is more or less the same, and they can check on cleanliness, quality, productivity and conformity to the corporate standard. This is the kind of control over distance that is required for industrial purposes. In the end, what is the assembly line? It is an effort to standardize the unit of labor power. The processes are not so different for grain production, burgers, or cars—as are the effects on diversity. Contract farming is then an instance to adapt agriculture to post-Fordist conditions with a higher emphasis on demand.

I’m pleased to read this because it confirms my reading of Scott in a post I wrote a few years back. And as I noted then, it provides a very interesting countercase against Hayek’s argument for the epistemological superiority of the market. Hayek argues that markets are superior because they allow the “dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess” to be aggregated in a useful way. This occurs through the price mechanism, which captures and communicates all the forms of information that other participants in the market need to know (pig farmers do not need to know that the turnip crop has been devastated by drought in a country five hundred miles away – all they need to know is that turnips are more expensive this year, and perhaps they should feed their pigs on mangel-wurzels instead).

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.

I think that this critique is hard for Hayekians to answer on their own terms. Hayek goes to some length to adumbrate economists for their failure to treat non-scientific and non-codified knowledge as important. If markets both distort production (by pushing towards products that can be standardized) and destroy knowledge (by lumping concrete things that are differentiated in important ways under abstract headings), then the Hayekian case for markets is at least qualified. One can still preserve the claim that modern markets preserve and communicate some aspects of non-codified knowledge. But one has to acknowledge that other forms of economic order can do this too (and at least under some circumstances may perhaps do it better, if Scott is to be believed).

1He does talk about this a little in the closing paragraphs. “Intervention in society (or nature) for whatever purpose (e.g. delivering welfare benefits to those with particular disability or keeping watch on political enemies) requires creating the mapping or optics necessary to legibility. In Seeing Like a State, and as a student of politics, I concentrate on state-making and government. Nevertheless, as I endeavor to make clear, large-scale capitalism is just as much an agency of homogenization, uniformity, grids, and heroic simplification as the state, with the difference that, for capitalists, simplification must pay. The profit motive compels a level of simplification and tunnel vision that, if anything, is more heroic that the early scientific forest of Germany. In this respect, the conclusions I draw from the failures of modern social engineering are as applicable to market-driven standardization as they are to bureaucratic homogeneity.” But still – I’d have liked to see him stirring it up at greater length and with greater explicitness.

{ 53 comments }

1

chris 09.10.10 at 7:13 pm

lumping concrete things that are differentiated in important ways under abstract headings

As a devil’s advocate, I think a Hayekian would respond that the market would subdivide that category if enough people had a strong enough interest in doing so, and so different things are lumped together in the market only when not enough people care about the differences to justify the transaction costs associated with preserving them.

Thus, even the market’s decision to destroy information reflects a tacit judgment of the uselessness of that information.

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Glen Tomkins 09.10.10 at 7:25 pm

i.e.,

The “Death Panels” run by the private insurers are for more oppressive than anything the US government would even think of imposing.

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Octagon 09.10.10 at 8:16 pm

“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.”

What about Law, Legislation and Liberty, Volume I? You cite a very important article … an article where you can’t make every point in the world.

“But global markets do not rely on tacit knowledge. They rely on standardization.”

Why oppose these two things? Even if standardization is a process distinct from the coordination and aggregation of tacit knowledge (is it?), I can’t see a reason to think global markets don’t rely on both.

“Far from communicating tacit knowledge, the price system (and the codified standards that underlie it) destroys it systematically.”

Not all tacit knowledge is created equal. Hayek thinks that markets aggregate information needs to coordinate; if standardization is what is needed to coordinate, then why is it a problem not to communicate unstandardized information? Hayek knew that prices were crude summaries of information; that’s the point, really, right?

“If markets both distort production (by pushing towards products that can be standardized) and destroy knowledge (by lumping concrete things that are differentiated in important ways under abstract headings), then the Hayekian case for markets is at least qualified.”

Why think that markets distort production by generating standardized products? I’m confused.

Few academic classical liberals think that markets don’t rely on institutional frameworks that aren’t always constructed through spontaneous order and profit-maximizing processes. Vernon Smith’s work in experimental economics has made clear that norms of non-maximization are required to create expectations needed to make markets efficient. Lin Ostrum has taught us a lot about how the affirmation of moral norms helps to produce a social order. And I think Hayek understood this; It’s really clear in LLL. Heck, even Adam Smith, Hume and Mill understood this. Even lots of contemporary classical liberal philosophers emphasize this point, including Loren Lomasky, David Schmidtz, Gerald Gaus, Chandran Kukathas and Jacob Levy. Which economists are you talking about? Most of the GMU-econoblogosphere is highly conversant in the material you claim Hayekians lack.

In fact, which classical liberals ever made the claim you think Hayekians are committed to? Who are these nameless Hayekians? Why don’t you actually cite a classical liberal that believes what you say Hayekians miss? Could you? Because the more I think about this the more I have no idea who you’re talking about. It could just be my ignorance.

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Henry 09.10.10 at 8:45 pm

Octagon – the question is not one of ‘moral norms’ nor yet ‘institutional frameworks’ (and btw Lin ‘Ostrum’ is not a classical liberal under any reasonable definition of the term ‘classical liberal’). It’s one of the crucial role that _standards_ play in the actual organization of economic activity. Perhaps there is a Hayekian account of standards – and how they organize economic knowledge – out there that I am unaware of that you can point me to. I’d be very interested to read it. But I certainly don’t know of any.

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Jed Harris 09.10.10 at 8:48 pm

A fascinating topic. I’m glad to see the quote from Scott on the “level of simplification and tunnel vision” and standardization driven by industrial capitalism — I regretted the omission of that issue from Seeing Like a State.

All of this raises the question “What forms of large scale equilibrium preserve or enhance local, tacit knowledge?” If to change we have to choose a new vision, not just reject the old one. And I think this is a very difficult but also very fertile and helpful question to address.

I do think we have to respect the need for rough equilibrium (in the rational expectations sense, if not with the rational expectations background assumptions). Our models have to explain the self-maintenance of a relatively stable order within which individuals can make choices.

Unfortunately I don’t have a proposal to answer my own question. I’m not yet even at the point where I can articulate a clear list of the properties a model would have to have, to generate global equilibrium without forcing standardization or otherwise destroying local fitness.

Maybe ecologies are worthwhile examples. They seem to reach a rough equilibrium while not imposing anything I can interpret as standardization. But I don’t know of any way to analytically model that equilibration process.

One thing I have noticed: Sufficiently fine grained standards don’t interfere with the deployment of local, tacit knowledge. For example the standards that make the internet work are so fine grained that they don’t interfere with evolution at the level of content and applications. Similarly the standards for voice compression and transmission in mobile phone protocols are fine grained enough to let people talk however they way. Without going down a technical rathole, this is not a trivial design choice, many protocols try to structure things more “semantically” and cause all the problems that one would expect given this discussion, eventually failing due to mismatch with evolving requirements.

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Jed Harris 09.10.10 at 8:50 pm

Argh. “If to change we have to choose a new vision” –> “If we want to change we have to choose a new vision”. Sorry.

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More Dogs, Less Crime 09.10.10 at 9:03 pm

“Destroying knowledge” is a funny phrase. The price of turnips in your example is certainly a “lossy” form of compression, but presumably the turnip farmers retain the additional knowledge. It’s not communicated to buyers, because they don’t care about the other stuff. The distortion could possibly make a particular variety of turnip standardized, and then knowledge of the non-standard types would be devalued. So it’s hard to separate the distortion & destruction.

I recall in Scott’s book the issue of tacit knowledge is sometimes related to an insiders vs outsiders dynamic. A “dynamist” described/lauded by Virginia Postrel would celebrate the shaking up of exclusive, entrenched networks. David Brin, who describes himself as a left libertarian, made a similar argument for the merits of progressive sci-fi vs reactionary fantasy literature (always with “the chosen one” from birth, often the member of an elite caste).

James Fallows had an article in the Atlantic on business in China. Their industries sell globally to big established American corporations, but the Chinese firms themselves (in the studied city) tend to be very small and unheard of. There was an Irishman who had been living there for a while and spoke no Chinese, but was reputed to have a great advantage from “tacit knowledge” of the firms in the area. Other westerners relied on him for that purpose. That delegation to a trusted holder of tacit knowledge (with presumably a number of such intermediaries existing) can allow a global market to still make use of such knowledge. A real issue it seems to me is Coase’s point about the market vs the firm. Firms are necessarily hierarchical and cannot give their components too much autonomy. And if you act based on orders from above rather than your own initiative, there is less scope for tacit knowledge. Perhaps Scott could write about “Seeing like a C.E.O” or “Seeing like a manager”.

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Jed Harris 09.10.10 at 9:07 pm

Regarding Octagon and Henry: I can’t get excited about what Hayek did or didn’t say. But the point about markets “spontaneously” producing standards I think is correct. It is worth thinking about a bit more.

Really only industrial organization produced standards — prior market orders did not, except for very basic ones like weights, and even those were subject to a lot of local variation and tacit adjustments.

Without trying to create a serious model, I think the rise of standards with industrialization is traceable to shifts in transaction costs. The size of transactions increased — e.g. from the amount of grain a farmer could handle, to the amount of grain that international trading companies could handle. Long distance communication was required to coordinate more of the transactions, and the cost per bit of e.g. a long distance telegram was significant. Quickly sending images or detailed data about samples was impossible. And so forth.

Also and likely more important, standards greatly reduce cognitive load — a cost factor that unfortunately is very important and also very hard to model. Henry describes this well in the context of the fast food franchise inspector. This is probably a big factor in the standardization of jobs, the definition of wage labor, etc. in industrial organization.

So arguably, the way we are rethinking all this now is due to the recent shifts in transaction costs where we can share any amount of data at effectively zero cost, and offload a bunch of (what used to be) cognitive tasks to cheap hardware.

If this is the major factor then we don’t need to worry about whether Hayek was right or wrong, he was just operating in a different cost regime.

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More Dogs, Less Crime 09.10.10 at 9:07 pm

I think language itself is something like a standard, and Hayek was fond of using it as an example. I think even in local situations there are going to be local standards (although Scott suggests they were purposefully malleable in many cases). Some people argue that the extinction of small languages will lead to the loss of some meaning, for languages are not perfectly translateable. But languages are extremely expandable, moreso than most kinds of standards.

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tom bach 09.10.10 at 9:14 pm

Are you sure you mean adumbrate?

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Henri Vieuxtemps 09.10.10 at 9:18 pm

One thing I have noticed: Sufficiently fine grained standards don’t interfere with the deployment of local, tacit knowledge.

What about the knowledge of how to repair things: TVs, radios, toasters. Your toaster stops working – you throw it out and buy a new one; standards don’t allow it to be fixed.

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Jason 09.10.10 at 9:31 pm

@ Octagon

I think what Henry is trying to say, and that Scott is on the road toward, is that, in a sense, markets are another road to serfdom. Products and labor standardized by market forces are hard to distinguish from products and labor standardized by the state in the final effect.

The market pressures that produce a monoculture of corn and the state decision to use a particular monoculture of corn have the same result: a monoculture of corn.

The market pressures that produce a standardized unit of labor and the state dictation of how your labor is used have the same result: serfdom.

Many of our cars are now made from interchangeable parts across several companies. A state car company may make a couple of models so cars are 90% the same parts, but market forces may push our cars to being 20-30% the same parts or more. But that is a difference of degree, not kind. A major factor that stops even more interchangeability is actually considered an anti-market force! Car manufacturers like to make their own parts because they can charge more for them than standardized ones when you need repairs.

I think Henry may have assumed that Hayekians (or Hayek himself) haven’t looked deeply into the social processes and standardization that make markets work because the inevitable conclusion is that the end result of their cause célèbre is identical in effect to what they have put forward as their bête noire: serfdom.

Now it may be true that it is hard for the state to dictate the standardization of as many products as markets can with minimal effort, so the larger set of choices looks more like freedom. But again, that is a difference of degree, not kind.

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Jed Harris 09.10.10 at 9:36 pm

More Dogs, Less Crime: Natural language isn’t a standard in the sense used here, because in typical use the speaker and listener are negotiating meaning so there is lots of room for local tacit accommodation. But it is a very interesting example of a very large scale equilibrium that’s not at all like an economic equilibrium! So we should include it in this discussion.

Henri Vieuxtemps: This is an interesting issue but not a negative one for standards. If the parts inside your appliance were standardized you could get replacement parts and local repair people would know how to hook them up. The problem is that each part is customized, the spec and technology change too quickly to track, etc. So actually this example supports an interesting argument that relatively fine grained standards can empower local tacit knowledge.

I think that argument is supported by the creative use of the web, where a set of relatively fine grained standards empowered an explosion of local tacit knowledge.

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Henry 09.10.10 at 9:49 pm

bq. Are you sure you mean adumbrate?

On mature reflection, no. I am mixing it up with some similar-sounding word meaning something like excoriate …

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Octagon 09.11.10 at 3:08 am

Henry,

(1) What is the distinction between norms and standards that you’re using? Isn’t a law a norm and a standard? If so, then I’ve already given you an example of a standard produced by the combination of a spontaneous order process and a legislative body, as in Hayek’s Law, Legislation and Liberty.

(2) What’s your evidence of Ostrum’s politics? I just assumed she was something like a classical liberal because libertarians are freaking out waaaayyy more about her Nobel Prize than social democrats. They can’t get enough of her at GMU, for instance. I’m not saying I’m right but that was my evidence, however scant. At least, I had no counterevidence.

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Henry 09.11.10 at 3:23 am

Octagon – we are talking about _technical standards_ and the like here. Which may be instituted as laws or regulations, but are a whole different kettle of fish (perhaps rotting – the _Codex Alimentarius_ has a wonderful categorization of the different stages of putrescence in seafood). This is what Scott’s argument is about. And Lin Ostrom (nb. spelling) is not a libertarian – her work is hard to categorize politically, but is very, very smart. And fwiw, this social democrat was “very excited”:http://crookedtimber.org/2009/10/12/the-ostrom-nobel/.

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Tom T. 09.11.10 at 4:23 am

It is perhaps worth noting that McDonalds’ menu encompasses numerous variations worldwide.

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Octagon 09.11.10 at 6:43 am

I grasp the basic distinction but I can’t grasp why you think it is important. If Hayek has a story about norm formation in law, language, morality and culture, is it really a big gap in his thought if he hasn’t applied his framework to technical forms of standardization? It just seems like a minor point now that you’ve whittled down the notion you’ve criticized Hayekians for missing. But let me try to ask you a constructive question:

Suppose you are right about Hayek. What’s the upshot? How should a classical liberal social theory adapt in order to accommodate this error?

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Chris Bertram 09.11.10 at 8:56 am

I see that the CU site is still listing Wilkinson and Lindsey as running things. Is this right?

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x. trapnel 09.11.10 at 9:05 am

I think a very nice, concrete example of what Henry is getting at is the standardization *and simplification* involved in finance, especially with respect to risk. Donald MacKenzie has a really fascinating article on this–“The Credit Crisis as a Problem in the Sociology of Knowledge,” available at his website. What the optimistic, transactions-cost framing can miss is attention to precisely what gets obscured and lost, and why. In the case of credit, what got lost was local knowledge of particular assets (mortgages, say), and what got obscured was perhaps more important–the correlation matrix of home prices and the counterparty risk in the system.

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x. trapnel 09.11.10 at 9:12 am

And as a direct response to Octagon’s query, “How should a classical liberal social theory adapt in order to accommodate this error?”– the theoretical point is the limits of theory. Each standard, each simplification gets produced by a particular historical congruence of actors and institutions with their own goals and limitations, and if we want to know what each misses, we need to drill down into the cases themselves. Sometimes it’s nothing that anyone will care about; sometimes–as in the financial risk models–it’s rather crucial.

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Tim Worstall 09.11.10 at 12:40 pm

Hmm, as someone whose actually written a technical standard for an industry body perhaps I could point out that a reasonable Hayekian point would be that such standards are simply the codification of that local knowledge? Thus making that local knowledge available more widely?

This is as true of Mickey D’s (trial and error has shown that putting the fryers here and the fridges here works best) as much as it is of the weird metals market where I work.

The specific point we made in our standard was that rare earth metals and oxides are usually traded and described using TREO (total rare earth oxide) content. You’ve got 99.0% yttrium oxide and this means that 99.0% of what you’ve got is yttrium oxide plus a little cerium oxide, gadolinium oxide and so on: the 1% is all the stuff that isn’t rare earth oxides. However, scandium oxide is traded and described using total content: 99.0% means 99.0% scandium oxide and everything else, including all of the other rare earth oxides, is in the 1%.

The (quite possibly minor) importance of this is that the rare earths are usually traded by purity….99.0% is good enough for some uses, 99.9% necessary for others, 99.99% going up a step again and yes, there are 99.999% and even 99.9999% purities sometimes required. But a a rule of thumb, 99.0% Sc2O3 would be equivalent in purity to a 99.9% Y2O3 and so on.

The background reason for this is that most of the rare earths have, for the past few decades at least, come from China where TREO is the normal method of measurement: scandium has almost exclusively come from the CIS where total purity was the measurement.

By writing the standard for the Minor Metals Traders Association (not a statutory body in any way but the MMTA standard contract, lot sizes and standard purities are used as a base for much of the global trade in minor metals) we’ve now codified this local knowledge for the wider market.

No one really needs to know why, China/Russia, no one really needs to have the local knowledge at that level of detail: but now anyone and everyone can know that there’s a difference in measurement and therefore possibly a difference in the purity requuired for any one task.

I’m afraid I can’t quite see how this is “the market” destroying information. I see it rather as sifting information so as to make the relevant such more, rather than less, available.

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x. trapnel 09.11.10 at 1:12 pm

To TW: (and sorry I can’t give this reply the full treatment it deserves) – the point isn’t that important things are always lost in standardization. The point is rather that the judgments about what’s important and what can be safely lost are made by particular agents, at a particular (sequence of) moment(s) in time, responding to particular incentives. Others’ interests get incorporated into this, or not–it depends on whether the structure encourages it. In the finance case, both the ecology of how and by whom derivatives were used, and the compensation structures–”I’ll be gone, you’ll be gone”–let to systemically crucial information being destroyed or obscured.

The point isn’t to replace the ‘happy ending’ teleology of markets-efficiently-using-and-creating-information with an equally teleological ‘unhappy ending,’ markets-destroying-information storyline; it’s to emphasize contingency.

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Bruce Baugh 09.11.10 at 1:20 pm

Tim: x. trapnel says the most important thing, I think. A lot of standards like the McDonald’s stock arrangement do not reflect any sort of experience in optimizing processes or outcome at all, and many are maintained by refusing to ever again look at the results of trying significant changes. A lot of them are dictated by authority figures sure of their own genius and correctness, a significant fraction of whom are deep in Dunning-Kruger territory at any given moment.

For one thing, a lot of them are laid down by people who never, ever consider the emotional state, alertness, or other aspects of the well-being of the people who will have to live by them. They take definitions of efficiency and optimization that assume away many things.

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Henry 09.11.10 at 1:22 pm

Tim – I was waiting for you to show up here. But the point (which may not apply to rare earth minerals) that Scott is making is that many standards _do_ in practice replace, and perhaps eliminate local knowledge. Food standards, whether imposed by government (the US rules restricting knobbly looking vegetables of various sorts) or by large private actors with market power, or by trade associations are an excellent example. If you are told by the government that your tomatoes have to be a certain size or shape or consistency to justify being included in Grade II and hence to be sold in markets, you will have to produce to those standards, even if you know that your soil would grow better tomatoes albeit of a different color or consistency if you didn’t have to do this. The same applies to large buyers – who want simple standards so as to keep their lives easy. And to trade associations. The underlying sociological point here is that _contra_ Hayek, the pricing mechanism, if it is to work on large scale markets, requires changes to production practices and hence distorts the patterns of knowledge that it is supposed to transmit more or less transparently. To put it another way – if standards were mere instantiations of local knowledge which could universally be applied without costs to information, production etc, we would not see the frequent “conflicts over standards”:http://www.duke.edu/~buthe/downloads/MattliButhe_WPv56n1.pdf that we do in fact see.

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Octagon 09.11.10 at 3:17 pm

@Henry: I’m sorry but I still can’t see it. Hayek never denied that information was lost in the process of price formation and always recognized that markets could err. But he emphasized that because the price system is essentially a feedback mechanism that it would evolve and adapt in a way that other social systems would not. So why can’t Hayek just respond to your point by simply accepting that the price mechanism requires changes in production practices? Sure, it will communicate some forms of knowledge over others but a Hayekian will reply that the market can accommodate this problem over time.

A nice reply to the Hayekian would be to maintain that markets systematically and regularly lead to convergence on suboptimal standards. The later Hayek emphasized that many decisions made by the market are arbitrary because market evolution is necessarily path-dependent. So sometimes a “sub-optimal” norm will be reached, but in many cases it is such a great accomplishment to reach a standardization that it is more efficient to select one than to continue to look for an optimal standard. For this reason, efficient markets often go with the standard at hand.

But it’s hard to see why Hayek should be criticized for making this point.

@x. trapnel: Theories adapt to counterevidence all the time. Not all counterevidence conclusively defeats a theory’s core model of its relevant domain. Unless you think that this frankly pretty minor point is a conclusive defeater for classical liberalism, then presumably there’s some kind of response or modification they can offer. It’s hard to do on the internet, but a constructive way to criticize a view contrary to one’s own is to both offer a criticism and a helpful reply.

@Tim: What a fascinating comment. Hayek often emphasized that markets evolved through experimentation and imitation. I hadn’t thought of the idea that imitation produces standards but it now seems stunning obvious. Your point about McDonald’s is particularly appropriate. This has been somewhat documented in the accessible and fun history of McDonald’s, Behind the Arches. And of course Hayek makes the exact same point about the evolution of the common law that you make here in Law, Legislation and Liberty, Vol. I: Rules and Order.

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Tim Worstall 09.11.10 at 6:25 pm

“Food standards, whether imposed by government (the US rules restricting knobbly looking vegetables of various sorts) or by large private actors with market power, or by trade associations are an excellent example.”

We’ve had this discussion before, I know. And my complaint has always been (and is always) that I see a huge difference between a standard promoted by, say, a trade association and one written into the law. The example I continually use is the EU rules (it’s a criminal offence to breach these, £5,000 fine and or 6 months in jail) on the allowable components of jam (it’s actually the jam, jellies, marmalades and sweet chestnut puree regulations as revised 2004). One of the definitions (over and above my favourite which is that carrots are defined as fruit) is that marmalades are, by definition, made from citrus fruits.

Now, in a trade body set of definitions we can have “marmalades are normally made of fruits but there are exceptions which require more direct contact between buyer and seller”….as an example. It might be possible to have such in the law but we don’t in fact have that. It is thus illegal to sell pineapple marmalade (I just found out that this is a sometime accoutrement to certain Southern US cooking) in the EU.

You can sell “pineapple boiled with orange juice sauce/spread” but not “pineapple marmalade”. But I would argue that the latter is a description that tells people a lot more about what the product is than the former.

Similarly with the scandium standards I wrote. It’s entirely voluntary to use them: I often don’t myself as I have customers who have much more unforgiving tolerances than could be found in any general standard (I’ve got one who insists on less than 2 ppm Fe and under 1 ppm Zr in his scandium as an example).

Great, fine, we’ve got a general standard which encapsulates certain specific, local, knowledge and anyone can dodge or ignore that any time they like….as long as everyone in the chain agrees that we’re ignoring it.

When the same things are encapsulated in the law such stepping outside the provisions, as a result of having that extra local knowledge that necessitates the stepping out, isn’t possible.

So I would and do argue that industry standards, organically grown standards if you like, ones which grow out of market participants agreeing to have them, are different in kind from those imposed by fiat…whether by the State or by any other holder of sufficient power to insist upon them (and I find it difficult to think of any other actor with that power to insist other than the State……even if Tesco insist that they’ll only sell Grade 1 bananas there are still plenty of other outlets for excessively curved ones….and the Codex Alimentarus where those banana standards comes from only defines what is a Grade I banana. It doesn’t say that other than Grade I are illegal to sell….which the EU implementations do with some of the specs they’ve taken from hte CA).

To go back to Mickey D’s….one regulation which is insisted upon in kitchens is that cooked meat should be stored in refrigerators etc above uncooked meat. This is local knowledge again: uncooked meat tends to have blood in it, which tends to drip. One of the great no nos of any kitchen, commercial or not, is that you don’t allow uncooked foods, especially meats (and poultry even more) into contact with cooked such. And you certainly don’t let the blood from one drip onto the other.

We’ve encapsulated hard won, at the cost of however many upset stomachs and even deaths, local knowledge into a standard.

We’ve also got the more recent insistence that all chopping boards should be made of plastic, not wood. This was a centrally imposed standard, imposed at EU level. Someone, somewhere, thought it was a good idea I guess. It was only after it had been imposed continent wide, restaurants and sandwich shops being closed down or fined for not obeying, that it was pointed out that wooden boards contain bacteria that kill other, infectious bugs (because wood does) and also that washing a wooden board in brine, as butchers have done for generations, cleans wood better than anything at all cleans plastic.

So I’d argue again that we’ve got two entirely different types of regluation/standard. Those which naturally grow out of markets, where they are an encapsulation of local knowledge to the benefit of all and the other sort: the ones that come from clever people being stupid in offices (my definition of bureaucracy).

So when someone says that “hey, standards are all the same, where ever they come from” I’m afraid that I bristle. They’re not all the same: some are hugely useful and some are positively harmful. And my experience is that the useful ones are the market derived ones and the harmful ones are the politically imposed.

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TGGP 09.11.10 at 8:33 pm

“When the same things are encapsulated in the law such stepping outside the provisions, as a result of having that extra local knowledge that necessitates the stepping out, isn’t possible.”
Robin Hanson says it should be, with some antitrust enforcement by the state making sure it works properly. Reminds me of the concept of the “remedial state“.

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Tim Worstall 09.11.10 at 9:27 pm

“And my experience is that the useful ones are the market derived ones and the harmful ones are the politically imposed.”

Apologies, yes, I know that data is not the plural of anecdote: but then we are talking about local knowledge here. As someone who has both had to implement standards (I spent more years in the restaurant industry than I care to remember) and write them (as above) perhaps that very local knowledge is applicable to the wider point.

As Hayek would have insisted it was of course.

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piglet 09.11.10 at 10:56 pm

“One of the definitions (over and above my favourite which is that carrots are defined as fruit) is that marmalades are, by definition, made from citrus fruits.”

This is interesting because that is not the case in Germany. Of course, Marmelade in German has a slightly different meaning than in English. You sure this is an EU regulation?

31

piglet 09.11.10 at 11:06 pm

Standardization and uniformization are as likely to result from “market” capitalism as choice and competition. In a recent thread, somebody gave supermarket bread as an example and I argued that the product variety that you find in an average European bakery exceeds that of a Walmart supercenter. George Monbiot, in the somewhat dated article below, points out that the variety of native fruit for sale in a UK supermarket is smaller than it has been for 200 years. This is scary. Biodiversity experts point out that thousands of local varieties of food plants, and their genetic information, have been lost. We do get access to fruit from all over the world that our ancestors never knew but globally, crucial biodiversity is being lost.

Though we still subsist largely on junk, even bilious old gits like me are forced to admit that the quality and variety of most types of food sold in Britain has improved. But one kind has deteriorated. You can buy mangoes, papayas, custard apples, persimmons, pomegranates, mangosteens, lychees, rambutans and god knows what else. But almost all the fruit sold here now seems to taste the same: either rock hard and dry or wet and bland. A mango may be ambrosia in India; it tastes like soggy toilet paper in the UK. And the variety of native fruits on sale is smaller than it has been for 200 years.

George Monbiot, http://www.monbiot.com/archives/2008/09/02/strange-fruit/

Also http://www.monbiot.com/archives/1995/01/01/monotonous-monopoly/, http://www.monbiot.com/archives/2004/10/30/fallen-fruit/

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tom bach 09.11.10 at 11:20 pm

Tim Worstall,
You’re half right about wood/plastic cutting boards, wood is perfectly safe but bleach plastic boards are as clean. You’re also right about cooked and uncooked meat etc. However, you’re wrong about the imposition of the standards of cleanliness, at least so far as the US is concerned. It wasn’t an restaurant industry led improvement but rather state lead, as was, for example, the improvement in the health and safety standards in slaughterhouses practices, process foods, shipping and handling food, growing food, as well as creating fire escapes, improving the safety of grocery stores, improvement in car safety, and so forth. Are there silly regulations in the world? Yes, yes there are. Do commercial enterprises require state imposed health and safety standards? Yes, yes they do.

33

TGGP 09.12.10 at 3:08 am

When I was in high-school we were assigned to read After the Fact, which contained a chapter arguing that the push for health & safety standards in food was the result of industry lobbying. I remember we also had to write about an early chapter on colonial Plymouth or Salem with a question (I forget if it was from the book or teacher) referencing “non-political aspects of democracy” which was like discussing a four-sided triangle as far as I was concerned.

34

Greg Ransom 09.12.10 at 3:57 am

This isn’t true:

“If you build a McDonalds or Kentucky Fried Chicken franchise, they tell you architecturally exactly how to construct it,”

You old people need to stop living in the world of your childhood which no longer exists — and in part actual never did exist (it’s what you were told existed, and you never grew beyond what you were told to believe.)

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Greg Ransom 09.12.10 at 3:58 am

This isn’t true either.

“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.”

You actually haven’t read any Hayek, have you?

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Bruce Wilder 09.12.10 at 5:33 am

Oh, dear.

It is a sad truth that economics analyzes allocational efficiency in “markets” (a metaphor for contracts) and assumes away the rest. What’s the rest? It is “technical” efficiency, and management and organization and engineering and all that. Assumed away.

The world is Markets and Hierarchies. Markets and Hierarchies. The Hierarchies are engaged in making and enforcing rules and standards. And, why? Because control economizes on error and waste. Hierarchies are engaged in technical and managerial control of production processes, which results in technical efficiencies (which can be distinct from allocational efficiency).

The standardization that Scott complains about is not a product of markets, qua markets. Markets, as Arrow and others have pointed out, can accomodate infinite variety, because markets can, theoretically, assign a different price to every object and bundle of exchange.

We don’t actually observe that, of course. A ticket to a bad movie costs the same price as the a ticket to a good movie. It doesn’t have to be that way, but it is. But, it’s wrong to attribute that “standardization” of price and quality to “markets” qua markets. Standardization is a requirement of control, in the cybernetic sense. Requisite variety and so forth. Standardization is a requirement of Hierarchy, in other words.

Markets and Hierarchies. The modern global economy is dominated more by the latter, than the former, even without totalitarian governments and five-year plans.

The early history of scientific forestry is quite appropriate, as a study in the problems of hierarchical planning and control. But, it is not a study of “markets”, in Hayek’s sense, or in the sense that Economics, as a discipline, generally uses that metaphoric term. It’s too bad, really, that Economics doesn’t know more about the dominating institutions of the modern Economy, but there’s also no reason to be confused about it.

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Tim Worstall 09.12.10 at 6:35 am

Piglet:

Yes, it’s EU.

http://europa.eu/legislation_summaries/consumers/product_labelling_and_packaging/l21134_en.htm

There’s even an amendment dealing with the German Marmelade thing (and with the Portuguese Marmelada as well, which is why you can put apple geranium leaves into qunice jam but not into any other flavour of jam).

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sg 09.12.10 at 10:26 am

I’m reliably informed that typesetting skills are a type of knowledge that is fast disappearing, being replaced by less-skilled computer operators using specific software. This is ostensibly because a lot of the “standards” of the old print industry are worked into the software, but they don’t actually contain enough information to provide the same quality of output that a good typesetter can provide. I think that could count as a good example of markets reducing knowledge. Of course, my “reliable informants” are themselves typesetters, so maybe they have a biassed view of the value of their own skills.

My father (a typesetter, incidentally) tells me that when he was a child there were many many more varieties of potato and apple in English marketplaces than there are now, and that many types were killed off by the introduction of industrialized agriculture after the war. The loss of biodiversity this implies surely would constitute a loss of knowledge?

A final, particularly egregious example: the relentless pressure from modern business associations to make universities more “job-focussed,” coupled with market ideology for education, leads to a reduction in the diversity of pure theory courses available at modern universities. Case in point: Vince Cable’s most recent opinions on the matter.

39

Zamfir 09.12.10 at 10:45 am

Tim, it seems to me there is less constrast between your rare earth standard and the marmelade standard.

You say that pinapple marmelade would need to be sold as for example “pineapple boiled with orange juice”. But would that not be very similar as the results of the rare earth standard? Someone selling something that is not 99% scandium according to the definition of the standard would have to use a more detailed, less standardized description.

You also mention direct contact between seller and buyer as a way to communicate things outside of the standard. But what is stopping people from writing to the Deep South Fruit Company to ask wehre their Pinapple Marmelade is sold, and getting a response back that in the EU it is sold as Pineapple Delight?

The differences seem to come more from different markets more than from the origin of the standards. The far majority of supermarkets shoppers will not read detailed descriptions, nor contact the producer directly. That can make labelling standards overly restrictive to sellers, but on the other hand it produces a pressure to ignore non-binding standards, and put some cheap apples in your 70% Fruit Marmelade

40

piglet 09.12.10 at 5:17 pm

Tim, that directive is indeed grotesque. According to http://de.wikipedia.org/wiki/Marmelade, German producers were indeed forced to rename “Marmelade” (which in German means “jam”) into “Konfitüre” (which traditionally denotes a slightly different kind of jam) except on local markets, which are covered by the exception in the amendment. I had no idea English imperialism was alive and well in the EU…

This kind of standardization that disregards local traditions breeds a lot of anti-EU resentment.

41

Current 09.12.10 at 8:17 pm

The key point here is that markets use local knowledge only if the costs outweigh the benefits. Veering from established standards often imposes costs, which must be overcome if the venture is to be worthwhile. Hence, “path dependency” arises.

The evolution of a footpath is another example of the same phenomenon. A footpath through a wood may evolve that takes a circuitous route to a destination. But, people may continue to use it because of the extra problems associated with hacking through the wood in a more direct way. (I don’t think Hayek would disagree with any of this).

In the past I’ve worked on designing electronics products for mass production, where I dealt with some of the problems mentioned. Let’s suppose your designing a module to be assembled into a electronic product on a production line. The designer can choose to depend more or less on the skills and knowledge of those working on the line. A product assembly process could be totally standardised within a company and planned so that a low-skilled person could do each task. Or, it could leave more leeway for individual initiative.

There are many choices that can be taken, each with their own risks, costs and possible benefits. A very highly standardised line is complex to design, it requires a great deal of costly process engineering, and it restricts aspects of the product. It risks leaving useful local knowledge on the table. A less standardised line requires more skilled people which is more costly. There is a greater risk of quality problems because of human error.

PCs are a good example of that. The mass-market ones I’ve worked on have used highly-standardised assembly methods because the costs associated with those are amortised over many units. More boutique computers often depend much more on the skills and local knowledge of the assemblers.

Incentives matter a lot here. In a line where people are paid only by the hour there is little incentive for them to veer outside of the standardised process. But, if there is a bonus for productivity then they have more incentive to find quicker assembly methods. But, that type of bonus is a double-edged sword, because it may encourage short-cuts to be taken that harm quality.

At the company I worked for line workers were bonused for productivity. When a new product was introduced there would be an official assembly instruction created by the process engineers. Very quickly the line workers would create there own assembly method. This would contain some genuine improvements. But, it line workers would also find ways to faster assembly that sacrificed quality. (For example, using floppy disk drives as hammers). The process engineering teams would attempt to integrate the improvements into the official instructions and eradicate the bad habits.

Of course there are many mistakes made in deciding these sort of trade-offs. But, how is a centrally planned organization to make those sort of trade-offs at all?

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TGGP 09.13.10 at 3:03 am

Oliver Williamson won the sort-of-Nobel in econ recently for his study of the economics of hierarchy instead of markets (more specifically, firms). But like his co-winner Ostrom, I suppose it would be fair to say that his work is not representative of economics broadly.

43

Alex 09.13.10 at 8:40 am

Isn’t it also possible that standards communicate knowledge? I don’t need to invent my own way of integrating HTTP and a public-key infrastructure, because implementing HTTPS guarantees that somebody has already solved those problems.

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Tim Worstall 09.13.10 at 9:06 am

“German producers were indeed forced to rename “Marmelade” (which in German means “jam”) into “Konfitüre” (which traditionally denotes a slightly different kind of jam)”

I didn’t know that: sounds like German makes the same distinction Russian does. There’s (can’t remember the word for it now) jam and then there’s posh jam, one with lots of fruit in it which is “confitura”.

45

Pete 09.13.10 at 10:58 am

@ Tim 44
So I would and do argue that industry standards, organically grown standards if you like, ones which grow out of market participants agreeing to have them, are different in kind from those imposed by fiat…whether by the State or by any other holder of sufficient power to insist upon them (and I find it difficult to think of any other actor with that power to insist other than the State……even if Tesco insist that they’ll only sell Grade 1 bananas there are still plenty of other outlets for excessively curved ones….and the Codex Alimentarus where those banana standards comes from only defines what is a Grade I banana. It doesn’t say that other than Grade I are illegal to sell….which the EU implementations do with some of the specs they’ve taken from hte CA).

Seems to me that Apple, Microsoft and the gang have been using market power to impose unhelpful standards for some years now. No-one wants to buy music that only plays on one make of player, or be tied into using one sort of word processor if they don’t want their footnotes to end up all over the page, but for some reason those are the standards we’re stuck with. It’s not an original point, but intellectual property law provides all sorts of ways for companies to impose standards and make it illegal for others to deviate from them.

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mw 09.13.10 at 1:02 pm

Certainly markets can handle sales and distribution of non-standardized products on an international scale — think of wine, cheese, coffee and other products that are sold in distinct regional varieties. That nobody (yet) markets bread made from ‘Saskatchewan Wheat’ the way they do ‘Shade-grown Ethiopian Coffee’ is not a sign that markets inevitably produce a drive toward standardization — they don’t. What drives standardization in such markets (when it occurs) is a combination of changing tastes, affluence, and the relative costs of standardized vs ‘artisanal’ products. We’ve certainly seen market-driven (or at least market-accommodating) trends away from standardization in our lifetimes (beer, bread, fruits and vegetables, music, television). I have a hard time thinking of any cultural product where there is not more variety now than when I was a kid in the 1960s and 70s.

What’s more, often prevents or retards this process has been the state standing in the way. The micro-brew revolution in the U.S. could not have occurred without the lifting of the ban on home-brewing, while ‘craft distilling’ is still crippled by such laws:

http://reason.com/blog/2010/09/01/free-the-shine

The ‘locavore’ movement is clearly being hampered by heavy-handed regulation:

http://www.mindfully.org/Farm/2003/Everything-Is-Illegal1esp03.htm

Sometimes the state doesn’t simply hinder, it actively destroys existing markets for artisanal goods, as in the U.S. with the CPSIA:

http://handmadetoyalliance.blogspot.com/2010/05/beloved-minnesota-toy-store-essence-of.html

No, where consumers prefer variety over standardization, markets will produce it — except where the state stands in the way (as it too often does).

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Current 09.13.10 at 1:04 pm

“Isn’t it also possible that standards communicate knowledge? I don’t need to invent my own way of integrating HTTP and a public-key infrastructure, because implementing HTTPS guarantees that somebody has already solved those problems.”

I think that that’s true. A standard like HTTP doesn’t preclude other people creating non-standard communications systems. But, it provides a standard system, engineers can see if that system is adequate for their purposes and adopt it if it is. The choice of using special local knowledge is always there, if a standard exists that’s just an alternative to it. There may be great costs associated with doing something non-standard, but that simply reflects real costs.

Fuels for combustion engines are a good example of this. An engineer designing a new engine can use one of the standard fuels such as petrol or diesel. In doing that he or she leverages the knowledge associated with those fuels, and the huge distribution networks that exist. Using a non-standard fuel requires much more work, and much more cost. It can only be justified if the benefits of changing are great. That’s why there have been few new fuels introduced for combustion engines.

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chris 09.13.10 at 1:16 pm

Seems to me that Apple, Microsoft and the gang have been using market power to impose unhelpful standards for some years now.

Or trying to. MP3 is the standard music format in spite of the corporations’ best efforts — they can only nibble around the edges by determining what format to sell in their own stores, but even Apple still has to *play* MP3s or suffer a catastrophic loss of market share.

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Pete 09.13.10 at 5:45 pm

Or trying to. MP3 is the standard music format in spite of the corporations’ best efforts—they can only nibble around the edges by determining what format to sell in their own stores, but even Apple still has to play MP3s or suffer a catastrophic loss of market share.

Granted: it doesn’t always work. I just thought it was worth pointing out that it’s not like the state has a monopoly on daft standards. Private parties and industry consortia, left to their own devices, can come up with standards that make Brazil look like a Getting Things Done instructional.

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Donald A. Coffin 09.14.10 at 12:51 am

What struck me when I first read this argument is that it emphasizes the *supply-side* issues–what profit-motivated producers choose to produce (focusing on cost-related argumentsm in the main)–while ignoring demand0side issues.

Consider, for example, the low-prices restaurant market, in which standardization (McDonalds, Burger King, Wendy’s, KFC, Taco Bell…) is quite prevalent. And (anecdotally) the range of options in the low-price restaurant market is musch smaller than it was when I was first noticing such things (the 1960s). Now consider the issue from the point of view of potential customers.

What standardization does is to reduce the risks attached to the choice one makes of where to eat. Chains, in fact, are more vulnerable to consumer choices based on minimum quality standards, because those choices will affect sales across all their stores, not just resulting in the decline or failue of an individual seller. So chains have a greater (demand-based) incentive to develop and enforce minimum quality standards. And in doing so, they reduce the risks for consumers when choosing where to buy.

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Ellis Goldberg 09.14.10 at 3:13 am

If a complete outsider could add a few random thoughts based primarily on study of commodity markets in Egypt in the 19th and early 20th centuries. I think some of you are confusing the idea of standardization with standards, including those for high-quality goods which can be an attempt to segment markets and reap a quality premium. Shade-grown coffee is precisely such an attempt at market differentiation and has little to do with local knowledge as such; it certainly avoids what I believe is a rather crucial piece of local knowledge, namely that children often pick the ecologically sound and tasty beans. That piece of knowledge is hidden for obvious reasons. Large firms (and not markets in a generic sense) often require standardized inputs so they like natural raw materials to be as uniform as possible. I believe they often communicate this to producers by, well, communication rather than markets. In agriculture the uniformity (standardization?) is accomplished by biotechnology (and yes they had a Victorian form of it through plant breeding). Firms pay a premium for standard goods just the way that many people pay a premium for fancy coffees, wines, and cigars. And all of these standards require state regulation to back up the “local” standard–otherwise you get (horror of horrors) Champagne from California, Monte Cristos from Nicaragua, or Brie from Wisconsin. So you have groups of people with specialized knowledge (also called brokers) who supply goods to markets with the required socially produced characteristics. And then you can use financial technology to transform non-standard goods into standard ones–every oil well in the world has a slightly different mix of petroleum but (like wine) it can be blended to a standard (such as WTI or Dubai–which ironically produces almost no oil) and then people pay or are paid depending on whether the actual commodity is “better” or “worse” than the standard. These markets appear to be markets for standardization but also for storage and insurance and generally meet the needs of both large firms and speculators. There are commodities markets in wheat but not tomatoes; in financial instruments but not in automobiles; in chips (silicon) but not chips (potatoes) although there are such markets for raw potatoes (but not I think for raw silicon). These are extremely complex social organizations, much more so (I think) than any other economic institutions studied by sociologists or political scientists. These markets are, essentially, markets in the creation of private money denominated in commodities. I’m told that this is not a possibility because all trades are offset and risk minimized. But I’m not quite so sure given that there have been some dramatic imbalances in such markets on occasion, most recently when the Hunt brothers tried to corner the silver market. For anybody remotely interested I actually wrote a book about this stuff.

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David 09.16.10 at 6:26 am

A minor bone to pick with Scott is his treatment of Witness. He’s welcome to think it a banal film (though it feels a bit impolite to use it as an example while also slagging it off). But he has conflated different bits of the plot in a way that sort-of strengthens his point. (The film Peter Weir actually made is more subtle, but could equally well have supported what Scott is saying here.)

If I can’t trust Scott on a 25-year-old fillm easily available on DVD, why should I believe him on Prussia or Tanzania?

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Boban 09.16.10 at 8:35 pm

Red delicious apples. Standards imposed by growers and buyers eventually resulted in bright red tasteless apples. Most consumers STILL go for it (apples should be bright red they think, and these apples are labeled delicious so they must be), but the more discriminating marginal consumer does not. Thus we have a decade long resurgence of tastier, somewhat obscure, non-standardized, and usually more expensive apples.

I would also note that while commodities may be “standardized” at many points in the supply chain, the end consumer will sort the bundle very efficiently choosing among the standardized product along a variety of predictable dimensions. The bruised and wormy apples well sell last and/or for less regardless of the standard. Seems to me that the market mechanism is at work here as well.

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