Learn some economics, be entertained…

here. YouNotSneaky is taking Max Sawicky to task. The insults are fun and they make the economics go down easier:

Okay, lemme explain slowly the concept of Pareto Efficiency here because folks is confused.

Suppose there’s a total of 100$ in the economy and two people, Meriadoc and Pippin. If all of that 100 bucks is in some way fully divided between the two, then regardless of who gets what, the outcome is said to be Pareto Efficient. Not fair. Not just. Just efficient. But suppose that only 80$ gets divided between Meriadoc and Pippin with, say, Mary getting 79$ and Pip getting 1$. The other 20$ just lies there on the sidewalk rotting. Then we have inefficiency. We could pick up the 20$ and give it to Pip, or give it to Mary or split it up between them two. Even if we give it all to Mary, so that now he’s got 99$ and Pip only 1$, assuming Pip and Mary don’t care about relative status, only more money, then we can all agree that (Mary=99, Pip=1) is “better” or, more precisely, “more efficient”, then (Mary=79, Pip=1). (If they do care about status or whatever, you can reformulate the problem in equivalent terms)

Of course we may care about income distribution, inequality and all those other things. But that comes later. The PO criteria just says, if there’s 20$ laying on the side, for goodness sake, pick it up and give it to someone, anyone. And that’s the attractive property that a “usual” S&D equilibrium has – no 20$ left lying around rotting.

6 thoughts on “Learn some economics, be entertained…”

  1. Actually, I think point 10 was misunderstood:

    Workers do not hire capitalists. Consumers do not choose merchants. Shareholders do not choose managers. Voters do not choose elected officials.

    Sneaky specifically attacks the “merchant” example, though his criticism works for any of the points, given his interpretation.

    I can explain this point with an anecdote. I know of four grocery stores in my neighborhood: Al’s Food Market, Safeway, Trader Joe’s, and PW. I “vote” for my preference by frequenting that store with my business. My preference is driven by shopping needs, quality of the goods and services provided, price, etc. The stores compete on all of these, prices are kept down, quality is kept high, everybody wins, right?

    Except… I didn’t pick these stores in the first place. What if I really wanted to shop at Whole Foods instead? Or Piggly Wiggly? PW and Trader Joe’s sort of have some overlap, so I end up shopping there instead. My reluctant substitution is indistinguishable from a loud endorsement at the ballot box (cash register). I can pick anything on the menu, but who writes the menu?

    That said, I’m not sure that there’s a way to remedy that across the system. Certainly not by banning private grocers and opening VALU-MAX FREEDOM PATRIOT MART outlets across the county.

  2. No, you have many more than 4 options. There are scores of potential store owners itching for the opportunity to fill your needs in the event one of these 4 screws up in one way or another (e.g. pissing off customers, not carrying the goods people want, etc).

    “What if I really wanted to shop at Whole Foods instead?” The issue isn’t want *you* want, its what consumers want. If consumers in SL wanted a PW, they’d get it.

    I agree that the ballot is more a result of power rather than choice, but I’d say the menu of super-markets is much less so. This is an argument for more market-based policy, btw.

  3. Or Wal-Mart could move in and push 2/3 of the town’s small shops under.

    Piggly Wigglys don’t magically materialize when enough people wish for them. Several people from the chain have to a) recognize the demand, b) decide that the demand is big enough to serve, c) acquire enough resources to start a branch, and d) actually risk opening a branch in the area.

    I have 4 grocery options today, and many potential grocery options floating out there in quantumville. Which is great. But quantum grocers don’t take my club card, and I’m out of corn flakes today. So they can’t help me.

  4. Consider what’s driving a, b, c and d… and then consider what it means for consumers to want something.

    Everybody, including PW (especially PW!), has a price. If consumers will pay it, they’ll get what they want. Hell, pay me enough, and I’d open a grocery store in SL.

  5. Yes, I’m aware of the mechanics by which a business grows through serving its markets well. The problem is the human element. There isn’t an omniscient oracle who instantly recognizes when demand reaches the critical mass necessary to sustain a new franchise. It takes time for people to notice. Demand can go unserved for long periods (in areas that can support it).

    Yes, in the long term, the market will tend to provide goods and services to meet demand. Like I said, I don’t know of a better way to handle these needs. Sniffing out new niches is one of the things that a decentralized decision making system like a market economy really, really excels at.

    Tangential topic, possibly for later discussion: branding/marketing/advertising.

  6. Ok, but that’s an interesting economic problem of the second order. To the first approximation customers *choose* their vendors.

    This isn’t just a rhetorical point. Economic outcomes can be predicted almost perfectly when we assume complete choice.

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