Tim Harford wrote ‘The Undercover Economist’ and also writes the ‘Dear Economist’ column for the Financial Times. His book is excellent — a very readable introduction to economic theory and how it applies to various facets of everyday life. I was going to write him a letter, but then I found out that he’d sold half a million copies of his book and so, reckoning that he’d be too busy to write back to me, I am posting my thoughts here. This is partly for my own benefit as a note-to-self and partly because I’d be very happy to get answers from anyone or everyone on the questions I ask. Useful references are an acceptable substitute for wordy explanations.

Dear Undercover Economist,

On development — can everyone be rich? Won’t there always have to be someone to work the fields / clean the toilets / serve the coffee? Technologists answer: automatisation will remove much of life’s drudgery. Environmentalist retort: resources put limits on growth. Economists: imagine a world where every economy is ‘developed’. In that world we would expect to find people are wealthy according to their talents (because talents define scarcity). My question : in that world, what will the utterly talentless be paid to do with their time? Presumably we’ll still be forcing them to clean toilets, because the toilet-cleaning robots will be too expensive (they need to be in order to pay the wages of the very-expensive-to-hire toilet-cleaning-robot designers).

Information asymmetry: Akerlof (1970) has a description of how information asymmetry can prevent a viable market existing. Harford’s discussion credits to information asymmetry the reason why you can’t get a decent meal in tourist areas, but I am wondering if the effects are far more wide reaching that this. Big organisations will have an information advantage over individual consumers (on some things), as will anyone who devotes their entire economic energy to a single domain (eg selling avocados) over someone who is time poor (eg the typical avocado buyer). Coupled with a dynamic economic environment, couldn’t those with informational advantage effectively manipulate those with informational disadvantage? In other words, i’d be willing to bet that in a static market even an extremely informationally-deprived / cognitively challenged agent will work out the best deal, given enough time. But if the best deal keeps changing (and those with the information advantage keep changing it to suit their ends) the chances of the individual agent aren’t so good. File under benefits of collectivisation / market failure?

Efficiency of the market leads to loss of diversity (because all inefficient solutions are squeezed out). Diversity has it’s own value, both in system robustness (see ecosystems) and in terms of human experience (belonging to a specific place, variety being the spice of life, etc). So how do we incorporate the value of this diversity into market systems? I would submit that diversity is an example of something that exists above the single-agent view of things — is an example of an emergent phenomenon (see below). (Previously on idiolect Why is capitalism boring?)

Markets don’t have foresight. Do free marketeers admit that this is one of the functions of government? For example imagine agents who like to consume some finite resource. Presumably a ‘free market’ will be the most efficient way to organise their consumption. Efficient consumption of the resouce leads to its disappearence. Then what? In the Undercover Economist (p237) Harford says that in markets ‘mistakes cannot happen’ because any experiments with resources stay small scale. I would submit that while this is true at the micro level, with respect to efficiency — in other words, I agree that markets tend to efficiency — this is not true at the macro level, with respect to whole-system health.

An objection to this is that markets do have foresight because the individual agents have foresight – so they will incorporate into their cost function the anticipated future (so, eg, anticipated future resource availability). But what is agents do not have the information, or motivation to worry about the future? Does my concern just resolve down to the existence, or not, of the tragedy of the commons? Perhaps. I think key is the existence of a discontinuity between agent-level information and collective-level information; ie the issue is really about emergence, which is what the tragedy of the commons is really a specific example of.

Side note: if you are a market economist you are a de facto fan of emergence. Aggregate effects which emerge from mass individual action = emergence. Disconnection between individual goals (eg profit) and collective outcomes (efficiency). Etc. Economics is interesting precisely because their are non-obvious relations between agents and outcomes.

Side note the second: there is an essential similarity between economics and cognitive psychology – a focus on information processing. Further, market economics recognises the power of distributed information processing, as does the connectionist school of cognitive psychology. This is the reason I talk about agents, rather than consumers. I believe that the same principles will not just apply to the economic and social sciences, but also to the social sciences (remember Minksy’s “Society of Mind”). A question: can we usefully apply the idea of a distributed, free, ‘informational economy’ to undestanding neural coding? (Remember Glimcher’s “Neuroeconomics”)