When one wants to talk about examples of coordination through simple rules, they're two kinds of
transactions.
One of them are sort of outright transfers of goods and the other is cooperative behavior.
When you're dealing with an outright transfer of goods, it's not as easy as you think.
You have to figure out when delivery is going to have to take place.
You're going to have to figure out what conditions have to be satisfied in order for the buyer
to take the goods.
These will typically involve warranties, having to do with the ownership of the good called
warranties of title, or warranties of merchantability.
And it's extremely difficult for anybody from the center to tell you what terms and conditions
to a sale are to be done.
More importantly perhaps is there is no way any government agency can tell you what the
price ought to be for any particular goods and services that are sold by one party to
another.
What a market does that a government cannot do, is to set a price for sale or a price
for labor, which leaves both parties better off than they were before.
When government set these prices, it can easily create a situation in which one party would
want to move away from the deal.
Uh, the similar problem arises when you're trying to do coordinated behavior.
Uh, the simplest arrangement in this particular point is generally speaking a partnership.
Let's assume that you have five or six individuals who wanted to get to put together a startup.
What they're going to have to do is to develop basically a framework in which they can divide
the gains and losses of the venture on the one hand, and determine their obligations
on the other.
With respect to the first part, generally speaking, the rules are usually pretty rigid.
Each person knows how much they have to contribute to the business, and what fraction of the
profits they're going to take out during this operation, or upon sale or liquidation.
But the day to day operations and the startup are completely chaotic.
And the effort to try to specify in advance with each of these partners is going to do
is, generally speaking, an impossibility.
Partnerships, essentially, cannot specify at the outset all of the rights and duties that
people will have given the huge number of unforeseen circumstances that could arise
in any kind of new business.
Think about the way in which a startup is going to work and you could realize that
business plans can change as much as every day.
And so, what the common law rules have always done is distress the notion of good faith
behavior.
What the rule essentially means is that each of you when you're engaged in your partnership
activities act as if the welfare of your partner is of equal dignity and of equal importance
with your own.
Uh, this is hopeless to do in large social arrangements where people are strangers to one another.
But the great advantage of a partnership is you get to pick your partners, and if you
pick people whom you trust, the chances are that the good faith obligations can be much
more faithfully observed.
So, the secret about partnership is selection of trading partners on the one hand, coupled
with the right mix of fixed rules on the one side, and then these good faith obligations
on the other.
And only simple rules can get you through voluntary arrangements to those optimal solutions.
The simple rule system that I'm talking about is the bottoms-up system, in which individuals,
essentially, by individual and cooperative action, try to devote resources to their highest
value use.
Uh, the alternative system is a top-down system in which government tries to figure out who
is going to get what particular assets and how they are to be used.
Top-down systems in the end rarely work, and the reason is that the people who are in charge
of them do not have sufficient knowledge of either the taste of the abilities of the various
individuals who are involved in the situation.
So what they must do is to sort of make commands on the basis of abstract principles, they
often miss human motivations.
They don't understand how people will subvert the kinds of commands that are imposed upon
them against their will.
And in effect they cannot figure out from descent how to orchestrate all of these divergent
interests.
So, the lesson that you sort of learn from this is since many complex ventures require
good faith coordination, the most dangerous thing that a government can do is to force
people to come together against their will.