Friday, January 3, 2014

Perfect Cooperation

If you can get through this without raking your fingernails across your face and screaming into the futile night, I congratulate you. I can't do it. I'd rather listen to Henry Kissinger botching ABBA karaoke in a sequined thong (I'll leave it as an exercise for the reader to imagine who exactly is wearing the glittery underpants). The startling thing is that the piece has no protagonist. Both Krauthammer and Klein commit egregious errors of a priori reasoning and ex post evaluation of empirical evidence. Ordinarily, I'm quite fond of stories that contain nothing but villains: I count Herzog and Von Trier among my favorite auteurs, but what I adore in cinema I abhor in attempts at serious analysis. If you've better sense than to click on the link, here's the giveaway graf:
By way of background, during the minimum wage segment, Krauthammer correctly noted that raising the minimum wage would result in some job losses because "it's an axiom of economics: If you raise the price of everything, you are going to lower demand."
If you need me, I'll be over here, shaking my damn head, palming my damn face.

Economics is a funny ol' discipline. It's extremely important out in the wide wide world, and most undergraduates take at least an intro course. Certainly folks who end up in a b-school or poli sci or whatever have done the principles series. But something (obviously) gets lost in time, translation, and under the pressures of special interests. Like Bryan Caplan observes, there's a telephone game of dread import happening, one subject to not only innocent mistakes, but to active sabotage.

And the curious language of economics lends itself quite easily to misinterpretation. Consider something that's in pretty much every intro textbook: (except the only one you should be using) a model for "perfect competition", shorthand for a market with many sellers, each with a small proportional share of the market. This is used as a pedagogical tool to teach students the role of prices in the production process. Importantly, it's the economist's version of a frictionless environment, a blackboard fiction intentionally stripped of context to teach the mannequin articulation of applied price theory. The "competition" bit means competition between firms, but lazy op-ed writers latch on to the linguistic shorthand and claim that competitive markets imply that the competition is between firms and customers or firms and their employees.

This is not the message of the discipline of economics.

Markets are first and foremost about cooperation. The simple, common, everyday act of offer and acceptance in an environment that respects both the prior and post allocations after an exchange is a cooperative act embedded in a suite of institutions that holds all participants sovereign. The mundane activity of going grocery shopping is a marvel of commonplace human dignity. Trying to justify coercive intervention into this by claiming that firms are competitive perverts not only the lessons of economics, but robs ordinary people of the ability to say "no". In a livery market, if I don't like the surge pricing, I can say "no". In a market for after a hurricane, if I don't like the price for ice or gas, I can say "no". And that's as true for a buyer as a seller. Markets may be less cooperative under situational duress, but their fundamental character is still cooperative. I for one plan to change how I talk about this. I encourage you to at least consider doing the same.

If even bright people like Krauthammer and Klein can botch something as simple as the First Law of Demand, some small tweaks to the jargon might be worth considering.


  1. Markets are not 'first and foremost' about co-operation. They are co-ordination solutions- not robust ones save at some higher metaphorical level- and Econ, as a discipline, knows this.
    You are speaking of local Tiebout type models and assuming that the Meta-preferences they enforce are indeed Euvoluntary.
    You say 'The mundane activity of going grocery shopping is a marvel of commonplace human dignity.'
    It isn't.
    When I visit my Dad in West Delhi (which has a large Sikh population with a religious objection to Smoking) I am humiliated coz I have to engage in a hole in the corner transaction to get my daily carton.
    More generally, the whole 'grocery shopping experience' is about enforcing the tastes valorized by the local Tiebout Model on the housewife. My elderly Italian neighbor used to ask me to go and buy offal from the butcher for her. She was of peasant origin but had risen into the middle class. As a black man, I could demand whatever I liked and pay for it with no eyebrows being raised. The joke is, I belong to a Vegetarian caste.

    Economics does have something to say about 'euvoluntary' transactions- it is that they can be modeled by a particular sort of co-operative repeated game. There are some conditions, which I'm currently trying to grok, where a competitive game has a representation such that the essential hysteresis free, or euvoluntary, nature of transactions is shown to be both effectively computable and demonstrably dynamically 'golden path'.

  2. Derivatives are a broad category of investment vehicles that have been stigmatized with a bad reputation for being difficult to understand, challenging to price, and risky to trade


Do you have suggestions on where we could find more examples of this phenomenon?