Resource Allocation

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Resource Allocation
24/08/14


One key quettion for any economy is how should resources be allocated.

Allocating Scarce Resources
In an aeroplane, how much leg space should be allocated to each person. Should we be squashed like sardines? That would reduce the cost, and allow more people to travel. Or should we accommodate the intense discomfort of sitting in a cramped area amd acknowledge there is more to person-travel than carting sacks of potatoes?

How many people should we allocate to building new homes, and how many to build swish new contents to make those homes more appealing? Should we move some of those people from house building to road building, to increase the capacity of moving heavy materials around the country to reduce the cost of house building?

How far ahead should we predict what we think people will want? If we do not predict far enough ahead, we will never have enough goods or services available to meet demand. If we predict too far forward, we can easily create unwieldy structure that take enormous amounts of time, and personal distress for some, to dismantle the over-productive capacity to meet the lower demands of a recession?

Over the last few centuries, we have had two models that deliver these decisions.

Autocracy
Centralised power usually involves a handful of of very bright people makint the decisions. This is usually flawed because of the need to maintain concentration of power. It is difficult to avoid corruption, decisions being made that benefit the decision makers or supporters, rather than everyone. Progress is usually limited by the limited human capacity for wisdom. Complex economies that are powered by thousands, millions or even billions of immensely complex people, cultures, beliefs, skills, attitudes and interactions are way beyond our ability to process all the salient points. And the greater the concentration of power, the smaller pool available to come up with decisions, innovations and motivation.

Destructive Competition
Distributed power involved any degree of distribution of decision making. In a capital economy, we use the monetary system to motivate people to make decisions of production. It is hugely sophisticated. Money attempts to creates a system of equivalence. It allows a capitalist to judge how much people want ice creams in fantastically hot climates, with how many people want water in fantastically poor climates. One problem is that money is too limited to provide reliable comparisons - although it is the best we have come up with to date. It also relies on competition to sift out the less effective decisions from the more effective ones. But raw competition fails in two key respects. Firstly, competitive grazing of cattle will almost always create a few wealthy farmers in the short run, and a unproductive, overgrazed fields in the long run. We fish to extinction. We burn energy to destruction. We throw money at financial basket cases if there is someone else stupid enough to buy that asset. We come up with multi-billion pound projects to allow the rich to enter space for 10 minutes, without regard to the millions of people whose lives could be saved by spending that money on mosquito nets to eradicate malaria. Secondly, it relies on decisions being made for everyone based on the sole interests of the person making the decision. The more effectively one person/group competes, the quicker the restraining hand of competition is eliminated. Monopolies and oligopolies in individual industries are better that a predominant, single autocratic ruler at distributing power. But they do not have a good track record. This system can be called Destructive Competition.

Collaborative Competition
There is a very real prospect of developing a third method of distributing power - to communities whose interests consider the entire community at least equally to the interests of the decision makers. A major challenge to this method of distributing power is the vested interests of the kings and queens of destructive competition. There is enormous evidence that this disruptive system delivers infinitely greater creativity and better allocation of resources that serve the wider community. This disruptive system Collaborative Competition.

It is almost certain their individual interests will be subsumed over the long run in favour of the interests of the wider society. They currently have the power. Why would they want to give it up?

A key question arises for the people who govern an economy. What is the purpose of society, and how is the purpose best achieved in the long run? The wellbeing of society at large over the coming 50 years is completely dependent on how the architects of power resolve this emerging, distruptive model for competition. In democracies at least, our future is in our own hands.

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