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”)
12 replies on “Questions for economists”
Too many questions at once ! Although I am not an economist I am going to try to answer your questions.
On development. First, no-one is “forced” to clean the toilets. Second, I fail to see what would be wrong with a line of work that is honest and useful/necessary.
If any such thing as an “utterly talentless” person exists (something that I would deny except perhaps for severly disabled people) the answer to your question is pretty simple : http://en.wikipedia.org/wiki/Comparative_advantage Note that the laws of demand and supply apply to labour: if the supply of toilet-cleaning is low, its price will go up. Would it be better if people who are “utterly talentless” had no job at all ?
For information asymmetry : your vision is indeed too static, I suppose that you assume that the perfect competition model could somehow become real. In the real world, the relevant information is not that A is selling x cheaper than B on moment t, but that B consistently overcharges whereas A doesn’t. Now of course that doesn’t mean that nobody buys anything at B, but perfection is not of this world.
Diversity : I am flabbergasted that you would consider diversity to be a good in its own right, regardless of what the things that we are considering really are. Wouldn’t we be better off if e.g. racism did not exist anymore ? Same thing in economics. There is simply no good reason why something that does not appeal to enough people to be cost-effective would deserve to survive (and gobble up precious resources). Do we still need e.g. stone tools ?
Markets have no foresight : markets have better foresight than individual persons, for a very simple reason: there is more (intelligence, information, etc.) in two heads than in one. “The market” is not a kind of person. It is only a word for the aggregate economic preferences of the people that sell and buy the good that you are considering. “The market” is in fact a selection of people who care enough to put their money where their mouth is, so your objection about the uninterested individual falls. There is research about e.g. the prediction of election results that shows that markets beat all other “prophets” (which of course is not the same as “never make mistakes”)
I hope this will at least partly answer your questions. 😉
Hubert,
You have, as I hoped, come to my rescue! I will take these things one at a time as I get a chance.
First – on the “utterly talentless”. By this phrase I meant the people who have no *special* talents – ie their talents have no scarcity value. I agree that it is good that people have jobs, and that no one is *directly* forced to clean the toilets.
My question is about the potential for development through the market. Although useful and necessary labour can have dignity, I submit that some kinds of work will still be mostly drudgery, especially if they are the only way you spend your time (note that specialisation is implied by comparative advantage). I am asking if, in a hypothetical developed/rich market economy, toilet cleaning would still be done by individuals, and what the conditions of their labour would be. They might choose to work long hours, seven days a week, for low pay and little respect if the alternative is starvation but I wouldn’t believe this was just when it could be prevented by a little loss of efficiency elsewhere in the economy.
More to follow on other issues…
On information asymmetry – i think we have missed each other here. I precisely don’t think that the perfect competition model could become real, and I know that free-marketters don’t believe it could or that their arguments rely on it becoming real. What I am asking is if the effects of information asymmetry are powerful enough in conditions of collectivisation of producers to warrant collectivisation of consumers? If so, what does this look like? Government?
On diversity – here we have a substantive disagreement. Yes, I think that diversity is a good in its own right. As I implied in my first post, I think that diversity has benefits for system stability – this is well demonstrated in ecological models, (i think there is also an abstract paper on the mathematics of this by Norbert Weiner in Nature, but i’ve lost the reference). Additionally, diversity has benefits for human psychology – it means that not everywhere is the same, it means that you can have a sense of both belonging (to a place that is different from other places) and of travel. Finally, let me turn the question around and suggest that there are drawbacks to efficiency. These drawbacks will be found if markets demand changes quicker than a) human capital can respond to, or b) human psychology can adjust to.
On the former – formally, i think there is an analogy here with feedback control. If the feedback (ie market indications of what is efficient) changes faster than the system (ie the economy) can become unstable (ie nobody wins). See http://en.wikipedia.org/wiki/Hunting_%28engineering%29
On the latter issue, it is all very well for a steel-working job to move to Russian because it has ceased to be inefficient in Yorkshire, but the Steel-worker will will have a hard time moving at the same speed as the job, both physically and in terms of it emotional adjustment.
On markets and foresight – I take your point about markets having more foresight than individuals, in some circumstances. My feeling is that markets have a different kind of foresight than individuals. Often this will be better, the “wisdom of crowds” effect, but sometimes it will but subject to systemmatic errors (biases, “the madness of crowds”, hysterias, etc). I am not sure what I think about this. On the one hand it is possible to look back at examples of crowd behaviour and say “that was wrong, and needed some intervention”, but on the other it isn’t at all clear what kind of general scheme for crowd/market supervision would out perform the crowd/market.
This is why i think my concern may resolve down to the issue of the tragedy of the commons / market failure and what to do about it
On a tangent, the brain seems to deal with making neural systems reliable by building supervisors on top of each other – ie a layered control achitecture in which basic systems are mostly left to run themselves but which, every so often, a higher system intervenes.
One thing I should be very clear about is that markets do not necessarily produce “perfect” results; but the point is that perfect results do not exist, so what is important is the “best possible” result. That btw, is capitalism’s main marketing flaw; it does not promise heaven on earth.
So as for comparative advantage, all skills have scarcity value, but that doesn’t mean that they all have the same value.
In this world, toilets need to be cleaned, streets to be swept, you name it. And someone needs to do it. Would it be just – and cost-effective – if everybody had to take turns to sweep the streets ? And what would the people do who are now sweeping the streets when it isn’t their turn, teach psychology at university ? I actually encourage you, since yours is an essentially moral reflex, to think about the moral aspects of this, including the fact that you in fact assume that people would be unhappy cleaning toilets.
On information assymetry: the political process – lobbying to be precise – is far more damaging and costly precisely because of this reason than the market can ever be. Nobody is making the case against IP or at least some aspects of it for instance, because the public does not understand it is being ripped off : the time investment you have to make to understand the legal issues is too important, hence only people who have a big individual stake in the system – those who are ripping everbody else off – can influence decision-making. Elton John who thinks the Internet should be closed down because people might copy his songs is only a caricature because of what he actually thinks should be done, but not as far as his basic mentality is concerned. And these are the guys that parliaments invite when they discuss legislation.
On diversity: ecology is a brilliant example. When a species is not adapted to its surroundings any more, it disappears. Of course it is important that (good…) new ideas get a chance to prove what they are worth, and that actually happens. But old ideas that failed deserve to disappear, to clear the ground for something else. Getting to the point of your steel-worker, I hope I don’t sound callous, but do you notice that people resent capitalism when it redistributes wealth ? And why would the Briton who loses his job be more important than the Russian who gains one, especially when you take into account that it is much harder to be jobless in Russia than in Britain.
On foresight : as I said, nobody pretends that the market would be infallible. The important point is to compare its efficiency with government. And I think there is no question about who wins here.
The major point, which I think you understand very well and act upon, is that “markets” are other people, and that limiting the market is limiting other people’s rights. What it boils down to in other words is, “do I accept that other people might not share my ideas ?” That’s why I think ethical consumerism is a very valid way of advancing your ideas, both in terms of morality and efficiency.
On toilets. You’re right that it’s a prejudice of mine that I was assuming that cleaning toilets wouldn’t be a satisfying life. Nonetheless my general point was that a) there will be some jobs that are more drudgery than others and b) these jobs will *additionally* but done under worse conditions – precisely because the relative lack of scarcity of the talent for performing those jobs. My question: isn’t this an inevitable outcome of free market organisation of labour?
On everything else: I take your points but remain interested in the issue of market failures. I’m interested in – firstly – whether we can indentify common features of situations where markets will fail and – secondly – if we can come up with solutions. Hence my choice of topic areas/questions in the originally post. I know you’ll be skeptical of this project because it sounds like statism. Perhaps i could sell it to you by saying that since there’ll be government interference in markets anyway we might as well try and work out how to reduce the harm this does 🙂
It is inevitable, but not only in a free market. Toilets need to be cleaned, and people who are going to do it are not going to make as much money as, say, an engineer, because that would be both unfair and inefficient. Do you actually know about a place or time where that wasn’t the case ? Can you imagine an economy in which that wouldn’t happen ? Frankly I can’t. As for toilet-cleaning people’s lot being worse in a capitalist economy than in (what ?) that is actually something that is verifiable and should be proven. I can’t go much further with that line of reasoning because I have no idea about what kind of economy you would oppose to a free market.
On market failures : could you define what you mean by that ? Your toilet-cleaning example for instance, is not specifically a market problem, it’s just the way things are in every economical system known to man. A market failure is supposed to be an inefficient allocation of resources, but that is clearly not what you are writing about.
Finally, I do not believe that governments should intervene in the economy; so I am listening, but it’s going to be a hard sell ! 😉
One more thought : when I read you, my impression is that the problem isn’t the economy; it’s our lack of respect (well, not yours, obviously) for people who do menial jobs. A person’s worth isn’t defined by the amount of money he or she makes.
Hello guys,
I’ve been reading some of your site Tom, I’ve been quite enjoying Huberts and your banter. I thought I’d come and add a few pennies worth.
On Toilets:
Toilets are bad, plumbing is good! In England you do need a bit of training to be a plumber but from speaking to plumbers the training is quite straight forwards. They get paid a fortune (60k+). That’s scarcity value in operation, few people want to do it and so its a well paid job, it isn’t a taxing job.
In a market economy you have choice, if you are low skilled you can be a toilet cleaner or if you don’t like toilets you can be a gardener. But you always have the option of doing a night course in plumbing. If you can’t be bothered then society doesn’t reward your laziness, working as intended?
But money doesn’t buy you happiness or worth, the book ‘fooled by randomness’ has a section on happiness and the author says theres been studies that show happiness is more related to your wealth in comparison to your neighbours. So if you’re in England and earning 30k+ then you have a higher chance of being happy, if you’re in Nepal and earning 5k then you have a higher chance of being happy.
Tom said
“These drawbacks will be found if markets demand changes quicker than a) human capital can respond to, or b) human psychology can adjust to.”
Markets are changed by consumers or by suppliers. Consumers by definition can’t change a market faster than they can adjust to it. Suppliers can, but its an inefficient market that moves away from its customer base.
Ethical consumerism
I think the undercover economist covering the fair trade coffee quite well. But generally I’m against it. Its a crutch, why create a false market demand or inflated prices for something just because its from a third world country? Is that really going to help them in the long run? what happens to these countries when this false crutch is removed? The problem isn’t solved by me paying 10p extra for fair trade coffee (and the coffee brand taking 8p of that and passing 2p on to the country) If you want to make money commodity products is not the way forwards.
The way forwards is tackling corruption, tackling military misuse, introducing your Nike factories, building infrastructure, time. Go do what China is doing.
Diversity (more about your other post about supermarkets)
Its interesting that you say that supermarkets create lack of diversity, if you’re talking about number of products I’m exposed to as a customer then this is surely wrong. A Supermarket has around 100,000 products. If you’re talking about ethnic diversity, then supermarkets are bringing meal options from all around the world, my Sainsburys has a Japanese section, its great.
20 years ago peoples dishes were limited because local shops lacked the customer numbers to make niche products viable, supermarkets have the numbers of customers to cater to all tastes. Darwinism killed off these shops. In this respect market economics is similar to Darwinism.
Supermarkets are also terrible examples of monopolies, they are in fact one of the best examples of how competition lowers price, increases quality and diversity. The battle between supermarkets is massive. They’ve even changed their business models so that a lot of their money isn’t made in sell goods on for a profit, but the interest rate schnanigans on when they get paid versus when they pay their suppliers.
Market Failures: Externalities
Markets certainly do fail, and one of the key areas is externalities. If you are going to base all interactions on money then everything has to have a price, polluting air has to have a price; dumping waste in the sea has a price, etc. These prices may well be commensurate with the cost of undoing the damage cause plus a percentage. When externality charges aren’t in place then companies pursuing market ventures have carte blanche to play on an uneven playing field.
Market Failures: Rare events and Gambling and losing
The Undercover Economist talked a lot about the problems of health care. But it highlights a problem with market economies: They are essentially a game and as a country are you prepared for people to lose that game?
Healthcare, I’m quite young, the chances of me getting sick are small and so perhaps I wouldn’t buy health insurance (lets assume I’m in America and have no NHS to fall back on for free aid), this is a game I am choosing to play, based on some statistics or expectation values or whatever I might well be making the ‘right’ decision by not being insured… but what happens if I lose? Are you willing to live in a society where a bad roll of the dice can leave you with nothing? And are you will to live in a society where people like that do exist and will have an affect on my life, perhaps in terms of crime etc.
Healthcare isn’t the only example, theres fire, flooding or earthquake insurance etc. And when things do go wrong, such as the recent flooding, who pays in a truly market economy?
Market Failures: The military
“I can imagine a world of peace, without guns. Then I could imagine invading that world because they’d never expect it”
If we privatised everything then one thing that would be problematic is the army. Having private military companies wouldn’t work for just so many reasons to list:
> Does everyone have to pay to the army?
> Is it a private company? who does it answer to?
> Can other countries have contracts with that same company?
> How do I stop it from being a monopoly (once that company has set up thier radar sites in my country, the cost of switching to another company would be prohibitive.
> misuse
There has also been countless examples of armies being misused for hostile coups etc. Of course this criticism could be levelled at a state army which has also been misused against the people, but its much harder, especially in England.
In England the army swears allegiance to the Royalty, not the government, if government tried to use the army against the people then their first loyalties would be the royals, this serves as an interesting buffer to misuse of the army (and its one of the rarely touted benefits of our royalty).
England has also been downsizing its army for the last few decades (in terms of manpower) whilst increasing its force multiplier through technology. Technology has allowed our army to reach the point where its lethal for defense, destroying objectives and applying political pressure, but its not very good for holding territory or misuse against the people as these tasks are very man intensive. If your army model can allow you to be effective, but not be misused then that strikes what seems to me a good balance.
Market Failures: Monopolies and Infrastructure
They are quite frankly everywhere. Any company that requires substantial infrastucture costs before they can deliver value is a potentia monopoly, you can’t go and switch out all your power stations because theres a French company that will provide the energy 10% cheaper. The marginal cost of these things ar inconsequential.
Market economies fail whenever there are monopolies, governments are pretty much your only protection against this form of abuse.
Market Failures: The burden of Knowledge
I don’t want to have to have opinions on everything. I like that I pay taxes and then someone else worries about crime, street lighting, mowing parks, litter, jails, asylum seekers etc. Market economies are about choice and my choice is to not have to choose about a variety of subjects I don’t care about.
Lot’s here. Just two things
1. Toby “Consumers by definition can’t change a market faster than they can adjust to it.”
I think this is demonstrably untrue, all it takes is a little positive feedback for a situation to accelerate out of individual control. Stock market crashes? To say that consumers can’t change a market faster than they can adjust to it denies the existence of emergent outcomes — one of which, efficiency via price signals, is a major benefit of markets in the first place.
2. Toby “Its interesting that you say that supermarkets create lack of diversity, if you’re talking about number of products I’m exposed to as a customer then this is surely wrong”
Yes, if I am talking to range of products that the individual has access to, then supermarkets definitely increase diversity, in this limited sense. If, however, I’m talking about the range of products available full stop then increased market integration seems to have reduced diversity, at least in some sectors (food for example).
Sorry for taking so long to answer, Toby, but you almost wrote a book !
First, I of course wholeheartedly agree with most of what you wrote – and I have to say, Tom, that I genuinely do not understand your answer to some of Toby’s remarks; could you clarify ?
I do agree that some companies throw off the cost of some of their actions on most of us (externalities) but I do not consider that a market failure; it is actually a failure of the state. Supposedly the state should act for the common good – and it even tries to monopolize, quite successfully, action for the common good. This is one of those areas in which that pretense is exposed.
I am going to answer your remarks about health care, catastrophes and the army somewhat later (I lack time now) but I already want to tackle the “knowledge” problem; I would like to refer you to Hayek, who showed that the function of a price is to give you the information that you need. In fact, the market is the best way to share information efficiently. See http://en.wikipedia.org/wiki/The_Use_of_Knowledge_in_Society