Most people in economics think of economics as being a largely positive, scientific approach to studying. More than that: It is a set of questions that have answers. And they have answers in the optimization sense. And so, it could be Robinson Crusoe, or it could be an individual in a society, but these are well-defined problems.
And, one of the things that I admire James Buchanan for saying was that he mimicked Böhm-Bawerk’s claim that the way to judge an economics textbook was how many pages before it first talked about horse trading and exchange and the indeterminacy of markets.
Because, notice that for you and I to agree on a price, we have to disagree about value. The only way you and I can agree on a price is if we disagree about the value–because the price we agree on is above the one where I’m willing to sell and below the one where you’re willing to buy. So we have to disagree about that. Whereas, if you’re just using calculus, we’re all agreeing on everything.
And so, the social problem is how to choose a set of institutions that allow us to reconcile the conflicting plans and purposes of all these myriad people in society. And that’s what Adam Smith was constructing a system of. A system of propriety that does that, not just in the market, but in the larger setting.
And so, that’s a long answer to your question. I’m interested in social systems that reconcile the conflicting plans and purposes. And I want to say, as a classical liberal, we have to start from the point where all these conflicting plans and purposes–because I’m a subjectivist–they’re allowed to have those. We can’t solve it by saying, ‘Well, no, no. You all have to want the same thing.’
That was Mike Munger on EconTalk, “The Future of Higher Education.” Cost estimators, contract officers, and those in the inspector general could really learn from this reality of markets. Prices depend on conflicting views about value. A simple example comes from inherent geographical differences. One locality may be better suited to produce wine, and another spices. This creates a discrepancy in the price each is willing to pay for wine and prices, leading to an opportunity for exchange where both parties are better off as a result.
In the modern economy, the comparative advantages are a bit more esoteric. For example, an entrepreneur sees the existing constellation of products and prices, and speculates about better ways to recombine productive inputs. If she or he speculates well (i.e., innovates), then the entrepreneur has discovered a way of doing more with less, or satisfying an unrecognized need. The innovation can, for example, allow the entrepreneur to cut input costs by 50 percent. The customer, used to paying the existing price, values the product at the going rate. And so there is opportunity for mutually beneficial exchange, such as the entrepreneur reducing prices by 25 percent and keeping the rest as profit — that is, until a competitor out innovates him or her.
There is not one global “objective” truth to costs, prices, and value. Experience in the market and continuous competition is what surfaces objective prices, which nevertheless are based on subjective views of opportunity cost. Unfortunately, the DoD perceives value to based on a price that reflects input costs. That’s basically an admission that the DoD doesn’t have the people and talent to understand the intrinsic value of a product outside of input costs.
Here is Ben McMartin expanding on this in our Acquisition Talk conversation:
Subjective is a bad word in in federal contracting and guess what these things are subjective! Sorry. That’s a rough place to work. It’s an uncomfortable place to work. But at the end of the day you’re making value judgments on whether a technology will prove out what impact that technology will have, where it will fit into the system, and whether it will transition into the field. No one wants to hear that. They all want to hear well it’s a numbers game and and everybody plugs into a matrix and it spits out who the answer is and that’s not how it works.
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