Wednesday, November 11, 2009

Quality is a Market Notion

Quality is a Market Notion
by Jim Fedako

Published by The Ludwig von Mises Institute

For generations, products have advertised themselves as "new and improved." We are too quick to dismiss this phrase as a promotional boilerplate. The market really does generate unrelenting improvements in our living standards. Meanwhile, the public sector is forever promising to improve its services and products but every attempt creates only conflict and eventual stalemate.

For example: the proposed solution to the ills of public education is for government to raise the quality of teachers by increasing salaries and certification requirements. The belief is that a better workforce will lead to better educational outcomes and an improved economy.

Of course the adjective better has no agreed upon definition. Every pressure group and political faction has its own definition of better. Mostly these disparate definitions contradict each other. Regardless, the call for better continues to grow louder each election cycle.

There are perceived ills in the free market too — not ills in the same sense as discussed above, but ills in that all consumers have wants that are unmet. The argument for better can be applied to any sector of the economy. Better factors of production are always sought since acting man desires improvements in consumer goods; improvements that are reflected in increased selection and quality, as well as lower price.

In this case, the adjectives better, improved, and increased can go undefined since they are subjective value judgments of each individual consumer. No one needs to define them in literal terms; the actions of consumers define those terms as ends that are either satisfied or unsatisfied. More importantly, acting man does not need government bureaucrats or commissions to codify such terms for quality. The entrepreneur knows he matched the market definitions of better, improved, and increased simply by looking at his profit-and-loss statement at the end of each accounting cycle.

That better factors are not simply added to each and every recipe — the directions for producing desired goods — is explained in one simple word: scarcity. Scarce factors have to be correctly employed in the production of the most sought-after ends. Any other application leads to accounting losses and financial ruin for the entrepreneur.

Entrepreneurs have more solutions to the unmet wants of man than capital goods. Capital goods are required in the creations of factors of production, which are themselves required in the production of consumer goods. Using resources to produce goods other than those most wanted leads to economic losses, as does using goods inefficiently to produce most-wanted goods. Consumers buying and abstaining from buying along with double entry bookkeeping provide guidance for the allocation of factors of production.

The socialist utopian belief that the burden of scarcity can be lifted with the correct utilization of current capital and factors of production is still prevalent. The line of thought goes that once the altruistic and omniscient bureaucrat grabs the reigns of the economy and guides the factors to their correct application, scarcity will fade away and the Land of Cockaigne will appear on the horizon.

But this is not reality. Scarcity will always be with us as long as man's desires exceed his ability to satisfy them. Of course, once scarcity is lifted, once all desires are met, society will meet the same fate as the ants in an Uncle Milton's Ant Farm: it will quickly die off.

At any given point in time, each factor is limited. Successful entrepreneurs recognize this and direct scarce resources to the most pressing needs. Government, on the other hand, recognizes no concept of scarcity. It only sees one side of the equation, or only one result of its actions. Government functions counter to Hazlitt's admonition to see the unseen; to look for secondary effects of any proposed action.

It's important to employ resources and factors where they will have the greatest effect. The successful entrepreneur would not use a high-quality diamond in a simple industrial process when a low-quality one would work fine. A CEO would not place his or her CFO in the company cafeteria to run the register simply because a $10 cash-versus-sales shortfall was being reported on a daily basis. To employ a highly skilled and hence scarce resource to chase the odd $10 would be wasteful and inefficient.

Human qualities are indeed scarce resources. No one would suggest that Joe Paterno would be most efficiently employed as a high school junior varsity coach. Would Joe Pa be effective? Of course he would. Would it be the best use of such a quality resource? Of course not. Many less experienced coaches could achieve the same result, though those same coaches could not generate Joe Pa's lifetime college win record.

The same goes with other scarce resources. Would Mises have generated the greatest bang for the buck teaching eighth grade economics? Would the resource known as Bill Gates be most efficiently employed as a ninth grade business teacher? How about Einstein as an AP physics instructor? It depends on who you ask.

The socialist utopians truly believe that a Mises, a Gates, or an Einstein would be most efficiently employed in the classroom. They have no concept of scarcity of human qualities and have adopted Trotsky's vision of all men rising to the height of Goethe and beyond. A utopian's fantasies do not allow him to see the world as it is. His epistemology is invalid so his beliefs and conclusions are errant.

Mises said that only a handful of any generation has the abilities to advance economic knowledge, and indeed he was correct. But to coerce the best and brightest to become primary and secondary teachers is to rob future generations of essential knowledge. The same can be said of the use of tax dollars to guide such geniuses into the primary and secondary classrooms by raising the incomes of teachers above their marginal product.

The unhampered free market correctly allocates resources to their best use. Interventionism changes the allocation so that resources are applied to uses that are not beneficial to a society. Government loves to create roadblocks to entry into fields of choice.

Raising teacher certification standards above that required by the desires of man simply creates shortages where none should exist. Attracting the best and brightest with too-high salaries — salaries above their marginal product — or by creating shortages (real or perceived) succeeds only in raising the cost of education; it does nothing to solve the ills of a government-run education system.
Because of this, education is best left in the hands of the free market. Under a free market, the allocation of scarce human qualities and knowledge will be matched to the desires and wants of man. Public school math teachers, gym teachers, librarians, etc., would be paid exactly what they produce; no more, no less.

Should the desire for knowledge garnered in a ninth grade business class exceed that of the desire for faster and cheaper personal computers, Gates would find his most remunerative employment in the classroom. Otherwise, keep the Miseses, Gateses, and Einsteins of the world out of primary and secondary classrooms, and keep government out of education. We will all be better off.

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