Thursday, August 27, 2015

Shadow Prices in a Toy Economy

I spend a lot of time thinking about prices. Probably more time than is good for me. My first Big Boy Pants price theory was hand-delivered from an out-of-press Alchian and Allen Exchange and Production (nb, the top billing that "exchange" enjoys in the title is something regular readers of EE will appreciate) via Walter Williams. But graduate level Microeconomics I was hardly the end of my obsession with the subject. Cost and Choice, a breezy little treatment by the late James Buchanan and the occasional lecture by our own Mike Munger also top the list of influences. It was Buchanan that got me thinking of subjective value (though I think my pals at Sweet Talk might prefer to call it conjective value) on both the consumption and the production side, and it was Mungo who urged me to think carefully about the wide range of opportunity costs and the many otherwise unnoticed frictions of ordinary commerce.

I recently had a Munger Moment visiting Colonial Williamsburg with my niece who is visiting from Lithuania for the month. If you've not been there before, it's a working recreation of the actual 1750s era town, complete with brickyard; milliner; cooper; baker; forge; foundry; loom; smiths tin, black, and silver; & sundry. There's even a dedicated period-appropriate toolmaker who uses modern equipment to craft the tools used by the on-site artisans using the same steel that would have been available at the time. The bit that intrigued me started at the brickyard. While the barker was giving his pitch to the punters, I tugged the ear of one of the other folks working there to ask her why the sundried bricks had what appeared to be a cattle brand on it. She explained to me that the bricks they fired there in the traditional style were actually used on-site for repairs, renovations, and for new projects. Since they were obliged to be period-accurate, they have to distinguish the brick sizes on account of everything predating the standard 220/73/106mm dimensions in use today. Moreover, despite being a tourist attraction, they're one of the few brickyards in the US to use traditional firing methods to create non-standard bricks, so folks owning old brick homes in historical districts often buy from them, especially if they need to replace vitrified or hot-fired bricks.

My curiosity rose as we visited further. At the tinsmith, we discovered that not only were wooden mallets, fids, hods, and scrapers produced on-site, but a great many other easily-manufactured goods as well. It's pretty tough to work with tool steel when you've got a foot-cranked grinding wheel, but cast iron is easy enough to work in the style of the period. Much of the cookware comes right out of the foundry on site. Costumes too, even if the fabric is imported (which is also period-appropriate, since Virginia only grew the cotton; all the textile mills were either up north or across the pond). The really interesting bit was when I saw that some of these same goods used and manufactured on-site were on sale in the gift shops. So between the bricks, the tricorn hats with or without cockades, the wooden dice games, the horseshoe puzzles, and the rag rugs, there are three market tiers: a wholesale market (bricks sold to homeowners in Old Town Alexandria), a retail market (hurricane lanterns in the gift shop) and a shadow sharing market (can you fix my solder oven? I'll owe you a favor later).

Now, ordinarily, we'd just impute the formal market price to the shadow market to determine what the opportunity cost of this local sharing economy is, but casually watching it in action on a lazy summer afternoon gives me pause. I think there's a little something else on the balance sheet in the trade between the park employees that doesn't exist across from a cash register. I think some of it is what the accounting trade calls "goodwill," but I also think there's a special residual for cases like these that rely heavily on in-group aesthetics. You probably already know the literary trope that has the plucky hero earn the "special price just for the family" thanks to some courageous act of derring-do. There's some truth to that. Cherished in-groups enjoy a favored-customer status. Some of it's probably because of reputation effects, but I suspect a lot of it is just atavistic clannishness. I'm a little out of the loop on the current experimental econ lit, but I imagine that you could test it pretty easily in the classroom. Randomly assign folks to a blue team and to a green team, let them trade within their team for a while, then let them trade with each other. My hypothesis is that Team Green will charge higher prices to Team Blue members, and I also suspect that this effect will intensify when the objects traded are more tangible and personal (cups or sweaters in contrast to financial instruments or tokens).

I didn't press the girl in the tinsmith shop to elaborate on the economic institutions (my niece was a little tired and footsore), but if I'd had the time I think I would have asked her to describe the local economic system. I think she would have gone with "communism" or some variant, because she was about half a syllable from uttering "from each according to his ability, to each according to his need" (REMINDER: Marx didn't write that, he just popularized it). And I think there's some merit to that. I also think there's a great deal of merit to Bastiat's counterclaim that while you're wearing the 18th c. duds, it might be easy to overlook that Colonial Williamsburg is still just a tourist attraction. It's embedded in the institutions of the 21st c. Without the external prices listed in the shops, the tough decisions of "what shall I produce" and "for whom shall I produce it" are nigh insoluble. Without the residual ownership of the entire enterprise, and the motivation of being a colonial-era theme park that exists to entertain tourists, can you imagine that a bunch of college-aged kids would show up to sew breeches and bake bread for each other?

Like I noted with one of my favorite old posts here, barter, gifts, truck and other lesser forms of commerce are at their most euvoluntary when the alternatives of impersonal, anonymous exchange are also available. I'm coming around to the argument that the new sharing economy (Uber & al) merely reinforce those same moral intuitions. People really like to share, to be a part of a community rather than one cog out of many. Humanity isn't merely eusocial, it's social as well. The app-driven sharing economy allows us to be both at once. And I don't know about you guys, but I think that's pretty awesome. Uber, except for the day-to-day commerce of a model local economy.

1 comment:

  1. This seems like a case where there may not be enough similar transactions for the market to set an easily observed price.

    I mean in some sense the market sets a price on these fixes since each craftsman presumably has some average return per hour of work that gets traded against time spent fixing something for another craftsman (unless they need to fake work for tourists). However, the craftsmen have different skills so the person asking the favor doesn't know how long it really takes (working effectively) to perform. Similarly, with few craftsmen it's hard to determine how much someone values a given repair since the alternative may simply be doing without.

    Without a large enough market for their to be multiple suppliers (and buyers) for some kind of good this leaves a very nasty price setting problem. It would require a great deal of thought to determine how much you could charge for a fix. Many mutually beneficial exchanges might not happen because neither party wants to signal to observant 3rd parties that they are willing to flex that much in price (he says he can't do it for any less but I heard he said that to X as well and then did it for 1/2). The cost of this kind of bargaining is probably fairly high relative to any inefficiencies arising from trading favors.

    In the long run everyone in the system probably benefits if you could constrain all craftsmen to charge only the true value of the time spent fixing. This is very hard to do with a monetary system as there will be constant pressure to push up prices by a few cents. Favors (viewed as the value of the time invested to do the favor) come in lumpy sizes so it's harder to practically skim off just a little more. Also they invoke a mental context where we feel more motivated by moral virtue than in a bargaining context.


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