Competition and Coordination: The Invisible Hand
Microeconomics: Chapter 9
February 22, 2007
I. Introduction:
According to the text Understanding Capitalism, “markets provide a way for individuals and firms to organize some aspects of their interdependence; as they do this, markets coordinate the many complex activities that make up the economy, with no one in particular directing the process” (200). The topic discussed addresses coordination by rules, coordination by command, the invisible hand, and the dimensions of market failure.
II. Coordination:
Coordination refers to a horizontal dimension of economy. Rather, “a circulation of goods, services, and people is called the horizontal dimension because from this perspective things and people do not move ‘up’ or ‘down’ in the economy…they move ‘across’ from place to place” (200). This dimension allows the movement of things from one place to another, initiating self-sufficient individuals and cultures. Coordination allows individuals, and families to specialize; causing them to engage in a type of exchange between different units. The specific methods of this type of economic coordination are: caste, custom, plan, gift, theft, and tribute. This traditional means of coordination is what makes up markets and planning in today’s society.
The text addresses how coordination can be achieved. Most commonly it occurs by rules and by command. Coordination can occur, “with no one dictating anyone else’s precise behavior, but everyone observing a set of rules, or with someone directing the behavior of others”. First, coordination by rules occurs when interactions are governed by general principles of behavior; obeying orders. A rule specifically addresses behaviors that are approp ...