When each of the individuals belonging to a given group acts animated by its own objectives, the result could be chaotic, or, on the other hand, an order could emerge. In the latter case, order would be established without the intervention of a super ordinate authority with respect to the individuals themselves eg: the coach of a football team; the government authority that imposes a certain regulation). In this case we speak of a 꽁머니 order that arises spontaneously; of a coordination that takes place without the intervention of a “central” authority.
Spontaneous order and decentralized coordination
In the economic systems of the planned type there is nothing spontaneous in theory. Coordination is imposed by the center. The allocation of resources is imposed by the center.
In a market system, the allocation of resources is determined in a decentralized way. Coordination between individuals is made possible by the pricing system.
Naturally, it is necessary to distinguish between a pure market model in which the allocation is entirely determined by the choices that each makes on the basis of the observation of prices alone (which correctly reflect the “social value” of the resources), from the real market economies, in to which the allocation of resources is determined “also” by prices (which however may not reflect the “social value” of the resources)
During these lessons you will often hear expressions such as “Spontaneous order”, “Decentralized coordination”. Common to these expressions is therefore the idea of an order that is realized without the intervention of a superordinate authority with respect to individuals; of an authority that can to some extent determine behavior.
Does free trade always ensure socially satisfying outcomes?
Not all mutually beneficial exchanges take place.
Economists use the expression “market failures” to indicate cases in which the coordination that occurs spontaneously between individuals is not socially satisfactory.
The cases in which this typically occurs are the following:
management of common resources (commons)
provision of public goods
presence of externalities
market power (e.g. monopoly, etc.)
presence of information asymmetries
In all these cases there are mutually beneficial exchanges which are not made by rational individuals interested in improving their position. The market failures are the result of circumstances which on the whole outline a situation similar to that described by the “prisoner’s dilemma”. All the individuals involved in this situation act rationally, but the outcome is socially unsatisfactory.
Individual rationality and socially unsatisfactory outcomes
The Prisoner’s Dilemma well exemplifies a situation in which each individual rationally pursues the maximum individual advantage but the outcome is socially unsatisfactory.