The Benefits of Variation; J. Edwards

However, there are many important fea tures of the real world that are abstracted from the model. Austrian economists are correct in asserting that real states of market structure and competition which deviate from the model are not necessarily inferior, and may even be superior in crucial re spects. Assuming away such differences is some times useful for allowing clear focus on the relationships between a single pair of vari ables, or the effect of a single change, such as in demand or supply. The real· world, James Rolph Edwards is assistant professor of economics at Northern Montana College. however, is not only characterized by vari ation, but benefits enormously from it. Such variation cannot be ignored if economic and other social phenomena are to be under stood. Consider, for example, the fact that min erals and metals are not spread evenly throughout the earth's crust, but are distrib uted randomly with concentrated lodes in some places, and almost none in others.

Clearly, if such resources were spread evenly in the earth's crust it would not have been economically feasible to mine any of them with primitive technologies. Note also, that in the history of economic thought, this uneven distribution of such resources has been one of the prime factors in the theory of comparative advantage used to explain trade flows. Analogous to resource variability is cli mate, an under-represented factor in expla nations of comparative advantage and trade. How often do we stop to think of the great variety of products that exists as a conse quence of the variety of weather and tem perature (in combination with soils, miner als, and other factors) around the world? Many types of plants and animals, which flourish in climates a standard deviation or so away from the mean, would not exist if the mean temperature prevailed every where. The variety of our consumption options would be greatly restricted as a consequence.

Now consider human variability. The two 311 312 THE FREEMAN • AUGUST 1993 most crucial dimensions here are in abilities and tastes. Most of us go through life la menting our apparently low endowment in one or more human abilities, even though we usually have above average endowments in some others. Consider certain obvious consequences that would follow from ev eryone having the same endowment, equal to the present mean value, of every human quality. For one thing, there would have been no Galileo and no Copernicus to ad vance knowledge of the universe, and no Edison to create practical products. The basic point here is crucial: The mean intel lect is inadequate to make the kinds of discoveries such individuals make, but, amazingly, it is adequate to understand their basics once they are discovered and taught. The existence of individuals with extreme intellectual abilities therefore re sults in enormous advance in the knowledge of the general public. The absence of vari ation in such abilities would leave humanity in a perpetual primitive state, at best.

Variation in human abilities also has per vasive economic and social effects. It is another prime source of the comparative advantage that results in specialization, di vision of labor, and exchange which so greatly increase the aggregate production, wealth, and income of society's members. Associated differences in knowledge and attitudes give rise to civilized discourse and communication, the arts, and so on, without which lifewould be much less interesting. In addition, each of us can gain pleasure from the mere observation of abilities we lack being applied. Who among ordinary mortals does not thrill at the sight of Michael Jordan leaping from near the foul line and sailing through an army of defenders to make a left-handed behind the back layup? In the absence of variation in human abilities there would be no Einsteins, Rembrandts, or· Michael Jordans, and I suspect we would all die of boredom posthaste.

Such variation also gives rise, however, to differential attainment within all fields of human endeavor, hence differential ac quisition of wealth and income. Some re sentment results on the part of those who regard themselves as disadvantaged in terms of their endowment of human (or other) resources, or whose accomplish ments seem meager. It is easy to argue, however, that under at least some institu tional arrangements, specifically private property, limited government, and free mar kets, there are large social benefits that result from differential attainment of assets and wealth. Consider, for example, differential skills and attainment in business activities. One of the abstractions of the theory of perfect competition already mentioned is that it assumes away differences in managerial and entrepreneurial ability among the decision makers of the firms in the market. It is often noted that in many real world markets the bulk of assets are concentrated in the hands of a relatively few firms, who also do the bulk of sales. But given the natural variation in managerial ability and entrepreneurial talent, and the great scarcity of extreme abilities of these types, how could things be otherwise?

With a normal statistical distribution of such abilities among corporate decision makers within an industry, there will be a distribution of costs among the firms, with some being high, a few very low, and most in between. But the highest cost firms will lose market share and leave the industry, while the low cost firms will gain market share, increasing both sales and assets. In essence, assets willbe transferred within the industry from inefficient, high cost firms to efficient, low cost firms. That means not only that assets and sales in the industry will tend to concentrate in the low cost firms, which will make larger profits than others in the industry, but that industry total output (and hence market supply) will be larger and price will be lower than would be the case under an even distribution of managerial and entrepreneurial talent at the mean value. The consuming public will be en riched. This common, real world market condition is not inferior to the state de scribed by the perfectly competitive model, but superior to it, from the crucial perspec tive of human well-being.