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.

Opting In and Out at a Medium Pace.

Bryan Caplan on the farce of gift exchange among mere acquaintances.

Yes, non-pecuniary preferences argue against cash; but SDB [social desirability bias] suggests that a lot of professed non-pecuniary "preferences" are, in fact, lies. Why don't these liars jointly agree to stop exchanging (non-cash) presents? SDB once again! The first person who proposes an End This Miserable Charade Treaty sounds like a jerk.

 Abruptly opting out of a suboptimal gift exchange regime is likely to damage valuable relationships. Easing out over the course of decades wastes time, treasure, and attention. Strike a pleasant balance, and bolster it if you can with translucent excuses like changes in career or family to switch to those gifts that make the exchange a pleasure for the recipient.

And for the love of God, cut it out with the Secret Santa crap already. The demoralizing waste is an affront to decency.

Interesting variant on Buchanan's "Samaritan's Dilemma"

You may know J. Buchanan's "Samaritan's Dilemma."  An interesting game, with altruism (game theory does NOT require self-interest, okay?)

Now, here:  What should this woman have done?  What would you have done?

Conspicuous Consumption

Is a $40,000 case of wine euvoluntary? Neil Irwin says no, and underpinned by utilitarian calculus, it's not an unreasonable claim. If you've got a few dozen thousand dollars to throw at a half a liter of rotten grapes, you can afford to buy some bed nets or tap an aquifer in sub-Saharan Africa.

Of course, that's generally true for people of more modest means too. You might not be able to save 1.5 million people, but you can surely save one or two lives by brewing your own coffee instead of queuing up at Starbucks for fru-fru sugarmilk confections. Does the suffering of distant people enter into your BATNA calculus?

Should it? How do we know when it becomes salient?

Euvoluntary Exchange, Sympathy, and Evolution

Two interesting examples.

1.  Is generosity adaptive?  It used to be verboten to suggest that group selection worked across species (though it might work within a species, for hives or nests of eusocial insects).  But now we can ask, is generostiy adaptive?  Notice that this is NOT altruism, exactly.  Interesting.

Evidence from economic games played in the laboratory for real money suggests humans are both trusting of those they have no reason to expect they will ever see again, and surprisingly unwilling to cheat them—and that these phenomena are deeply ingrained in the species’s psychology. Existing theories of the evolution of trust depend either on the participants being relatives (and thus sharing genes) or on their relationship being long-term, with each keeping count to make sure the overall benefits of collaboration exceed the costs. Neither applies in the case of passing strangers, and that has led to speculation that something extraordinary, such as a need for extreme collaboration prompted by the emergence of warfare that uses weapons, has happened in recent human evolution to promote the emergence of an instinct for unconditional generosity.

I'm not so sure.  Smacks of a "just so" story.

2.  On the other hand:  the incredible shrinking wholly mackeral ball.  Do watch:



Bait ball, bait ball, watcha gonna do?  Whatcha gonna do when tuna come for you?

My colleague Emerson Niou insists that this behavior is a straightforward one-shot PD.
That is, this behavior is NOT adaptive, at the group level, but it is adaptive at the individual level.

Consider:
a.  If somehow the mackeral could signal, "1, 2, 3....GO!" they could all skedaddle at once, in random directions, before predators gather in large numbers.  The bluefin would have had to concentrate on single skedaddlers, instead of taking a bite of the ball, and then another, and then another.

b.  However, if I expect you to skedaddle, I should stay in the (for now) relative safety of the bait ball, while you lead predators away (and, of course, you die, because one loan mackeral can't escape the speedy tuna).

c.   If instead  I expect you to stay in the bait ball, I should...stay in the baitball.  In other words, "stay in the bait ball" is an individually dominant strategy, even though the Pareto optimum is "everybody skedaddle now!"

The question is how a species that acts like this survives.  The answer has to be (as commenters pointed out when I discussed this over at KPC) that it just doesn't happen very often.

My question for Prof. Niou is:  why not?  Why would it be rare?  Why aren't mackeral extinct?

(UPDATE: I accidently said "loan mackeral" above. But I left it. Because it's true that a loan mackeral could never escape a loan shark. Man, I kill me...)

The End of Selfishness

If people work for reasons other than self-interest, are they doing it voluntarily?

Will the internet be the "end of selfishness," or it finest flowering?

The article does pose an interesting "third way" question:

If neither the command-control systems dictated by the Leviathan nor the Invisible Hand of the free market can effectively govern society, where shall we turn?

Nod to Jay Larson