the way the market transmits economic forces through the system, tending to make the actions of all market participants dovetail more closely in the system. The present chapter demonstrates how these interactions in the market economy enable it to fulfill the basic functions of any system of organization. We are not concerned here with what the market process is or with the patterns of relationships the process consists of, but with how it accomplishes what it is supposed to accomplish. Some remarks are necessary to make clear, at the very outset, the point of view from which such an appraisal can be undertaken.
Social phenomena can be examined from two distinct points of view. First of all, they can be examined merely positively. Chains of cause and effect can be proved to exist; the likely effects of particular changes can be foretold; the probable responsibility of particular prior events for definite current phenomena can be explained. Social phenomena, however, can be examined in addition from a normative point of view. The way prior causes bring about subsequent events can be judged by the success with which the process fulfills definite goals (believed by the investigator to be cherished by someone concerned with the usefulness of the process). A breakdown in a commuter bus service may be seen positively as responsible for highways swarming with an unusual number of private cars. It may be “blamed”—normatively—for the inconvenience experienced by those who use the bus service for a convenient means of transportation.
The economic theorist, too, is able to view his subject matter from both these perspectives. He may simply trace through the operation of market forces. Or he may, in addition, appraise the market from the perspective of one or other aspects of the “economic problem.” Although the concept of an economic problem is most frequently discussed with respect to an entire society, the idea is fundamentally one relating to the individual. For an individual, the economic problem consists in ensuring that the resources at his disposal be utilized in the most effective manner possible—from the point of view of the goals which he has set up. Successful solution of this economic problem requires that the individual apportion resources to promote his various adopted goals in a pattern that will faithfully reflect the hierarchy of importance to him of the various goals. If he desires goal A more urgently than goal B, and the available resources are insufficient for both goals, a “correct” solution of the economic problem requires that he allocate his resources to A rather than to B; and so on.
From the perspective defined by the goal of correctly solving his economic problem, an individual may judge his actions as being either efficient or otherwise. From the point of view of his own chosen goals, considering the varying degrees of urgency that he has assigned to these goals, the individual may frown at a particular course of action as being at variance with his goal program. Such a course of action is “inefficient,” “wasteful,” and “irrational”; it fails to aim at the most important of the chosen goals.
The goal of “efficiency” is not really a separate goal in its own right. Efficiency is nothing else, in the present context, than the consistent pursuit of other goals. Consistency in the pursuit of goals calls for a refusal to apply resources to achieve one goal when this implies forsaking a still more highly cherished goal. Inefficiency is thus synonymous with inconsistency. An inefficient course of action is one that is inconsistent with a given program of goals. A course of action that is inefficient with respect to one set of goals may be highly efficient with respect to a different set. But the point is that, in making plans, individuals have in mind given sets of goals. With respect to this set of goals, they seek a consistent, efficient course of action.
SOCIETY AND THE ECONOMIC PROBLEM
Economists frequently speak of the economic problem facing society. What they usually have in mind is something closely similar to the economic problem faced by individuals. But the legitimacy of this interpretation of the term “economic problem” is by no means clear, and the limitations on its use in this sense must be understood. Discussions that deal with the economic problem facing society assume a group of human beings, on the one hand, having numerous different desires for consumer goods and services and, on the other hand, having command of a body of productive resources. The economic problem facing the society is, once again, that of securing efficiency. The problem consists in constructing an organized social system that will most efficiently utilize the limited resources of “society” for the satisfaction of the desires of “society” for consumer goods and services. Once again a successful solution of this problem calls for “consistency”—a pattern of activity and production that should faithfully reflect the respective weights assigned to each of the goals that it is desired to satisfy.1
The limitations surrounding this use of the term “economic problem” arise from the fact that society is made up of numerous individuals. Each individual can be viewed as independently selecting his goal program. And in a market economy especially, each individual adopts his own courses of action to achieve his goals. It is therefore unrealistic to speak of society as a single unit seeking to allocate resources in order to faithfully reflect “its” given hierarchy of goals. Society has no single mind where the goals of different individuals can be ranked on a single scale.
Nevertheless, there is a sense where one form of societal organization can be termed “more efficient” than another. For example, a market economy, as we shall see, is unquestionably more “efficient” than a system of self-sufficient individual “economies,” because each individual shows by his voluntary participation in the market that he is better off under the former than the latter. Thus, each individual finds he can most efficiently solve his own economic problem by cooperating with other individuals through division of labor and the market. Any form of voluntary social cooperation emerges only because each participant seeks in this way to further his own goals. If he participates in a social system of any kind, he does so in the interests of his own efficiency; his participation is a method of solving his own economic problem.
We will be speaking of the efficiency or inefficiency of a social system in this sense. We are not invoking the notion of a society having its goals in any sense apart from the goals of the individuals making up the society. Efficiency for a social system means the efficiency with which it permits its individual members to achieve their several goals.
However, when individuals seek to fulfill their purposes through some form of social cooperation, the efficiency of the social system in the above sense depends on the degree of coordination with which the separate activities of the participants are carried on. The cooperation of individuals requires that their actions fit into an overall pattern of organization. The fundamental point is that the source of the advantages of social cooperation over individual autarky exists in the possibilities that social cooperation opens up for specialization and division of labor. It is efficient, for example, to participate in a market economy (instead of being a self-sufficient Robinson Crusoe) because the value of one’s specialized services to the market is higher than the value of all that one could produce by spreading one’s efforts over numerous branches of production for one’s own consumption.2
Now, the very factor specialization, which can make social cooperation “efficient” for each of the cooperating individuals, itself introduces problems upon whose successful solution the worthwhileness of specialization depends. Clearly, if everyone specialized in the same kind of production, specialization would be worse than useless. A social system will emerge only if the system promises individuals a way of cooperating
