This is the mystery we’re trying to solve : The United States is a big country. It has over 300 million hungry people who need food every day. How do they get fed?

 

The way we handled this problem back in the bad old days was, everyone would grow their own food. There weren’t many people back then, maybe not 300 million in the entire world.

 

The way we handle this problem today is, nobody makes their own food. Nobody makes their own anything. And as a result, there’s a lot more of everything.

 

In the bad old days, people were self-sufficient. Not literally, of course, but pretty near to it. People grew their own food, built their own houses, made their own clothes. And they were poor. Nowadays nobody makes their own anything, not even to sell. And people are rich.

 

Not too long ago someone tried to make a commercial-quality toaster from scratch. He failed. He couldn’t make the toaster--literally, it was completely impossible for him, a single human being, to make something as mundane as a toaster without any help. He had to cheat, and the toaster was still a terrible mess.

 

It’s not hard to get a toaster if you’re willing to enlist human help. You go to the store. You buy a toaster. It’s pretty simple. They’re not special-made artisan products that only come in on special occasions and people rush and trample each other to acquire them. Nobody ever worries about running out of toasters. Nobody ever worries that their might not be toasters in the stores, or that the group that makes toaster might have some kind of problem and the toaster supply will disappear.

 

But nobody can make a toaster. So how do toasters get made?

 

How does anything get made?

 

Things get made because people don’t make them on their own. Things get made because every member of the economy cooperates to make neat things like toasters together. People don’t make things; the economy makes things. The things people work on in the economy are by themselves totally worthless. If people were not participating in the economy but were instead self-sufficient, and they worked on the things they work on today, they would appear utterly insane (and would soon starve). But it works, because everyone contributes a little part of the economy, and the whole thing churns out an amazing output that is the source of our historically sky-high standard of living. It’s called the division of labor, and the farther we progress along the division of labor, the richer we get.

 

Now this all raises is a very interesting question, which is how any of this is possible. The United States has 300--wait, no, it’s a global economy these days. If there’s 6 billion people in the world, half are children, another 1 billion are barely capable of participating if at all in the global economy for whatever reason, then that’s 2 billion people who make up the global economy. They’re separated by distance, language, culture, history, even hatred and bigotry. But something gets them all to cooperate.

 

And as for what these 2 billion people are producing, well, I haven’t the faintest idea of how to go about estimating how many different of goods and services are sold in the world, but it’s a lot. Call it a million--a million different things are sold in the world. That might be an overestimate, but I also wouldn’t be shocked to learn it’s an underestimate. 

 

So here’s the problem: how on earth are these 2 billion people making these one million different goods and services possibly coordinating? Doesn’t that sound of impossible? I mean, it’s hard enough to get a group of a dozen people who like each other and know each other well to coordinate effectively. Now 2 billion people, a lot of whom hate each other, are supposed to coordinate on an incomparably complicated task? Yeah, right.

 

But everyday, there’s food in the supermarket. The stores are stocked, everywhere, with dozens or hundreds of different items, at affordable prices. And if one store doesn’t have what you’re looking for, you just go across the street to their competitor to get what you want.

 

So it happens. They coordinate. At the very least, those 2 billion are fed every day.

 

It certainly isn’t because people consciously choose to make this all work. The vast majority of these 2 billion have no idea of what it really means to be part of the global economy. They have no view of themselves as part of a 2-billion man machine that outputs a huge array of goods and services. And if these people could see all the people they cooperate with every day, they might be horrified. Because right now racists are toiling away for the benefit of peoples they despise, and in turn gladly buying and putting to good use the products of people whose hand they were never shake. 

 

No, people don’t do their part in the economy in order to cooperate with others and make the economy work. They work on their small part because that’s their job. Their boss told them to. Their focus is on their tiny slice of the economy. They toil away for their paycheck, not to may the economy work, not to cooperate or coordinate with anyone beyond their boss and co-workers.

 

So the economy doesn’t coordinate because people choose to make it do so. Maybe instead the economy is centrally directed by some powerful, smart organization?

 

As a matter of empirical fact, I’m pretty sure the global economy isn’t centrally planned. And those parts of the world where production decisions are by and large made by the central government are poor, despotic places. Whenever central economic planning is substituted for decentralized coordination where decentralized coordination is possible (i.e., not ruled out by transaction costs), the result is less coordination and production, not more.

 

So how does the economy coordinate? Broadly, there are three elements that allow such an extensive division of labor to occur with such apparent ease:

 

1. Restricting the domain of people’s actions to their own self-interest;

1. Prices aggregating most of the information in the economy, and;

1. Competition promoting the best-coordinating activities and institutions and killing off the least-coordinating activities and institutions.

 

We’ll start with self-interest tomorrow.