What to produce?
The question of what to produce is one of the foundations of any given country’s economic system. How do people in a society decide what to do? How do they decide if they should produce milk or produce beef; if they should produce rice or maize; if they should produce rubber tires or plastic chairs? Of course, I am oversimplifying things as societies produce many things but stay with me here.
Consider a simple example of a farmer who has one hectare of land and has to decide what to grow. For simplicity we will assume that costs for each of the crops the farmer has the option of growing are the same (we economists and our pesky assumptions).
The farmer does a survey of various crops that could be grown on his farm and concludes that the farm will earn five million naira in that season if sesame seeds are grown. The farm will earn four million if maize is grown, three million if rice is grown, and finally two million if cotton is grown. At this point you do not need an economist to tell the farmer what should be grown. Sesame seeds are the obvious choice. For that farm, sesame is the crop with the highest level of productivity, compared to the other options.
But there is a plot twist. The farmer goes home and announces to the fam
ily, “This year we are going to be growing sesame!” The family is not too pleased. “We do not eat sesame seeds! We don’t even know how to eat sesame seeds!” The family accountant checks the accounts from the previous year and announces, “Last year we spent one million naira on rice. Surely that is what we should be growing so we stop wasting money on other people’s rice”.
The farmer laughs; by the way he took some basic economics classes in secondary school. “OK let me put it like this. We are going to eat one million naira worth of rice this year no matter what. But after we eat that rice, how much money will we have left? How much will have left if we grow sesame seeds? How much will we have left if we grow rice? How much if we grow maize?”
The family accountant brings out the calculator and crunches the numbers. “If we grow sesame seeds we will have four million naira left after eating. If we grow maize we will have three million naira left. If we follow my suggestion and grow rice we will have only one million naira left after eating. OK it makes sense to grow sesame seeds. We will be richer afterwards and still eat all the rice we want.”
Indeed, the farmer is right. The decision of what to produce does not really depend on what is consumed. As long as the farmer can buy whatever it is the family consumes then the best thing to do is always to produce the most valuable thing, or the thing with the highest level of productivity.
The farm example is a very simplified one and economies are way more complex, but the logic still applies. How do you decide what to produce, and how do you decide where to channel resources to? In general, the smart thing to do is to channel resources to areas with the highest levels of productivity and then just trade for the rest.
On an economy-wide level, it doesn’t really matter what we consume or import. If we can grow $3bn worth of maize on our limited pieces of land then why should we choose to grow $1.5bn worth of rice instead? If the goal is to get richer and have wealthier citizens then the citizens should be doing the most productive things they can regardless of what it is, and of course continue learning to be even more productive.
However, how do we decide what the most productive thing we can do is? Is it the same everywhere or is it different depending on the location or sector? Is there any guarantee that the most productive thing this year will be the most productive thing next year? All these questions are mostly unanswerable. The National Bureau of Statistics is one of the model government agencies but even they don’t have the productivity data by sector, or by region or by firm.
Even if they did, predicting the future would probably be beyond their capacity. So how do we decide what to do? Let the people decide. Let the farmer, and the industrialist, and the tailor, and the oil company each decide what to invest in. The odds that they choose the thing which they are most productive at doing is much higher than if a bureaucrat sitting in Abuja without data chooses.