Economics: vacuous?
Such is what they wonder at Crooked Timber.
Yesterday I went to a grocery store (don’t worry, this will connect) whose televisions, blaring lights and omnipresent noise gave me a splitting headache that lasted the rest of the day. It’s one of the new super-massive Shaw’s stores, and it competes (as far as I can tell) with only the Stop & Shop across the street.
As it happens, I’ve also been arguing at work with an arch-libertarian and “anarcho-capitalist” who draws his inspiration from Ayn Rand and Murray Rothbard. So I asked myself how my libertarian coworker would defend an incredibly annoying grocery store. To me it’s obvious that there’s nothing to defend: no customer actually asked to have a television assaulting him from directly above the salad bar, and to have another TV assault him in the checkout line. I presume my libertarian coworker would say that if customers really cared, another grocery store would arise nearby that’s not as annoying as Shaw’s, and would steal business from Shaw’s. You could argue that the existence of Whole Foods, with friendlier lighting, pleasant staff and a soothing décor is evidence in favor of this response.
I could retort with a model. I’ve got the outlines of it in my head. Suppose each customer in the area has a utility function that depends on two variables, namely price and “comfort,” where comfort includes the severity of the lighting, the presence and volume of televisions, and so forth. Assume utility is monotone decreasing in price, and monotone increasing in comfort.
As for the stores themselves, assume that they they can offer economies of scale: the larger they are, the lower their price can be.
You can make predictions about which stores will thrive. Of course all will depend on the precise balance of price and comfort in the customers’ utility functions. If price outweighs comfort to a sufficient degree, for a sufficient number of people, the number of potential customers for a new, more-comfortable store will be too small to be financially possible. (The stores must make a certain number of sales just to pay rent.)
This model would give you a plausible story about why there’s a given number of grocery stores in an area. You could falsify that particular story, it seems to me, only if it had any generality: if you then tried to move to another city and apply your price/comfort model to that city, and the model didn’t work, then you’d need a new model. Maybe you’d need to add other variables to price and comfort — variables like per-capita income, accessibility by car and so forth. If your model didn’t work in another city, what you have is an explanation, not a model. It’s not a model unless you can use it to predict something.
Eventually, after enough work on this particular class of model, one hopes that you’d have something that could tell grocery-store owners where they ought to locate. Maybe you’d be able to say that more-comfortable stores would thrive in one place and not in another. I assume there are practical economists working within grocery-store chains who spend all day every day doing just this kind of work.
If you were going to be accurate about it, your model ought to be dynamic: it ought to explain that as more stores in an area turn loud, ugly and assaulting, it becomes harder and harder for people to realize that any choice is available to them. Grocery chains will continue making annoying stores until customers revolt. But customers are growing used to a world where they’re assaulted at every corner by advertising and where shots on television are only a couple seconds long; over time, their tolerance for noise increases and their desire for quiet diminishes. So surely the success of a new, comfortable grocery store will depend on the current stock of grocery stores in the area. It’s not a one-way ratchet — Whole Foods can appear and thrive, after all — but it’s definitely important to factor it into the model.
Making economic models dynamic is the whole point of considering evolutionarily stable strategies, by the way: static equilibria of the sort that you learn in Econ 101 become the endpoints of a process that evolves in time. See also Herbert Simon’s paper “On A Class of Skew Distribution Functions”, which explains the appearance of power laws as the result of a very natural time-evolving process.
All of this involves a good deal more subtlety than the Econ 101-style story that libertarians like to spout. In part, I’m coming to think that this is because they’re confusing the model with the thing being modeled. I heard a libertarian recently say that in a free market, thus and such would happen because there would be infinitely many producers of a commodity product. Which is as ludicrous as saying that such-and-such a thing will happen on the earth because it’s a point mass. “Infinitely many undifferentiated producers of a commodity” is an assumption of a model; it’s not a conclusion. More to the point, it’s an obvious idealization that no sane person would take as a postulate of his worldview.
I do, incidentally, see some value in the political side of anarchism as a first reaction. When you see that the president doesn’t faithfully execute the laws, and the only solution proferred against him is more laws, you wonder if our faith in laws is misplaced. If you actually want to stop dictators, you stop the conditions which make dictators possible. As we all know, a representative democracy like ours is built on a gentleman’s agreement. It’s worth asking whether a gentleman’s agreement is enough to keep dictators away.
So I at least understand the motivation for anarcho-capitalism. When I don’t think that anarcho-capitalists are just mean-spirited and wish to eat the poor, I understand that they actually have the best intentions: they believe that the only way to end the evils of dictatorship is to radically decentralize power. Anarchists only take one step in their analysis, however: they imagine the day after the people have taken back the power that is rightfully theirs, but they don’t imagine the next day when warlords or the Mafia have retaken it. They don’t imagine the feudalism that would (to my mind) inevitably follow. And their critique is wildly ahistorical: capitalism as we know it is only a few hundred years old. To think that the world needs more of this is to offer proof by lack of imagination.
