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The Tyranny of the Market
A new book by my friend and Wharton colleague, Joel Waldfogel. I've not read it yet, but based on our lunchtime conversations, I'm looking forward to it. (Hint: what does it take to get a free copy?) Plus you've got to admire any book invoking the Rolling Stones in the title.
Joel has summarized the main arguments in his latest column at Slate. Certainly a subtle and fascinating hypothesis about how and when markets can fail us. More commentary (from the Wharton writers) here.
Posted by Justin Wolfers on October 4, 2007 at 11:58 AM | Permalink
Comments
Part of the article is obvious, the rest is misleading. Obviously if my tastes are unique, then it might not be profitable for a marketplace to provide goods and services that meet each of my idiosyncracies.
The difference is that a government forces me to pay for things that I do not consume, while a market does not. I might want to buy what Wal Mart is selling or eat at McDonald's, but neither can forcefully take my money from me. The same cannot be said for government, which confiscates my wealth every paycheck whether I like it or not.
Posted by: DM at Oct 4, 2007 12:08:17 PM
He offers a critique but no solution. The only one I can come up with is that the government undertakes the task of providing products for people who form too small a market to be profitable. Of course if these products are not profitable, they are not self-funding, which means that the government will need to take money to cover the losses from other areas. Such as my paycheck... Which makes this "tyranny of the minority".
The problem isn't markets vs government. It's that there are fixed costs to producing things that need to be payed for. Markets make the people who use the products pay those costs, and if they don't want to, they don't have to (but then the product doesn't get produced). Government makes people who don't use the products pay, whether they like it or not.
Which one does the word "tyranny" sound more like?
Posted by: Josh at Oct 4, 2007 12:30:09 PM
everyday there is more variety than there was the day before.
Posted by: josh at Oct 4, 2007 12:32:53 PM
It seems to me, based on the column, that the book's thesis is based on a flawed premise. That being the assumption that The Market is perfect. The Market isn't a perfect model satisfying _everyones_ needs and wants in all cases and at the price that they want to pay. The Market is just the most efficient model compared to the alternatives.
Posted by: Bob. at Oct 4, 2007 12:37:28 PM
I thought the Slate article was nonsense. What was its point? I fail to see why it is a "tyranny" that the market does not meet every single desire of mine at a price I want to pay. How exactly else does he propose these needs are to be met? He never addresses that. The wish that somebody else immediately fulfill my desires, and calling it tyranny when somebody else does not, seems extremely narcissistic. Seems more like people like him need to understand that the world does not revolve you and exist to serve every single need. This is the argument of a child, not an adult. If this is representative of his work, I'll readily pass.
Posted by: Chris Durnell at Oct 4, 2007 12:37:38 PM
I think that Waldfogel has an interesting point. Essentially, if you have fixed costs of catering to a preference, and low/constant marginal costs of production, then you may not get what you want if not enough people share your preferences. I've certainly seen Waldfogel's core argument for years, I've heard him make the argument, and he's produced a fine body of work that illustrates that point in TV, radio, and newspapers.
I think Waldfogel overplays it a bit, however.
First, whatever the "tyranny" of the market, it's certainly a lot less tyrannical than the democratic tyranny of the majority. In 1957, both John Galbraith and Ayn Rand had bestsellers. It's hard to see that happening if publishing was democratically-controlled.
You have a bestseller if 1 million people buy a copy of a book. That's less than 1% of the adult population. That's certainly a lot smaller than 50% of the population. Maybe you'd have been out of luck if you'd liked a novel that only 1,000 other people would buy.
Second, we now have technology that greatly lowers the fixed setup costs
across a large variety of products, especially media products. You can start a webpage of a blog devoted to anything at virtually zero fixed cost. New technology is lowering the fixed costs of producing music, movies, and even news coverage. The vast increase in channel space available on satellite and digital cable greatly lowers the fixed costs of having a channel that caters to a given preference (BET and TVOne, for instance are both cable channels targeted to African-Americans). Innovations like satellite radio allow firms to spread their fixed costs across larger groups of people. That means that you don't need enough people in your local area to share your preference; you just need enough people across the country. Heck, thanks to the internet, it probably is now profitable to web-publish books that only 1,000 people would buy.
So "preference externalities" really never made the market worse than government, and they are now rapidly diminishing as a real driver of actual marketplace outcomes.
Posted by: Keith at Oct 4, 2007 12:38:07 PM
Here's a illustration of point about how aggregation by national media services can solve the fixed-costs "tyranny" in the marketplace, from some very subtle and fascinating work by my favorite economists:
"Many media products incur up-front fixed costs and constant (and
often low) marginal costs. Consequently, media firms will only produce content
that appeals to enough people to cover their fixed costs. Locally-based media may
not produce adequate diversity because not enough consumers with a particular
preference live in the same locality. Nationally available media like satellite radio
helps resolve this problem because they can aggregate the preferences of
consumers across the nation, which means that they can cover the fixed costs of
producing content that appeals to small (locally vanishing) groups of consumers.
For example, assume that a radio station requires 150 listeners to be
viable. In city A 100 listeners like jazz and 100 listeners in city B like jazz. Local
radio stations in cities A and B will therefore not air jazz, because no station in A
or B could attract enough listeners to be viable. A national radio service that
reaches listeners in both cities, however, will produce jazz, because the national
radio service reaches 200 jazz listeners, which more than covers the fixed costs of
its jazz service."
Posted by: Keith at Oct 4, 2007 12:45:46 PM
As someone who is 6'8" and wears a size 15 shoe, I sympathize with the Native Americans in the Slate article. (By the way, according to Census figures, the percentage of the population over 6'4" (0.8%) is about the same as the Native American population (0.7%).) Growing up it was very difficult to find shoes, shirts, pants, and nearly anything in my size. As noted by "Josh", this is no longer true. The innovation of the market has driven down the costs of all transactions to the point where idiosyncratic preferences are much easier to satisfy today than in the past. I can get size 15 in nearly any shoe; I can satisfy my preference for antique Geology books by using the Web to buy books in Japan or Spain; I can listen to old-time country music on the computer or satellite radio. There may be some markets that are unsatisfied -- when, oh when will Vera Wang make a black cocktail dress in my size!? -- but these are becoming fewer and fewer by the day. Not because of government intervention, but in spite of it. The goal of government policy should be to drive down transaction costs and get out of the way of voluntary exchange. From that all else will (eventually) flow.
Posted by: Todd Henderson at Oct 4, 2007 12:47:18 PM
I haven't read the book, and I believe that Joel W is a smart guy, but that Slate article is just nonsense.
Yeah, pity those Native Americans who didn't have wide shoes until Nike stepped into the breach and...oh, wait. Try a Google search for "wide shoes." You get, oh, about 2.5 million results; the first page is entirely different places to buy wide shoes.
So...the real tyranny isn't that Native Americans couldn't get the wide shoes they've been craving lo these many years but, rather, that they couldn't get the wide Nike shoes they've been craving.
Forgive me if I don't shed a tear for those who are so cruelly oppressed by the market that they are denied cheap, designer shoes built to their specific tastes.
Posted by: Bob Montgomery at Oct 4, 2007 12:53:34 PM
In what sense is this an advance on the work of Meade?
Meade, James E, 1974. "The Optimal Balance between Economies of Scale and Variety of Products: An Illustrative Model," Economica, London School of Economics and Political Science, vol. 41(164), pages 359-67, November.
Posted by: tom at Oct 4, 2007 12:56:30 PM
In what sense is this an advance on the work of Meade?
Meade, James E, 1974. "The Optimal Balance between Economies of Scale and Variety of Products: An Illustrative Model," Economica, London School of Economics and Political Science, vol. 41(164), pages 359-67, November.
Posted by: tom at Oct 4, 2007 12:56:38 PM
A purer example of academic thumbsucking in the face of our historically unprecedented avalanche of market-driven productivity and choice would be hard to imagine.
What sort of market failure produces people like Joel Waldfogel? Finding an (ethically acceptable) way to fix that would be useful.
Posted by: ZF at Oct 4, 2007 1:14:23 PM
Christ, ZF. You're being a little over the top, no?
Like I said, Waldfogel has a good point and he's actually shown markets where this phenomenon occurs.
It's just that the phenomenon is now rapidly disappearing in many areas. But it certainly likely holds in the case of pharmaceutical research.
Posted by: Keith at Oct 4, 2007 1:20:37 PM
I kept thinking what he is complaining about is the tyranny of scarcity. It seems that the market often does a very good job of mitigating that tyranny.
Posted by: martin at Oct 4, 2007 1:23:37 PM
I'll add my voice. This concept is nonsense.
Posted by: dave smith at Oct 4, 2007 1:28:07 PM
I really want a 200,000,000 dollar blockbuster with special effects and top actors/actress about my life story.
I guess the market sucks for not giving it to me.
Seriously, I thought that the beauty of the market was that it ensures that my movie, who would only be seen my me and my mother, would never get made.
Posted by: dave smith at Oct 4, 2007 1:30:56 PM
It seems to me that Adam Smith already laid this point out. The diversity of goods produced is dependent on the extent of the market. No one has claimed that the market is a genie in a bottle. Though it is an oasis that frees you from a type of tyranny. If you could not exchange your labor for others', you would be left poor and desperate.
For an economist to fail to see the glory of that freedom, save the counterfactual of no market, is depressing. Do you think we could petition his PhD granting institution to rescind his degree?
Posted by: Richard Pointer at Oct 4, 2007 1:46:40 PM
I can't get my head around how bad this is. Richard Pointer's point is very good.
Also, if I remember from my IO classes, most people critize markets becuase they provide too much variety.
Posted by: dave smith at Oct 4, 2007 1:50:04 PM
Hold the presses! MR commenters dismiss arguments sceptical of markets; find their beliefs confirmed.
I have to wonder why some people bother reading the one-page article. Of course, you could ask why I read this comment thread and had my own prejudices confirmed about MR commenters, but two wrongs don't make a right.
Posted by: tom s. at Oct 4, 2007 1:50:05 PM
free-market economists have told us for decades that we should rely on market decisions, not the government, to meet our needs, because it's the market that satisfies everyone's every desire.
This guy is a professional economist? Good grief.
Posted by: Patrick R. Sullivan at Oct 4, 2007 1:51:48 PM
If you're not familiar with Joel's work, I highly recommend "The Deadweight Loss of Christmas" in AER in the mid-90s. I know it's not the traditional season to break this article out, but Christmas advertising does seem to get earlier every year, does it not?
(And I think this tyranny is a bit of a strange argument...if the total marginal welfare of a new product is less than the total cost (including fixed costs), it should not be produced on efficiency grounds. I feel pretty confident that, at a higher price, one could get Nike's widened by a decent cobbler, so the market is "complete" in that sense. If the argument is just that markets aren't complete for some reason (say, in insurance), then I buy that, but in general I imagine the welfare loss from this is small since otherwise the market would quickly fill in a large gap).
Posted by: cure at Oct 4, 2007 1:56:46 PM
Yeah, the comments have gotten really unfair about a guy who's done good work. Waldfogel really has shown that there are markets where people are more likely to get what they want when there are other people like them in that market.
Now, I think that's rapidly becoming less important as we've seen much lower fixed costs in a wide variety of markets, and Waldfogel himself seems to acknowledge as much.
But geez, people, ease up on the torches and pitchforks, already.
Posted by: Keith at Oct 4, 2007 2:08:51 PM
On the specific point, New Balance makes running shoes that come in widths. The shoe I am wearing right now comes in D, EE, and 4E. Some of their other models come in B.
I know this because my feet are narrow. I fit somewhere between New Balance's B and D. I bought a woman's B, which fits me perfectly.
On the broader point, if government controlled the shoe supply, I doubt they would legislate that New Balance make me a men's C, in the exact size, style and color I want. But other posters have critiqued this thesis better than I can.
Posted by: Phil at Oct 4, 2007 2:09:20 PM
I don't know what Native Americans did for shoes before this shoe, but I bet they weren't barefoot. There market I'm sure was limited in choice and variety, but I bet there were decent substitute shoes. The reason is that if they were willing to pay 3x as much for a shoe as the regular person, someone would step in and make that shoe. The point is that there wasn't a market for a great variety of shoes, at the price they are willing to pay for it.
But it does make me think about, other goods that we actually do require markets to provide. We often provide sellers to offer handicap access to their stores. This access may be costly and unjustified from a profit perspective if the number of handicap people is small, yet, there is something about freedom of access appealing about it. Milton Friedman (who I greatly respect) was against protection of consumers against race discrimination and presumably (though I'm not sure) against forcing the market to provide handicap access. He thought it was wrong to make us pay for such things, and he thought government would do such a lousy job (regulating badly, too often) that the costs would outweigh the benefit.
I don't think the government should force the market to make a larger variety of shoes for people with big feet (just as I don't think it should keep my beloved Sorkin shows on the air), but handicap access is something I think about a lot. In some ways, it is very similar.
Posted by: Charlie at Oct 4, 2007 2:21:35 PM
I too was seriously disappointed with the article. Didn't we just not too long ago have a book called "The Long Tail" that showed how smaller and smaller niches are getting served more and more often? Where's the beef?
Special thanks to Bob Montgomery (12:53pm) for saving me time by typing exactly what I was thinking. Come on Waldfogel, were these Indians shoeless before Nike "belatedly" came along? What was the population size, 1.5 million? Aren't there any Indian entrepreneurs who are astute enough to see and fill such a huge market? Perhaps the reason Nike didn't enter the market is because it already was being filled.
As far as diseases/viruses that "too few" people have, and therefore it isn't profitable enough to fund for-profit research on, I think it makes more sense for the private for-profit sector, the private non-profit sector, and the government sector, to focus on mitigating as much pain and "premature" (whatever that means) death as possible for as many people as possible. Where is the logic in anyone (excepting the afflicted themselves and their loved ones) funding research to find a cure for a disease that afflicts perhaps 500 people a year when there is another disease that is as promising or unpromising to find a solution to that afflicts 500,000 people a year? (The argument works for any size group).
There is no market failure here, unless you think that the lack of living a painless life for eternity is a market failure. Government action on the other hand would be more likely in the absence of market agents to fulfill the funding requests of the squeakiest wheels, not the wheels most likely to be helped by reasearch dollars or the wheels most in need of help (i.e. the most numerous categories).
Posted by: happyjuggler0 at Oct 4, 2007 2:24:53 PM
