One of the first things I noticed when I started studying economics was that goods that can't be bought and sold are basically ignored. That might be fine for determining prices of stuff (especially if people have quasilinear utility), but when you have massively incomplete markets, the basic big results of first-year microeconomics - the welfare theorems - go totally out the window. In addition, to get comprehensible results for the prices and quantities of exchange-able goods, you need to make a lot of heroic assumptions about the non-exchange-able goods - in other words, when people spend most of their time working for things that money can't buy, their behavior toward the things that money can buy gets a lot more complicated.
And when I think about it, I realize that people do spend much of their time working for things that they can't possibly buy. Here are some examples of things that can't be purchased in any market, even with one hundred billion dollars or a million tons of gold:
* Love
* The respect of your peers
* A feeling of career "success"
* The ability to fit in with other human beings
* Close friends
* Your family being proud of how your life turned out
* The feeling of being good at what you do
* Dignity
There are many more examples. It's not a question of whether these things should or shouldn't be traded in markets. It's simply that they cannot be.
Now, of course you can purchase things that help you get the items listed above. You can buy a cell phone that will help you hang out with your friends or meet your lover for a date. You can buy a car that takes you to where your friends are, or where your job is. Etc. But markets won't get you all the way there. If you want a hamburger, in contrast, markets will get you all the way there - just slap down the cash and the burger is yours.
Also, some of you may be thinking "But, people who make more money get more respect and are seen as more successful!" And this is (often) true. But that's not the same thing as exchanging money for respect. Exchange is voluntary - I give you some good (or some financial asset, e.g. money, that represents claims to goods), and you give me some other good. But when you get respect for being rich, you are not giving up your money in order to get more respect. (Sometimes you can engage in conspicuous consumption, but that's a bit different.) So "money leads to respect" does not mean that there is a market for respect.
Others of you may be thinking "OK, well, some people are born with these non-exchange-able things. Those lucky people have higher baseline utility, but I don't see how this changes how markets work." Ah, but here's a key point: Many of these non-exchange-able goods can be produced. Good relationships, for example, are not something you are born with - they take time and effort to build. Similarly, the respect that comes with a successful career requires that you put a lot of work into the career.
So, basically, markets provide only a limited slice of the things that humans want. In fact, I'd argue that in rich countries in which food and security are not a problem for the majority of people, the vast bulk of our effort is spent producing non-exchange-able goods like "success", "respect", "love", and "relationships".
We live in a world of Massively Incomplete Markets.
What does this mean for economics? First of all, it may help explain a lot of the phenomena we see in markets. For example, a lot of people's "leisure" time is spent working at the production of (non-exchangeable) love and relationships; this could be the source of "consumption-leisure complementarites" and other phenomena that describe people's behavior toward work and leisure.
A second example: Though people in rich countries work a bit less than people in poor countries, the super-rich often work very hard (at least, the ones I know do). This is a puzzle for the type of simple utility functions used to explain labor-leisure choice in macroeconomic models. Why do the super-rich work? It could be because working itself provides them with utility, or it could be because working enables them to produce the feelings of self-worth and capability that their huge bank accounts can't possibly buy in any market.
A third example: People may choose to be unemployed for a very long time if the new jobs on offer represent a loss of "dignity" (due to, for example, their family or spouse seeing the new job as a "step down" in their career). This could lead to search frictions that might explain a lot of long-term unemployment. Dignity concerns also probably affect wage demands, which could lead to sticky real wages in addition to the more commonly used sticky nominal wages.
A fourth example: People notoriously like minimum wages better than government handouts like the EITC, even though most economists agree that the EITC is a lot more efficient. Why? Probably because "earned" income gives people a feeling of dignity, while "handouts" reduce dignity. The former can only produced through work, not bought in a market.
So I think that non-exchange-able, but producible, goods might have an absolutely enormous impact on economic behavior of all kinds. What gets exchanged in markets is heavily dependent on what must be produced outside of markets.
Also, I think that non-exchangeable producible goods should have an impact on our analysis of human welfare and government policy. Assuming that all consumption can be bought with money leads one to support policies like the EITC, but these policies may be extremely sub-optimal when goods like dignity are brought into the equation. Additionally, government should think about how its policies discourage the formation of human relationships - for example, by subsidizing low-density suburban sprawl that makes it hard to meet people.
Now, of course, in the most general sense, incomplete markets are a technological problem. After all, when the Beatles sang "Money can't buy me love," money couldn't even buy you hair. Someday we may get the ability to buy our emotions and desires from vendors. That will be a very weird day! But for now, Massively Incomplete Markets define our world.
(Note: I'm sure people have thought very long and hard about this already, but I don't know the literature, so feel free to recommend papers in the comments or on Twitter!)
There are lots of institutions devoted to production of non-market goods. All of open source and other peer production. Model railroad societies. Amateur theater. Most art studios. Writers' groups.
ReplyDeleteFor a long time I've been struck by the way that the cool emergent properties of markets seem to also show up in these non-exchange-based institutions. I strongly suspect that whatever generates this emergence depends on much more fundamental and more interesting processes than the ones economists model.
Unfortunately I don't know who *is* modeling them. No academic discipline with any modeling skills seems all that interested.
How dare you suggest my utility function is quasilinear?
ReplyDeleteI, sir, am intertemorally homothetic.
"But when you get respect for being rich, you are not giving up your money in order to get more respect. (Sometimes you can engage in conspicuous consumption, but that's a bit different.)"
ReplyDeleteCouldn't but help think of Poor Prince Alaweed and his Herculean efforts over the years to stay in the top ten billionaire list. He paid his staff of flunkies and sycophants to generate phony magazine covers and lobby Forbes editors with the sole aim of persuading the world that the Prince is indeed the savviest investor in the world. And, one supposes, a certain percentage of the world did believe that the Prince was endowed with a special talent. Old Abe Lincoln had something to say on the topic, something about fooling all the people all of the time.
How's that not re-discovering the Maslow pyramid?
ReplyDeleteBut, frankly, I do not see as a huge deal for economics. Economics concerns itself with output growth etc. Even micro or behavioural studies are mostly interesting if they allow you to understand the bigger picture, not predict or describe what one agent will do in x situation.
So the key is here: "I think that non-exchange-able, but producible, goods might have an absolutely enormous impact on economic behavior of all kinds" and "I think that non-exchangeable producible goods should have an impact on our analysis of human welfare and government policy. Assuming that all consumption can be bought with money leads to policies like the EITC, but these policies may be extremely sub-optimal when goods like dignity are brought into the equation".
But it certainly need to be thought about some more. If people prefer minimum wages but EITC works better then something is out of whack - People's preferences are not impacting their behaviours.
I think you missed the point of the post. People's preferences are what CAUSED their behaviors.
DeleteBut the writer advances the idea that markets only "provide a limited slice of the things that humans want."
DeleteMaslow says otherwise, the items quoted by the author as non-exchangeable may be just that, but they are high-level human wants. The conclusion should be that markets promote further self-actualization and continuing motivation.
Frederic, Maslow's pyramid says nothing about whether higher needs are marketable and/or producible. Noah is thinking about the consequences of producible but not marketable higher needs. This has important economic implications that have not yet been well explored.
ReplyDeleteNoah, Akerlof/Kranton in Identity Economics touch on some of these themes, and Scitovksy's Joyless Economy is a classic critique of standard consumer theory.
Nice post.
But they are 'producible' in a very weird way. Sure, I can work on my relationship skills, I can read Flow by Csikszentmihalyi and understand better what makes me 'happy' but it's not something that's going to impact GDP in a very measurable way.
DeleteI mean, a lot of people have said that 'buying stuff' does not make people truly happy.
And maybe it's true. I'll tell you when I have enough myself. In the meantime, I think macro-economics is more about delivering the means for people to find their own happiness. It's not about delivering happiness itself.
OTOH, if, in terms of economic efficiency, two methods are more or less interchangeable, by all means, take the more popular of the two.
Hence, I think the interesting bit is really around things like EITC vs. minimum wage etc.
There is a big group of economists studying non-market production decisions: the literature on 'home production'. There are of course basic results on how people make choices when their choice set involves allocating some of their resources not just to 'leisure', but to producing non-exchangeable goods. More generally, there has been great work in recent years incorporating work on non-market production with non-market allocation: the literature on matching (with and without transfers), and on mechanisms, especially auctions and unilateral and multilateral bargaining, which in a sense are non-market allocation if only in that there is no 'price' but rather a set of rules or environments coordinating allocation. As you are no doubt aware, there are tons of micro theorists working on these issues, usually in a fairly abstract way, but my sense is that most of them are concerned about general allocation mechanisms not as a mere curiosity but precisely in order to answer the kind of questions you bring up.
ReplyDeleteThe most direct application of all this theory I have seen to interactions between market and non-market outcomes, beyond purely micro models of school choice or kidney exchange or what have you is the literature on the marriage 'market', which is of course a massive misnomer. It is not a market in the sense of goods or services allocated by price: it is a decentralized (perhaps with intermediaries) mechanism bilaterally assigning each person to (up to) one other person, with its own equilibrium criteria drawn from cooperative or non-cooperative game theory. Literature on this topic focuses not just on the set of allocations, but how they affect bargaining over inter-household resources, and how they interact with market decisions (primarily labor supply, but also investment and insurance). A good summary of what is known is the book "Family Economics', by Chiappori, Browning, and Weiss which is available online at http://www.cemmap.ac.uk/resources/chiappori/paper_1.pdf
I think a more interesting dilemma is whenever some goods could be non-measurable: a good that is destroyed if you try to assess how valuable it is.
ReplyDeleteThe lack of a formal market doesn't strike me as very problematic: economist always speak about utility in order to avoid this issue. If you price everything in terms of time, for example, even the love and respect are "purchased". The standard approach of trying to internalize external cost should be helpful in many of these circumstances.
I have read many people who think that some things are not measurable. I think that's a much bigger issue (like a social science uncertainty principle). If that's true, you cannot use experimentation (which requires measurement) to reach decision and I think you are forced to shift to deductive reasoning (which requires assumptions). Such goods could never enter a market mechanism and as such are a bigger issue.
Personally I doubt such goods really exists (everything is a trade-off). But I think that's much more interesting than the fact that you cannot buy respect or love with cash...
You can't outright purchase love. But you can, say, choose to continue working full-time even as you pursue an advanced degree full-time because you want to provide for and support your spouse, when you may not have made the same decision if unmarried. Who am I talking about? Why, who can know?
ReplyDeleteAnyway, I think a good, simple way to envision this is to imagine time as money and imagining a budget line split between "material reward" and "social reward." Obviously it's more complicated than that (eg, you may work an extra shift at work so you can afford flowers for Valentine's Day), but if you imagine that most people spend their time, and not their money, and some of their time is convertible into money via a labor function (which is different for different individuals dependent on their skills, education, etc) and some of it is converted into the pursuit of Maslow's "higher" needs then you still have an "economic" framework for understanding these kinds of decisions.
It is also clear, as you say, that different policies attempting to achieve the same goal are computed differently by individuals and communities based on how their mechanisms or framing comports with higher-level desires and needs. Indeed, even identical policies can have this result - note how some subsidies are done through "positive" cash transfers, and some are done through "negative" taxes, and the difference between how Americans for Tax Reform treats those policies despite being identical, economically and budgetarily, in every way.
Perhaps better than government handouts would be the government buying/commissioning (with some minimum which correlates with your private sector job) works of art or service from people?
ReplyDeleteNot everyone needs to be employed producing things, as we grow more efficient less and less people will need to be employed producing things. Even in China, labor intensive industry is being replaced by more labor efficient industry through the use of robots and machines.
In the future, most laborers will be involved in service work or in the individual production of art/literature/music/etc.
So instead of transfer payments, we have the government provide open contracts which people can fill.
To write a book
To keep a stretch of road or a park clean
Musical performances/recordings/etc
Volunteering
A short video or a local play
A piece of art
Then you have dignity: You are not a Walmart greeter, you are an author. You are not a gas station clerk, you are a musician. You are not a Starbucks barista, you are an artist.
The government commission would be correlated to how valuable (how popular?) your work is. If your work was popular enough, Amazon or Sony or someone could outbid the government.
This might cause a total increase of government. But there would be a decrease of welfare/etc processing government so it would not be as bad as one would initially think.
You are paid to produce a piece of sh*t book or video or artwork. A Walmart greeter has more dignity. Unless you can delude yourself that your piece of art is really something special; getting paid for it is not just glorified welfare. But then people have an amazing capacity to think that, yeah, they deserve all the money they get, and in a more just world would actually get more.
DeleteGee, Roger, I've never met an artist or a writer who doesn't think their productions are masterpieces; "creative" types are notorious for their narcissism. Those who elect to take up the government's offer may not get the respect of others, but self-respect won't be a problem.
DeleteIIRC, the Netherlands had a program like this (at least for cultural works) and a result was warehouses full of paintings not regarded as particularly interesting by critics or the public. It was changed in the past ten or fifteen years because it was widely viewed as a boondoggle.
DeleteThis blog post mentions that program in passing when discussing art subsidies -
http://blogs.artinfo.com/culturalaffairs/2013/03/04/the-truth-about-art-subsidies/
I strongly recommend work done by Viviana Zelizer. She is not an economists but an economic sociologist. Her work on the Social Meaning of Money (1995) or on Markets and Intimacy (2005) is really interesting. Here is an interview with her:
ReplyDeletehttp://www.econtalk.org/archives/2007/02/viviana_zelizer.html
Is the theory of Massively Incomplete Markets set to become the next big thing in label the residual economics ;-)?
ReplyDeleteProbably not, it'll have to wait in line behind Confidence, Technology, Economic Freedom, and Culture...
Delete"Also, I think that non-exchangeable producible goods should have an impact on our analysis of human welfare and government policy. Assuming that all consumption can be bought with money leads to policies like the EITC, but these policies may be extremely sub-optimal when goods like dignity are brought into the equation."
ReplyDeleteI agree that there is a lot of casual evidence that people have preferences over terms of pre-fisc exchange, and not just the post-fisc consumption bundles. This captures notions of fairness or dignity, and arguably is one reason so many people across political spectrum support a higher minimum wage.
Once again, I disagree with tons of things you said ... there's much shadow-commodification of non-market activities and many market activities are not fully commodified. And yet, I applaud the idea of an anti-imperialist economist.
ReplyDeleteCompare your post to Oster's WSJ advice column: http://blogs.wsj.com/ideas-market/2013/03/25/on-spacing-out-your-kidsand-your-family/. I am an economist and yet the birth of my second child was all about when we could agree there was enough relative calm to create a happy disruption and not some forward-looking monetary calculus.
I think economists try to model a lot of the non-market, but we fail to understand actual non-market behavior (and in markets) because we often stop with the widgets and the price tags. Economics can handle the subjective and internal constraints on behavior, but we often don't add or prioritize that level. Thoughtful post!
there's much shadow-commodification of non-market activities
DeleteWhy does this make you disagree with me? Given multiple non-market goods that are produced by each person with the single input of time, the money price of time (which is a scalar) cannot span the space of the shadow values of the non-market goods...
I think economists try to model a lot of the non-market, but we fail to understand actual non-market behavior (and in markets) because we often stop with the widgets and the price tags. Economics can handle the subjective and internal constraints on behavior, but we often don't add or prioritize that level. Thoughtful post!
Thanks!! :D
non-market production is much more than time. (There's as much human capital behind non market production as market production.) I think the set is spanned outside the market as much as in. probably just a definitional difference. I think I like your framing better, as it's clearer. I would muddle the market, which would be even messier.
DeleteI think my point is easiest to see via a simple thought experiment: Imagine if there was complete d-mod technology, so you could pay for love, dignity, respect, etc. Imagine how much our allocations would change. This shows that technology can create Pareto improvements by turning non-market goods into market goods.
DeleteAlso, what do you mean by "anti-imperialist"? You mean, I think econ should incorporate results from other social sciences? Sure! But haven't we been doing that for years, with behavioral econ?
DeleteI'm not sure that d-mod technology, no matter how complete, would help, here.
DeleteI'd suggest that love, friendship, respect, etc. are valued, at least in part, -because- they cannot be bought and sold. One can already purchase simulacra of such things, but such simulacra are perceived as false: a friend or lover who stays around only as long as they are being paid is considered a sham friend. I suppose d-mod technology would mean that, so long as you were paying, someone could be a perfect simulation of a friend, but I suspect that this also would be perceived as false.
I'm not sure that d-mod technology, no matter how complete, would help, here.
DeleteD-mod would help anything.
Proof: Suppose you want something. D-mod yourself into being as satisfied and happy as if you already had it. QED...
Eh? I'm not really sure what's going on with Noah's post or this comment. There's anti-economic imperialism (economics can't explain human sacrifice) and pro-economic imperialism (economics can explain human sacrifice). So which is it? Can economics explain human sacrifice?
DeleteAs I explained in that blog post...it's funny because there are economists who say that economics can't explain things like ritualistic sacrifice and "noneconomists" since Socrates who have been using economics to explain why sacrificing to gods is simply exchange...really not fundamentally different than two people bartering and trying to get the most bang for their buck.
What I've been harassing Noah about for the longest time is the concept of opportunity cost. He never specifically discusses the significance of this concept. Which is exactly why this post of his is nonsensical. Opportunity cost is exactly what makes economic imperialism possible. When somebody has a firm grasp on the concept of opportunity cost...it should be easy to appreciate the absurdity of Noah's list of goods being "outside" the market.
And when somebody has a firm grasp of opportunity cost it should be easy for them to appreciate the concept of non sequitur economics. You'll always end up with nonsensical results if people don't have the freedom to decide for themselves exactly how much they are personally willing to sacrifice for love. If you prevent people from shopping for themselves...if you don't give them the freedom to decide whether something/anything is worth it...then it's inevitable that the result/output/product will not match people's true preferences. In other words, the result will be a non sequitur...it will be an extremely inefficient allocation of society's resources. But solving the preference revelation problem is as easy as allowing taxpayers to shop for themselves in the public sector...aka pragmatarianism.
"anti-imperialist economist" in my mind is an economist who does NOT lay claim non-market a by simply planting the flag of a standard economic model with a few tweak. (anti-Becker-style economics). of course, economic models can handle a lot of richness so even though we can't observe all the inputs we can model the outputs. but that's not how it always works, plus you can see psychology (via behavior econ) as throwing a big wrench. Economists depend on preferences being stable and psychology gives us a lot examples to the contrary. Maybe psychology just looms larger in the non-market and weakens the economics. (Not a fan of d-mod, I have it filed away with meta-rationality as something to be wary of.)
DeleteYeah, state-contingent preferences with incomplete state-contingent markets are a BIATCH to deal with. I didn't even touch that rail...it's a story for another day.
DeleteAs for d-mod, of course we should be wary of it, but it's coming like it or not...though who knows how powerful and precise it'll end up being. We need to think about it ahead of time and manage it...but that is another story for another day...
Claudia, there are two main types of economists...people like Samuelson who are happy to assume that government planners are omniscient...and people like Buchanan who do not make that assumption. Compare this passage by Buchanan...
Delete"Individuals do not act so as to maximize utilities described in independently existing functions. They confront genuine choices, and the sequence of decisions taken may be conceptualized, ex post (after the choices), in terms of "as if" functions that are maximized. But these "as if" functions are, themselves, generated in the choosing process, not separately from such process."
...to this passage by Simona Botti and Sheena S. Lyengar...
"Kahn and Baron’s (1995) results represent additional evidence in support of psychologists’ assertion that contrary to rational choice theory, people do not always hold stable and clearly ordered preferences that are simply retrieved at the moment of the choice. On the contrary, according to psychology research, most of the time, people do not know their preferences before their decision-making task, but they construct them on the spot during the decision process; therefore, preferences are subject to contextual influences (Feldman and Lynch 1988; Payne, Bettman, and Johnson 1993)."
Where's the discrepancy? There's no discrepancy. Allowing people to shop for themselves produces superior results for the very reason that people's decisions are subject to contextual influences. What they spend their own money on reflects their unique set of circumstances. And how complex are our circumstances?
If you and I went to a restaurant together...if I was omniscient then perhaps you wouldn't mind if I ordered for you? That's simply because more information would go into my decision. You and I would both know that salmon matches your preferences...and we would both know that it's been two weeks since you last had salmon...but I would also know that the salmon really wasn't fresh. But given that I'm not omniscient...I would have to extract quite a bit of information from you if I wanted to order something for you that reasonably matched your preferences. How hungry are you? How much do you want to spend? Are you a vegetarian? Are you allergic to any foods? Are you on a diet? What percentage of the relevant contextual information could I possibly hope to extract from your brain? It would be a waste of both our time/effort because we could have spent our time talking about more important things...and it's seriously doubtful that the result would be superior to simply just ordering for yourself.
That's why allowing millions and millions of taxpayers to shop for themselves in the public sector would produce results that are far superior to the results currently produced by our current system. Can you even imagine how much contextual information is lost by allowing 500+ congresspeople to shop for an entire nation?
greg byshenk,
DeleteOf course a "true" friend or lover will stick around whether things are good or bad, and Christmas is truly about sharing with the people you love. But in this messy world, there aren't a lot of true friends or true Christmases. Money buys a whole lot more indirectly than it buys directly.
Good job, Xerographica you managed to pick one of the few foods that I don't like in your example. But to the substance. Yes, in general individuals understand their tastes and circumstance better than any policy maker could. But choice is costly and it can be overwhelming. I think there is something to contextualized choice (framing matters) but that can often get us off track from what we really want. It is not uncommon to show someone a sequence of choices (say retirement saving) and have them be unhappy with their choices in total. It is entirely possible that we have some deeper preferences (as economists like to assume) that get perturbed by out environment (as psychologists suggest). A policy maker may be needed to help get us back to the former. This is now thoroughly off the topic of Noah's post, but thank for the interesting quotes and comments.
DeleteNoah, I don't understand your point about d-mod with respect to -this- issue.
DeleteUnless I misunderstand, your original point is about things that you can't buy, such as friendship. I don't see how d-mod does anything to address that point. Certainly, if one is friendless, then one could d-mod oneself such that one was happy being friendless. But that seems to me to be addressing a somewhat different point, as it doesn't seem to be about buying friendship.
Where I thought you were going with d-mod was the idea that, with d-mod one could (human subjects issues, aside) pay someone else to be d-modded such that they actually felt themselves to be one's friend, at least so long as they were being paid. And my response was that such would be seen as only a better simulation of friendship, rather than as purchasing actual friendship.
Claudia, there's nothing wrong with me being your personal shopper...as long as you have the freedom to fire me when I buy you salmon. What makes me laugh/cry is when people tout the economies of scale of the public sector. Who cares if you don't like salmon...you'd be able to have a bunch of it for really cheap! Who cares if a pacifist doesn't value war...they'd be able to have a bunch of it for really cheap!
DeleteIn the private sector...maybe you don't know exactly what you want most...but you do know which things you want least. And those are the things that you don't spend your money on. As a result, the supply of private goods far more closely matches our true preferences than the supply of public goods does.
How did we stray from Noah's post? Noah thinks a market only includes things that money can buy. He's obviously not an Austrian...
"Austrians were among the first economists that recognized that the economic way of thinking was not limited to market exchange, but was generally applicable across social settings." - Friedrich Schneider, Charles Kershaw Rowley
"The most aggressive economic imperialists aim to explain all social behavior by using the tools of economics. Areas traditionally deemed to be outside the realm of economics because they do not use explicit markets or prices are analyzed by the economic imperialist." - Edward Lazear
From Noah's perspective, if it doesn't have a price tag then it's outside of the market. I'm the opposite...everything has an opportunity cost. That's the true price tag of everything we want. If you try and remove this true price tag then you run into the problem of people ordering things that they truly wouldn't be willing to pay for...
"As was noted in Chapter 3, expressions of malice and/or envy no less than expressions of altruism are cheaper in the voting booth than in the market. A German voter who in 1933 cast a ballot for Hitler was able to indulge his antisemitic sentiments at much less cost than she would have borne by organizing a pogrom." - Geoffrey Brennan, Loren Lomasky
Unless I misunderstand, your original point is about things that you can't buy, such as friendship. I don't see how d-mod does anything to address that point. Certainly, if one is friendless, then one could d-mod oneself such that one was happy being friendless. But that seems to me to be addressing a somewhat different point, as it doesn't seem to be about buying friendship.
DeleteWhere I thought you were going with d-mod was the idea that, with d-mod one could (human subjects issues, aside) pay someone else to be d-modded such that they actually felt themselves to be one's friend, at least so long as they were being paid. And my response was that such would be seen as only a better simulation of friendship, rather than as purchasing actual friendship.
I was thinking of both of those, actually! The question of whether d-modded desires are "real" is kind of a philosophical one...
With regards to d-mod, it's not like we don't have lowtech equivalents - alcohol, drugs etc. There was an interesting question that came up in a survey.
Delete"If a drug would make you happy and make you forget that you took the drug... would you take it?"
Most people say 'no', iirc. It's not a rational choice but people do put an emphasis on 'real'. Russians have a say about idiots and fools being happy too. Yet no one would choose to be one, would they?
Claudia: I know I'm jumping in here. But one thing jumped out in your exchange, you say that choice is costly, and can be overwhelming, and thus we might need a policy-maker to help us with it. But the policy-maker will be human, so how will the policy-maker escape being overwhelmed by choice?
DeleteThe policy maker may be aware of systematic biases or gaps in education that households don't recognize easily. I am not a huge fan of nudges though they could also be an intervention in this vein. I would prefer to help households see the consequences of their choices ... things like opportunity cost, inter-temporal optimization are very hard for most people. As another example, I think people are quite averse to ambiguity so it makes them act more risk averse than they really are and thus forgo healthy risks. Increased choice benefits people who have good decision skills (and big buffers for mistakes) and stresses out most other people. Government as a helper not a planner would be my ideal, but it is tricky.
DeleteNoah, it is in at least some sense true that "The question of whether d-modded desires are "real" is kind of a philosophical one." But I think it is particularly relevant to the instant case.
DeleteSuppose, for example that there was someone who could, so long as you were paying him/her, simulate "friendship" so well that no one could tell it wasn't real -- even you. Would this qualify as "friendship"? I suggest that the answer is 'no', because part of the value of 'friendship' is that it isn't bought and sold. Then suppose that someone could be d-modded to "really" like you so long as you were paying (but only so long as you were paying -- and in whatever sense the word 'really' applies here). Again, I suggest that most people would say that such is not actually friendship, but a sham version thereof. If true, then d-mod technology doesn't have application to this issue in this way.
Then again, I suggest it doesn't have application in the other way, either, because making oneself happy without friendship just isn't the same kind of thing as buying friendship.
Claudia, a couple excellent papers on conceit...errrr.."nudges"...
DeleteBehavioral Law and Economics by Wright and Ginsburg
and
The Knowledge Problem of New Paternalism by Rizzo and Whitman
That paper cites Joel Waldfogel's also excellent paper..Does Consumer Irrationality Trump Consumer Sovereignty? I created the Wikipedia entry for his book...Scroogenomics.
It's really as simple as this: the government should do what people are willing to pay it to do. If people want drugs to be illegal, then they should be willing to pay the cost out of their own pockets. This is the only way we can ensure that the costs do not exceed the benefits.
O.M.G. Things exactly reversed. One learns how to order effectively for another person by exchanging a variety of spoken and unspoken emotional signals. This is exactly what your politician/supershopper does. The host learns of success by getting a second date, the politician a second vote.
DeleteClaudia, what if the policy-maker is less aware of systematic biases and gaps in education though? After all, policy-makers are part of households too, if households struggle to recognise systematic biases and gaps in education, wouldn't policy-makers struggle even more, on average?
DeleteAnd you say that increased choice benefits those with good decision-skills (and buffers for mistakes), and stresses out most other people. So we should expect most policy-makers to be stressed out by too many choices too. So why would you expect said stressed-out policy-makers to do better than people making choices for just themselves? After all, policy-makers typically have even more choices than private individuals, for example ordering a missile strike isn't an choice for me, it is for President Obama.
Ronald: A vital difference between hosting and politicking is that second dates typically come along more frequently than second elections. (One can think of exceptions in both directions of course).
DeleteRonald, "close enough" only works for horseshoes and hand grenades...it most definitely does not work for deciding how society's limited resources should be used. Perhaps voting as a feedback mechanism would work if everybody's circumstances were all the same. But we all have a different set of concerns, fears, interests, hopes and dreams. When it comes to communicating the complexity of our individual circumstances...ballot voting does not even come close to dollar voting.
DeleteHere's a blog entry that I posted just for you...Dollar Voting vs Ballot Voting. Well...you and all the other people who fail to understand why shopping is superior to voting.
The entry I posted contains a couple dozen or so quality passages on the topic. Here's one of my favorites...
"Individuals express preferences about changes in the state of the world virtually every moment of the day. The medium through which they do this is the market place. A vote for something is revealed by the decision to purchase a good or service. A vote against, or an expression of indifference, is revealed by the absence of a decision to purchase. Thus the market place provides a very powerful indicator of preferences." - David Pearce, Dominic Moran, Dan Biller, Handbook of Biodiversity Valuation: A Guide for Policy Makers
Does that sound familiar? It should. Compare it to the passage I shared by Derrida...
"By preferring my work, simply by giving it my time, my attention, by preferring my activity as a citizen or as a professional philosopher, writing and speaking here in a public language, French in my case, I am perhaps fulfilling my duty. But I am sacrificing and betraying at every moment all my other obligations: my obligation to the other others whom I know or don’t know, the billions of my fellows (without mentioning the animals that are even more other others than my fellows), my fellows who are dying of starvation or sickness. I betray my fidelity or my obligations to other citizens, to those who don't speak my language and to whom I neither speak or respond, to each of those who listen or read, and to whom I neither respond nor address myself in the proper manner, that is, in a singular manner (this is for the so-called public space to which I sacrifice my so-called private space), thus also to those I love in private, my own, my family, my son, each of whom is the only son I sacrifice to the other, every one being sacrificed to every one else in this land of Moriah that is our habitat every second of every day."
"Every second of every day"..."every moment of the day"...we express our preferences because we're forced to choose between valuable alternative uses of our limited time/money. This is the opportunity cost concept. Resources cannot be efficiently allocated without each and every one of our individual valuations. In other words, there is no optimal without you.
If we want society's limited resources to be more efficiently allocated...then it's absolutely essential that you be given the option to shop for yourself in the public sector. How you would spend your own tax dollars would communicate your unique circumstances. As a result of being able to effectively express your preferences (aka "demand"), the supply of public goods would better match your unique circumstances. And that's exactly what it means for society's limited resources to be efficiently allocated.
I think you're right, but watch out: Despite being right, it might turn out that we have the sort of society in which we pursue our ends (Love, Respect, Dignity, etc.) *through* pursuing economic means. If we develop a consensus that the only road that leads to the truly valuable ends necessarily runs through the means economic achievement, then we will find ourselves back in the money-making hamster wheel. This despite the fact that we are chasing unpurchasable things as our ends.
ReplyDeleteOne of the great things about market societies is that there's little need for consensus about ends, or the means to those ends. Even if 99% of the people are on the money-making hamster wheel, you're free to defy the consensus and step off.
DeleteI believe buying love is still illegal in all fifty states with the exception of certain rural counties in Nevada.
ReplyDeleteThe richest man I know (net worth over $100 Million) inherited his wealth. He works hard and lives relatively modestly but I don't respect him for his wealth. Of the five or so most successful men I know who made it on their own merits: (1) one is dying of cancer, (2) one is a sociopath, (3) two are trying to buy love by lavishing money on women twenty years younger than them and (4) one seems to be retired and happy (with his second wife).
"They say that's money
DeleteCan't buy love in this world
But it'll get you a half-pound of cocaine
And a sixteen-year old girl
And a great big long limousine
On a hot September night
Now that may not be love
But it is all right"
- Randy Newman
"I believe buying love is still illegal in all fifty states with the exception of certain rural counties in Nevada."
ReplyDeleteUnless you are filthy rich and can afford to go from trophy wife/gf to trophy wife/gf.
trophy wife/gf
DeleteThis is one of my favorite "demotivational" posters:
http://www.filehurricane.com/photo-viewer/6076
Careful Noah, none of your students will get jobs on Wall Street.
ReplyDeleteMy pet peeve in this area is the arts, culture, music etc. which blur the lines between public and private non-tradable goods.
Wouldn't we as a society be richer if we had more music and less commerce? more musicians and fewer bankers?
There is also a whole fascinating set of anthropological research comparing commercial markets with gift markets which examine whether many things are not only not tradable, but are actually destroyed by commercial trading. Hospitality for example is often sullied by an offer to pay - the proper 'payment' for hospitality is returning or passing on hospitality. The Gift by Lewis Hyde (extending the work of the French sociologist Marcel Mauss whose book The Gift is is the foundation of social theories of reciprocity and gift exchange.) is fantastic.
Look at what happens to music when it is made commercial...
Mercenary abominations like the Beatles?
DeleteOr Beethoven.
DeleteI think it is rather an uncontroversial idea that many many artists of all types say that commercial requirements impact their artistic output.
DeleteOf course we don't know if that was true with the Beatles, but whether or not it was true yes, that's some fine abomination they made.
Beethoven performances today never (I am pretty sure its never) pay for themselves, they are all subsidized mostly through philanthropy, but also through the government (perhaps the same thing if there are tax breaks). Even the elite orchestras in the major cities only earn a minority of their costs with ticket sales or other 'commercial' revenues.
Activities that only take place through non-profits are another related and interesting set of issues that could be mentioned in this conversation.
Yep, it's uncontroversial. What's controversial is whether commercial requirements impact them for the better or for the worse compared with alternatives. I suspect that most artists have a vision of a world in which they are simply given whatever resources they want to achieve their artistic vision, with no strings attached. A pleasant vision, but not a practical one for society as a whole.
DeleteTracy W,
DeletePeople who train to become classical musicians are often both insanely talented, and insanely dedicated and hard working. My guess is that someone who can play Beethoven, has worked far harder at acquiring their skill than the person who say, trades interest rates has worked while getting an MBA.
They know that there will be little economic reward for them, and perhaps their efforts are simply not practical and their efforts are a simple mis-allocation of resources.
I doubt their motives are morally bankrupt and slothful as you suggest. Frankly, I am delighted that some people have the drive to become insanely accomplished at something that doesn't pay for itself.
I think it is a puzzle, why do some people do that, they are easily hard working and dedicated enough to have success at anything they put their minds and efforts at.
I don't see why we need to design a world where the only thing that is practical is activities taken in pursuit of money, or that are measurable, or transact-able in money terms.
We all benefit from art and more generally from people who expend effort at doing, becoming and making things that aren't practical. I would far prefer changing practicality than changing these endeavors.
Dan, what's going on, where is all this coming from? Nothing you say here seems to have any relevance to my previous point.
DeleteFurthermore, there are two things you've said that surprise me very much.
Firstly, why are you calling musicians morally bankrupt and slothful? Do you know many musicians? The musicians I know seem to me to be about as good as most people, and very hard-working, quite contrary to your claims about them. I presume that in history somewhere there's some musician who lives down to your view of them, but I doubt there's many. At least you have the honesty to admit here that they have to work hard to acquire their skills.
Secondly, why are you designing a world in which the only things that are "practical" are activities taken in pursuit of money? How practical is such a design? To introduce a real practical consideration, what do you think people will eat? In the real world, how it works is that farmers (plus fishers and the like) produce food and trade that for money, which the farmers (and etc) use to buy other goods like clothes and other services like healthcare, or concerts. A world in which the only activities undertaken are those in the pursuit of money is a world in which trade is impossible.
Your suggested definition of practical as being measurable or transactable in money terms is also weird. Most people's minds are practicable (probably not the minds though of those people who think that we should design a world in which only money is pursued), but until the invention of MRI scans they weren't at all measurable, nor can a mind be purchased in money terms.
Noah,
ReplyDeleteCheck out Nancy Folbre's work, it sort of delves into this.
Jed already touched on this.
ReplyDeleteFree open source software (FOSS) is, to my thinking, an example of a market for products that are both produced and exchanged, without money.
I'm not an economist; do economists define markets so as to preclude this case? If so, I would think the very idea is too strictly defined.
I've been involved with free open source software (FOSS) since its early days, and with Linux since it started, and I can tell you that for many, the exchange is in both directions.
I've long understood this case doesn't fit conventional (economic) wisdom - that shouldn't matter.
I think it was Linus Torvalds who had a signature file in the early days (it was just Usenet and the like then, before the WWW existed) that read:
"Sacred cows make the best burgers..."
I think one of those is that markets require monetary exchange. We know better; market transactions can be either way or both, without money involved at all, and such markets can be quite complex - not at all trivial.
Another, then is that greed is the only effective human motivator. We've also found that's not true either, and your comments in fact hint at that.
BTW, considerable effort has been spent over the years to track FOSS usage in non-monetary ways.
DeleteParticularly, there are counters of the number of official and non-official Linux users and installs, as there are for FOSS web servers (Apache comes to mind).
Your blog runs on a FOSS web server - OpenGSE.
Another example is supercomputers, which are well tracked. Last I checked, of the 500 fastest supercomputers in the world, 498 were running Linux, 2 were running a version of Windows.
If FOSS isn't a form of market, I don't know what else an economist would call it, and I'm waiting to be enlightened...
Noah, i have been a more recent visitor to your blog. Let me just say that you do a wonderful job of stating econ issues in layman language. This piece is one of the best that has appeared on your blog. I have a few comments/observations (Note for the reader: they are not in any strict ordering, or may not appear to have a link with one another).
ReplyDelete1. This piece reminds me something about Adam Smith, and a mistake that majority often make when talking about him. Majority talk about his Wealth of Nations, but nobody seems to talk about The Theory of Moral Sentiments (TMS)! As Amartya Sen commented, Smith's markets never stood alone! In TMS, he dwells upon some of the non-market factors that Noah has mentioned in his post. One of them was Trust, and its importance in the society. Take the recent recession as an example. The trust between the financial institutions and the public was severely damaged. Neither can the damage be measured, nor can the lost trust be valued and bought. This lesson, in general, seems to be lost upon the society as things start to come back to normal.
2. When we talk about cosumer preferences (or learn about them), what do standard Econ books teach us? One of the basic tenets is that 'More is Better'. But here's a pertinent question: how do you get 'more'? In societies where institutional checks are weak (or people are smart enough to get arround them), this translates into fraud, forgery,scam, cheating, greed, etc. In the process, not only does people's monetary wealth goes to waste, but social wealth also takes a beating in the form of lost trust, lower happpiness, pain, etc. Again, one can't put a value on these, although these have a much greater importance than just money wealth.
3. Simon Kuznets, the modern day architect of National Income Accounts like GDP and GNP, warned that these shouldn;t be taken as a measure of overall welfare. Unfortunately, like Adam Smith, his words of wisdom seems to be have been lost on quiet a few, and our fixation with GNP and GDP continues unabated.
4. There is now a worldwide recognition that GDP or GNP are not the perfect measures. In fact, an alternative in the form of GDH (Gross Domestic Happiness) is steadily becoming popular. Though its not without its shortcomings (for example, how exactly do you measure happiness?), its been adopted in quiet a few countries. Bhutan is the leader of the pack.
5. Last, but not the least, all of the above is not intended to totally disregard GDP or like measures. If market production was such a disaster, then there wouldn't have been any, and there wouldn't be any Capitalism. And if we didn't have capitalism, frankly, there wouldn't have been any blog, no internet or anything like it. My observation is that quiet a few of the non-market elements also exhibit the property of diminishing utility, just like the market stuff. For example, i have observed that beyond a certain point, socializing becomes tedious, time consuming and expensive. That's when the urge to know many people or have many friends tapers off. However, the rate of dimisnishing differs according to circumstances. In my country (a developing one), the urge for non-market factors in the country side is not very strong,despite the popular opinion, simply because they practice this stuff day in and day out. What they yearn for (example) is capital goods like cars. However, contrast this to a worker in the city environs, who has to work hard for 5 days a week. Stuff like cars dont mean as much to him because they travel in it everyday. What they want is calm, quiet,and a relaxed atmosphere, which they normally get in the countryside. This, in a shrot statement, is the typical story since the Industrial Revolution.
Waht i've tried to impress upon is that our fixation with growth in income bodes ill for non-market factors. The challenge is to find some semblance of balance between these two. Hope my take on the issue proves to be worth something for the readers :-)
Noah, you might want to check out this article and the guy's book as well:
ReplyDeletehttp://www.project-syndicate.org/commentary/what-money-can-t-buy-by-michael-j--sandel
I haven't read his book but his articles are talking about basically the same thing you are.
I like a lot of the points you make in this post, but I would be careful with the term "Massively Incomplete Markets". "Incomplete" has a normative ring to it and hints that it might be better if markets *did* extend to all these other domains of our lives (even though you clearly say they can't). Framing the issue as one of "market completeness" is a bit like calling the dry land "areas of insufficient sea".
Does EITC really not "feel" like earned income? That would surprise me. You do a job, and get paid for it. If the employer is receiving the subsidy from the government and directly funneling it to your paycheck (rather than having to separately file for it, I suppose) the employee might not even notice it. And since payroll taxes are witheld, it would make sense to do it that way. Remember too, that "make work" is more popular with the general public, though it seems less worthy of respect than EITC even if it's moreso than the dole.
ReplyDeleteI think there is a conceptual error in thinking like an economist about non-economic things. Is marketable-or-not even a useful paradigm for thinking about love, respect, or the enjoyment I get playing my trombone?
ReplyDeleteThese things all require "work" in the sense of some generalized form of effort expended, but not WORK as considered in either physics or an employer-employee context.
It's not that there are massively incomplete markets for these self-actualization related abstractions - which are basically emotional feelings. It's that the concept of a market has very little to tell us about these endeavors.
Cheers!
JzB
"If you want a hamburger, in contrast, markets will get you all the way there - just slap down the cash and the burger is yours."
ReplyDeleteI think one of the fundamental things that is misleading about basic micro is this idea. Human conceptualization of desires is really abstract and slippery. Language tokenizes it in a categorical way that works great for communication and reasoning, but tends to lose a lot of the original information in an attempt to make it easy to communicate or manipulate the concept.
So no, in the vast majority of cases, when you want a hamburger, you cannot simply slap down some money and have the hamburger you want. You have to pay your money for something that is conceptually similar to the hamburger you want, and which you believe will have the closest fit among available options to the hamburger-eating experience you are looking for.
'A third example: People may choose to be unemployed for a very long time if the new jobs on offer represent a loss of "dignity" (due to, for example, their family or spouse seeing the new job as a "step down" in their career). '
ReplyDeleteThe effect is not limited to the job-seeker alone. This 'loss of dignity' also makes employers reluctant to hire people who have worked in more prestigious positions. There may be a couple of reasons, possibly sound.
1. If the 'old' occupation became available again, it wouldn't be enough for the employer to match the compensation of the old job, it will be necessary to also additionally compensate for the loss of dignity.
2. A new employee's loss of dignity may interfere with her ability to get on with co-workers or even customers or clients. I knew a doctor who had his license suspended and wound up working at McDonalds. I can only imagine the amount of yellow bile that built up in his system.
* The ability to fit in with other human beings"............isn't this one of the criteria when employers are looking for employees
ReplyDeleteThe respect of your peers
ReplyDeleteA feeling of career "success"
Close friends
The feeling of being good at what you do
Dignity
.....these all apply when an employer is looking for an employee......surely is a "traded" feature
This is like the fundamental theorem of marketing. We can only sell the things that help people get what they truly want. We design the product to facilitate people getting what they want, and try to persuade them that this is the case (some firms put more weight on one than the other...). And it does seem to be missing from formal models (for example, it's absent in prevailing models of persuasive vs. informative ads).
ReplyDeleteA.Sullivan has a post about conservatism today that though about something else, was in my mind when reading this:
ReplyDeletehttp://goo.gl/yZT3f
"The inability to articulate the value of something you have come to love or do is, to my mind, part of its value."
Though I agree with him, I can't advocate this reasoning to guide our public policy. There should be a living space in this world that remains dynamic, misunderstood, liberating and unmarketable. Look at how misunderstood our market is despite the intense attention to it. Once you try to solve the undignified and lonely, you will have sucked out the exact magic you didn't know mattered.
Don't all cultures delineate in some fashion what can, and what cannot be bought and sold? These taboos surely are always with us (though they differ across time and space), suggesting that there must always be limitations upon market transactions.
ReplyDeleteIt's that the concept of a market has very little to tell us about these endeavors.
ReplyDeleteWhat the Market, blessed be It, tells us is that we are mistaken, when we think these endeavors exist.
All that is, can be bought and sold.
All that cannot be bought and sold, is not.
All that cannot be bought and sold, must be bought and sold.
For it is in buying and selling that all things come to be.
Blessed be the Market, the righteous judge. Baruch atah ha Shuk, dayan ha emet.
Noah,
ReplyDeleteYou don't even need to reach as far as that to find untradeable contingencies. Our biggest exposure by far, the value of our future earnings, is purely financial and also totally untradeable. The reason is that we cannot assign agency of our future decisions; and the value of future personal income is worthless without the power to force the person to work. I.e. slavery is a necessary condition of complete markets.
Because the human capital asset is so huge *and* unhedgeable, we can never sufficiently complete our exposures so as to make the representative agent remotely realistic.
A good point!
DeleteApparently K doesn't have any student loans
DeleteApparently K doesn't have any student loans
DeleteAnd has never even heard of the concept as something others might do. Not to mention other financing alternatives like marrying someone with a job and then having them support you through an advanced degree (which will carry with it obligations of "repayment" that the divorce courts will enforce).
Good post by NS. Another paradox of capitalism: the Solow model says long term only technological progress determines growth, yet all truly radical inventions are not patentable by law (world wide), but deemed "discovered" rather than "invented"--and typically done for free by scientists. Now you could argue that the Nobel Prize is their incentive--but, as NS said about money and fame being weakly correlated, this incentive of winning the Nobel is rather weak. So it remains that fundamental 'discoveries' of science are done essentially for free by nobel scientists.
ReplyDeleteThat assumes that the only reward is winning a Nobel prize. But a scientist can get fame and a good job in other ways. The Nobel prize was only established in 1895, so it seems safe to say that Sir Issac Newton and Charles Darwin weren't motivated in their discoveries by the hopes of winning one.
DeleteAlthough I am rather puzzled as to how you are defining a truly radical invention, surely transistors are both truly radical and were eminently patentable?
Good Blog sir... your blog is very helpful... I am happy to find this post very useful for me, as it contains lot of information. I always prefer to read the quality content and this thing I found in you post. Thanks for sharing.
ReplyDeleteMusic jobs
I cannot believe the subject of "reputation" has not been raised yet. That is the best example of a non-exchange-able good that has a great deal of impact on financial reward.
ReplyDeleteI have long been frustrated by the insistence on micro models built on the average rational consumer as if- like an electron cloud- the simple application of a potential (voltage) would align people in a particular direction on average, therefore we need not bother with the details. Once you get beyond the price competition of equally substitutable products (and if you find such a simple scenario remaining please let me know), the idea of an average consumer centered around a wonderfully optimal decision point is all but a myth.
This type of discussion is a great enumeration of why.
If people really value the dignity of earning money, then the minimum wage is an even more bad thing, as it puts some low-marginal-product people out of work entirely.
ReplyDelete(This does seem to match with happiness research, which indicates that unemployment is very bad for happiness).
Dan and Absalon,
ReplyDeleteThat's great! Dan-Absalon have saved the first welfare theorem from market incompleteness. Just add marriage and student debt. Excuse me while I get on the horn to Greenwald-Stiglitz.
But seriously...
Borrowing money doesn't *substitute* for trading capital. And two idiosyncratic incomes is better than one, but it doesn't *get rid of* risk.
Complete markets substitute unique prices for disparate preferences. If instead, all you have is unlimited access to borrowing at the risk free rate (and marriage!), but no trading of capital, that doesn't remove the impact of your idiosyncratic future income risk on your choices as mitigated by your own personal preferences. I.e. everyone's personal preferences are still critical, and thus all the standard preference-free results like the first welfare theorem collapse.
Next time you meet a mentally ill, homeless person, why don't you ask them why they didn't forward sell their future income back when they were a promising young person with their lives ahead of them? Or barring that, please explain to them how they could have achieved their previously *expected* outcome by just borrowing money or getting married.
Life is risky and uninsurable. Deal with it.
[Sorry for answering down here - "reply" doesn't work in my browser]
K,
Deletedebt doesn't make a market complete, of course, but it is a way of trading future income.
And the burden of student loans does force people to work, often at jobs and tasks that they wouldn't otherwise choose.
The reverse, a future obligation, can also be traded.
My comment referred to your rather startling use of absolutes.
dan
I agree with Dan. The statement in your original post that got me was: the value of our future earnings, is ... totally untradeable
DeleteLoans and marriage are two ways to encumber a future income stream. You can also "trade" your future prospects by entering into a commercial partnership. You can buy some protection of your income stream through disability insurance.
I suspect that there's an economic or market analysis waiting to be done on things like "karma" on reddit or "reputation" and "badges" on stackoverflow. Those serve as measures of respect, and users of those sites provide time, effort, expertise and/or amusement in exchange for that respect. The difference seems that these communities explicitly quantify respect, which has (maybe?) not hitherto been done and so has not been subject to economic analysis.
ReplyDeleteYou've arrived at the same conclusion that was the thesis of Robert Shiller's 2004 book "The New Financial Order"
ReplyDeletehttp://www.amazon.com/New-Financial-Order-Risk-Century/dp/0691120110
Shiller says the problem(s) with the world is that there are too FEW tradable markets. He offers suggestions for new ones. It's not a well written book but its ideas undergird his entire weltanschauung.
I think we can all agree that incentives can be broken down into economic (monetary fungible) and non-economic (non-monetary non-fungible). As long as the relative proportion of our desires stays constant (for non-monetary incentives vs monetary incentives) the fact that economic models ignores non-economic incentives is not important. However, when our relative preferences for the two changes over time e.g. people prefer safer assets over riskier assets despite a higher economic yield on the latter, or jobs with more time vs more money, then problems seem to arise.
ReplyDeleteI am often amazed at what economists discover. Incomplete markets? What next? Fire? Agriculture? Really - there are two major disciplines that have been exploring this side of behaviour for over a century.
ReplyDeleteSnark aside, you really ought to go and read Graeber (at least all but the last chapter). And Levi-Strauss, and Marcel Mauss on gifts, and Arjan Appadurai on the Social Life of Things.
You could also check out a bit of history (Tim Blanning would be a good start) and note that markets have never been the most common way of organising exchange - but have always been in tension with communal gift rules (as in households and small communal associations) and command rules (governments, corporations and so on). And letting markets get out of hand tends to be radically socially destabilising (as does letting command get out of hand). "Incomplete markets" frames it in a way which misses the need to balance things.
Snark aside, you really ought to go and read Graeber
DeleteYikes!!
New around here?
you really ought to go and read Graeber (at least all but the last chapter). And Levi-Strauss, and Marcel Mauss on gifts, and Arjan Appadurai on the Social Life of Things.
DeleteSee, this is a problem with the literary approach to understanding things. Terms aren't well-defined, concepts are fuzzy, and people end up talking past each other.
What Graeber and Mauss are talking about are externalities (with a bit of transaction costs). They are not talking about incomplete markets...the two are different things. But thinking about these ideas in a fuzzy, vague way - as simply the notion that "markets can't do everything" - conflates these things and can't keep them separate.
Economics has its faults, but to its credit, it rigorously defines terms.
But thinking about these ideas in a fuzzy, vague way - as simply the notion that "markets can't do everything" - conflates these things and can't keep them separate.
DeleteEh? Perhaps you need to read Derrida on Mauss...
"One could go so far as to say that a work as Marcel Mauss's The Gift speaks of everything but the gift: It deals with economy, exchange, contract (do ut des), it speaks of raising the stakes, sacrifice, gift, and countergift-in short, everything that in the thing impels the gift and the annulment of the gift."
...and then you can read Long on Derrida...
"It is through the gaze of my extinguished self that I realize the limitations that make scarcity necessary. Through this gaze into my own limitedness - a limit always established by the impending cessation of space and time for me - through this gift of death, I discover in nature the best way to be efficient. Thanks to death I must choose x rather than y. This has become a feature of 'nature' - a demystified 'nature' that bears no possibility of participation in the eternal. This is consistent with capitalism."
...and then you should go back to reading Derrida...
"By preferring my work, simply by giving it my time, my attention, by preferring my activity as a citizen or as a professional philosopher, writing and speaking here in a public language, French in my case, I am perhaps fulfilling my duty. But I am sacrificing and betraying at every moment all my other obligations: my obligation to the other others whom I know or don’t know, the billions of my fellows (without mentioning the animals that are even more other others than my fellows), my fellows who are dying of starvation or sickness. I betray my fidelity or my obligations to other citizens, to those who don't speak my language and to whom I neither speak or respond, to each of those who listen or read, and to whom I neither respond nor address myself in the proper manner, that is, in a singular manner (this is for the so-called public space to which I sacrifice my so-called private space), thus also to those I love in private, my own, my family, my son, each of whom is the only son I sacrifice to the other, every one being sacrificed to every one else in this land of Moriah that is our habitat every second of every day."
...and then you should read Buchanan...
"The concept of opportunity cost (or alternative cost) expresses the basic relationship between scarcity and choice. If no object or activity that is valued by anyone is scarce, all demands for all persons and in all periods can be satisfied. There is no need to choose among separately valued options; there is no need for social coordination processes that will effectively determine which demands have priority. In this fantasized setting without scarcity, there are no opportunities or alternatives that are missed, forgone, or sacrificed."
The moral of the story is...things seem less fuzzy once you get the opportunity cost concept under your belt. People's valuations matter. Resources just can't be efficiently allocated without them.
The moral of the story is...
DeleteOne man's "insight" is another man's gibberish.
The interesting thing that Mauss addresses in the notion of gift exchange is not usefully described as an externality.
DeleteThose things you list that we don't exchange for money are exchanged, they are exchanged for each other. Love is exchanged for love, respect for respect and so on. Sometimes these exchanges coincide with financial transactions sometimes not - but they are the item of exchange not incidental to it.
Mauss also observes that attempts to introduce money into such exchanges don't work. The famous example is the busy father trying to buy toys for his kid to show him love - what the kid wants is love, not toys (he wants toys as well, but that is a separate transaction).
There are many examples of exchanges that take place in the markets for these 'gifts'. Look at the history of Indian giving as an example. They don't use money, in fact, they are almost certainly never to use money. That is not to say that technology won't introduce superior exchanges for these things, just that what the technology will change is not love respect etc, but money.
Remember, exchange came first, then money. If you want complete markets, you will need to include other mediums of exchange besides money, rather than force money into exchanges where it simply doesn't work.
One of Economics great features is its rigor, but as is almost always the case, rigor is also one of its great short comings. Economics rigor is what produces such things as stylized facts, any literary man would be proud of such fictions.
I feel like game theory should have a lot to say about love, respect, acceptance, friendship, pride, family, and dignity.
ReplyDeleteGame Theory FTW!
See Stigler and Bekker: http://econfaculty.gmu.edu/wew/syllabi/Econ811JournalArticles/StiglerBeckerAER.pdf
ReplyDeleteI like the way you think, Noah. Now, I don't mean _how_ you think, or _what_ you think, necessarily, just I like the way you start wandering around in areas you can't really make hay in because they're not too amenable to data collection. It's still popular among some folks in the 'hard' sciences to sneer at those in the 'softer' sciences (or "arts" as I sometimes hear it termed), but I can't help remembering when these hard sciences were pretty damned soft themselves because the foundations and equipment just weren't there. Every hard science started out as a philosophy or the equivalent, and the early days involved a lot of "well, we can't measure it, but I think this is worth fiddling with anyway"
ReplyDeleteOf course, you get folks in the soft sciences who have bad cases of hardness envy, and try to pretend that their work is rigorous when it may just amount to putting pudding in brick molds and saying that they can build houses with the results. That's a different thing, I think.
I like the way you think, JohnR, but the way you write could use a little work...
DeleteAny subject which grants a "PhD" started out as philosophy. Some have gotten farther than others from those roots, for better (usually) or worse (economics).
DeleteThis also explains how a lot of advertising works. Much advertising claims (or at least implies) that you will get one of the non-purchasable goods if you purchase their product.
ReplyDeleteHi Noah,
ReplyDeleteI like your technological thought experiment about desire modification. It's almost like you've stumbled onto other disciplines by understanding what economists are holding constant: preferences.
Things like persuasion (humanities), or cultural shifts (sociology and anthropology), are by definition desire modification.
This is a far less snarky version of my comment.
DeleteI think Noah's d-mod, your post and mine are covering similar ground.
ReplyDeleteIf by "rigor" you mean "defining what I don't want to notice as non-existent" then, yes, much economics is very rigorous. And often the rigor is in inverse proportion to the sense. Einstein: "Everything should be as simple as possible, but not simpler".
ReplyDeletePeople are not simple. They live in/create/are created by/react to social worlds that are multiplex - most social meanings depend on context. Think how enabling language is, and how much a part of being human, but also how difficult it is to define any single element in language as it is used - where "Yes" can mean yes/no/maybe/I hear you.....If you rigorously define "yes" as the affirmative, you miss much of the conversation.
One basic test of real rigor is how much theory is tested against the real world. In this, economics as a discipline does rather worse than history.
Heh...
Delete"If by "rigor" you mean "defining what I don't want to notice as non-existent" then, yes, much economics is very rigorous."
DeleteTo be fair, not all economists have such a myopic view of human behavior.
So I think that non-exchange-able, but producible, goods might have an absolutely enormous impact on economic behavior of all kinds. What gets exchanged in markets is heavily dependent on what must be produced outside of markets.
ReplyDeleteHow is this different in any measurable way from Adam Smith's observation that the purpose of all production is consumption? The only reason we bother producing anything is because it brings benefits once consumed. How is enjoying better relationships because you had a dinner out with your friends different from enjoying the flavour of good chocolate melting in your mouth because you bought an Easter egg? I can't sell the taste of chocolate separate from the chocolate any more than I can sell a better relationship.
To take your hamburger example, yes, markets can provide me with a hamburger, but I don't want the hamburger per se, I want the nutrition and the taste and aroma of the hamburger, and the feeling of a full stomach. If I suddenly develop feelings of nausea between buying the hamburger and starting to eat it, then the burger was wasted money (this sort of thing happened quite a bit during my first trimesters of pregnancy). A hamburger might help me get the feelings I want (first of good flavour, secondly of energy the next day), like a cellphone might help me build friendships, but it doesn't guarantee it.
How different from what Adam Smith said? I think Noah is distinguishing goods which are consumed, and therefore tradable, from goods which are produced (in a sense) but not consumed.
DeleteLove is not consumed. But it has a salutary tendency to propagate, thank goodness.
I guess this depends on your definition of consumed. Love is not consumed like chocolate is, but then neither is a beautiful painting.
DeleteNoah -- I can send you a paper (chapter, really) that will be published in the next year or so that addresses a number of these ideas. More broadly, I'd love to see you dialogue with the author, Sajay Samuel, who is at UPenn. "Smith carves out economics from both ethics and politics by confining its domain to the determinants of market prices; to the sphere of exchange-value. He accepted Locke’s arguments: that labor is the foundation of property rights; that applying labor transforms the commons into private property; that money ignites acquisitiveness; and that accumulation beyond use is just. Smith deliberately ignores the commons and emboldens the market because it is the sphere in which acquisitiveness flourishes. He curtails his inquiry to exchange-value in full awareness of the contrasting ‘value-in-use.’ Even if not in these precise terms, the distinction between ‘exchange-value’ and ‘use-value’ was known to both Aristotle and Smith. Yet, Smith is perhaps the first who recognizes that traditional distinction and nevertheless rules out use-value as a legitimate subject of an inquiry on wealth. For Aristotle, it was precisely the distinction between use and exchange that grounded the distinction between appropriate acquisition and inappropriate accumulation... By focusing economic science on exchange values, Smith privileges the world of goods over that of the good. By being silent on use-value, Smith
ReplyDeleteforestalls the possibility of any economic judgment on what is useless, superfluous and wasteful.
...by excising use-value from the province of economics, Smith avoids addressing such questions and extricates economics from ethics. By choosing to ignore the useful, he also avoids seeing that his political economy is largely a science of the useless. Modern economics as the science of wealth through exchange remains blind to ‘subsistence’ precisely because Smith placed use-value in its blind spot."
Herman Daly has written around some of these issues (e.g. Daly, H.E. (2009) Incorporating Values in a Bottom-Line Ecological Economy. Bulletin of Science, Technology & Society 29, 349-357), and an excellent piece exploring parallel questions is Bardhan, P.K., Ray, I. (2006) Methodological approaches to the question of the commons. Economic Development and Cultural Change 54, 655-676, which grapples with, but does not resolve, some similar limits and problems of economics.
This post is the equivalent of a fifteen year old coming to the realization that his actions don't have much bearing upon the world at large after smoking his first joint.
ReplyDeleteeconomics is, by definition, the study of the efficient allocation of scare resources amongst unlimited wants. so your fabrication of "non exchangable goods" is impossible, since a good, by definition is an exchangeable good that is scarce. All your "non exchangeable goods" are purley subjective values, unable to be quantified or valued by anyone except that specific individual who they pertain to. Since elections, and thus democratic elections ignore a vast amount of the minority's preferences, subjective values, they are unable to successfully capture the subjective values of millions or billions of individuals, and thereby cannot efficiently or effectively supply good, or even "non exchangeable goods". The only institution that allows for 100% consensus and 100% voluntary interactions and exchanges is the market. let markets work, people will buy, trade, and associate as their subjective values see fit, and everyone is better off. Or we can steal and use force and coercion to jam our subjective views down the throats of everyone else...
ReplyDeleteSandel's "What Money Can't Buy" is very close to this, although he argues that markets are actively encroaching on things like dignity, not simply incomplete.
ReplyDeleteIt strikes me that you would have very interesting things to say about Phil Mirowski's work on cyborg economics and physics. I remember you yelled at McCloskey a while ago on that subject -- Mirowski is where she got it, and his stock is at an all time high right now. Definitely needs an adjustment.
Mirowski, 1989. "More Heat than Light: Economics as Social Physics, Physics as Nature's Economics."
Mirowski, 2002. "Machine Dreams: Economics Becomes A Cyborg Science."
"money couldn't even buy you hair."
ReplyDeleteIs that a Trump reference?