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Market choice theory...

by Metatone Mon Oct 29th, 2007 at 04:53:53 PM EST

Well, not really, but someone's written an actual semi-mainstream media article on something that I've wanted to diary about, but never quite worked out how to express: Why the market solution has all the same outcome flaws as the government solution so derided by "public choice theorists."

Article in Slate here.

You should go read the whole article, but here's a "key excerpt":

This brings us back to Nike's new shoe. Foot Locker is full of options that fit me and most other Americans. But American Indians make up just 1.5 percent of the U.S. population, and with feet on average three sizes wider, they need different-sized shoes. If we had all voted in a national election on whether the Ministry of Shoes should make wide or typical-width shoes, we surely would have chosen the latter. That's why Friedman condemned government allocation. And yet the market made the same choice. If Nike's announcement looks like a solution to this problem of ignored minority preference, it really isn't. The company took too many years to bring the shoe on line, and according to the Associated Press, the new sneaker "represents less of a financial opportunity than a goodwill and branding effort."

The tyranny of the market arises elsewhere. With drug development costs near $1 billion, if you are going to be sick, hope that your disease is common enough to attract the interest of drug makers. If you want to fly from your town to Chicago, hope that your city is big enough to fill a plane every day.

When you're not so lucky, you benefit when the government steps in on your behalf, with subsidies for research on drugs for rare diseases or for air service to small locales. For a generation, influential economists have argued for letting the market decide a wide array of questions, to protect your freedom to choose whatever you want. This is true--if everyone agrees with you.

Author details:

Joel Waldfogel is the Ehrenkranz Family Professor of business and public policy at the Wharton School of the University of Pennsylvania. His new book is The Tyranny of the Market: Why You Can't Always Get What You Want.

The market or the government is too simple a division. I'd like to submit the hypothesis that the reason that the US and Switzerland have the most expensive medical systems is the same reasons cars are most expensive in Germany (of the EU market) and in Japan. It's a matter of industrial policy, behind all the free market claptrap. It's not whether the state caters. It's who the state caters to.

Brad DeLong's statement here can maybe clarify this a bit:

David Kennedy thus demonstrates that he (a) has never read Adam Smith, and (b) has little acquaintance with modern American economists--who are (like Adam Smith) much more interested in prescribing how the nanny state should meddle to be effective than in protecting the naked market from interference.
The problem is that the way economists are prescribing the state to meddle is to shield corporations and the investor class from all risk and maximise their profits by shifting risk to the working and middle classes and keeping their wages low.
by nanne (zwaerdenmaecker@gmail.com) on Mon Oct 29th, 2007 at 06:51:35 PM EST
I do agree with your statement, but I think it's somewhat orthogonal to the issue, which may be due to my lack of/bad explanation.

"Public choice theory" isn't really a theory of "economics" as much as "political economy."

It is the basis of the "anti-government" crowd's policies. It seeks to prove that government is illegitimate because it tends to cater to the majority over the needs of the minority. The argument is that markets better cater to individual and minority needs.

However, the reality, as observed in this article is that the systemic pressures inside a market push provision towards majoritarian postures.

Nike will likely not make much money off making shoes for people with wider feet (and if they were subject to more competition they would arguably not be able to introduce this line.) The realities of modern industrial production (and the pressure to provide return on capital) render provision of services to small segments very often just not viable.

As such, we're discovering that the market provides no more "individual choice" than government provision. Thus government provision is not inherently less just.

Then one can get into issues of efficiency and equity within the market where the issue of risk shifting as enabled by state policy starts to play in.

(Maybe it's too late and I am not making sense here.)

by Metatone (metatone [a|t] gmail (dot) com) on Mon Oct 29th, 2007 at 07:31:30 PM EST
[ Parent ]
Also of course the title "market choice theory" is not really good perhaps, I was making a bad pun on the "public choice theory" concept.
by Metatone (metatone [a|t] gmail (dot) com) on Mon Oct 29th, 2007 at 07:32:35 PM EST
[ Parent ]
Maybe the my statement is somewhat orthogonal to the issue. But it's a big issue. And at some level it comes down to the question whether the market should provide or the government should provide. Which is not the right kind of frame, for reasons I tried to explain. Not as well as I'd like to be able to, but I don't think I'll manage a much better explanation right now.

Public choice theory does not state categorically that the government will cater to the majority over the minority, as far as I've been able to understand it.

To hypothesise that government will cater to the needs of interest groups, for instance by giving them money, because they can organise better than the majority, and the majority is not hurt too much by giving a small portion of their taxes away whereas interests groups benefit a lot, is a core tenet of public choice (of the crude kind favoured by wingers anyway).

Or so I thought?

You're right that it's too late...

by nanne (zwaerdenmaecker@gmail.com) on Mon Oct 29th, 2007 at 07:56:44 PM EST
[ Parent ]
I think metatone's point about "individual choice" is a valid one, though.

The standard theory (and the narrative we constantly hear) of markets always concerns the individual and her/is choice.

The tyranny of the market. - By Joel Waldfogel - Slate Magazine

As Milton Friedman eloquently put it in 1962, "the characteristic feature of action through political channels is that it tends to require or enforce substantial conformity. The great advantage of the market is that it permits wide diversity. Each man can vote, as it were, for the color of tie he wants and get it; he does not have to see what color the majority wants and then, if he is in the minority, submit."

Market decisions are supposedly made by individuals who vote, "as it were" -- an analogy stolen from the political situation of the citizen equal before the law and universal suffrage. But that's not the way marketing works. Commercial decisions are made on market segments, on groups large enough to be profitable.

Further, marketing and advertising seek to federate larger groups, as large as possible, by influencing public taste through what is generally called "fashion". (Clothing is the obvious example, but fashions concern other categories of consumer goods too.) There can be an argument about how proactive marketing is in "creating" fashion, but not, I think, about the extent to which it supports and extends a fashion that is "in the air" or "catches on". And often, fashions are simply decreed. And so no, I can't always "vote for" the tie I want or the jeans I want, because they're not on offer.

I wonder to what extent businesses are not a kind of special interest group obtaining advantageous conditions from the market (and, as they are well organized and may lobby efficiently), from government too?

by afew (afew(a in a circle)eurotrib_dot_com) on Tue Oct 30th, 2007 at 09:51:20 AM EST
[ Parent ]
Businesses are definitely a specialised interest group, and by far the most powerful. This has long been recognised by economic theorists. See for instance, Adam Smith in the Wealth of Nations:
The workmen desire to get as much, the masters to give as little, as possible. The former are disposed to combine in order to raise, the latter in order to lower, the wages of labour.

It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms. The masters, being fewer in number, can combine much more easily: and the law, besides, authorises, or at least does not prohibit, their combinations, while it prohibits those of the workmen. We have no acts of parliament against combining to lower the price of work, but many against combining to raise it.

We rarely hear, it has been said, of the combinations of masters, though frequently of those of workmen. But whoever imagines, upon this account, that masters rarely combine, is as ignorant of the world as of the subject. Masters are always and everywhere in a sort of tacit, but constant and uniform, combination, not to raise the wages of labour above their actual rate.
The masters, upon these occasions, are just as clamorous upon the other side, and never cease to call aloud for the assistance of the civil magistrate, and the rigorous execution of those laws which have been enacted with so much severity against the combination of servants, labourers, and journeymen.

Or, shorter, Milton Friedman:
With some notable exceptions, businessmen favor free enterprise in general but are opposed to it when it comes to themselves.
The broader and more influential organisations of businessmen have acted to undermine the basic foundation of the free market system they purport to represent and defend.

The way in which a specific market functions is determined by an interplay between the allocation of rights, duties and risks and the enforcement of this allocation by the government in specific domains and on specific occasions (as Adam Smith already suggests for the labour market), the strategic decisions of businesses, technology and the way it can be used to create preferences through advertising, etcetera. Free market ideology has very little to do with it.

At the same time, some of the reasons why the market has been as given to conformity (TV culture, mass production) may be fading away. At least Nike is partially going in a hyper-niche direction with thousands of sneakers that are only available at a specific place and a specific time.

by nanne (zwaerdenmaecker@gmail.com) on Tue Oct 30th, 2007 at 11:33:50 AM EST
[ Parent ]
But did American Indians go shoeless because Nike didn't provide them with suitable products? If not, then the analogy with (monopoly) government services is false -- provided that government takes care to enforce a strong enough anti-monopoly policy on corporations.

Words and ideas I offer here may be used freely and without attribution.
by technopolitical on Tue Oct 30th, 2007 at 01:50:19 PM EST
[ Parent ]

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