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.
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.
everyday there is more variety than there was the day before.
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.
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.”
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.
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.
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.
I’ll add my voice. This concept is nonsense.
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?
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.
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).
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.
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).
I’m a bicyclist, and often disappointed as designs I like fall out of favor. Bicycling technology is very trend-driven, and moves in waves. So yeah, I get the idea. You can get what you want, as long is what everyone else wants in this ‘wave.’
Might be a good domain for someone researching this …
I forgot to add that for people who like products which do not have a market, technology is easing your surely painful life. The book “The Long Tail” discusses this.
I agree with those who thought the Slate piece was overblown.
Fixed costs are a fact of life, but they’re not “tyranny” and they are not caused by “the market.” If anything, the opposite is true…the market prevents tyranny, and finds ways to lower fixed costs.
It’s just that the phenomenon is now rapidly disappearing in many areas. But it certainly likely holds in the case of pharmaceutical research..
Actually this is changing in the pharmaceutical world too, with the rise of personalized medicine and digial R&D technologies. Drug researchers are giving more attention to drug therapies aimed at smaller markets, and this seems to hold much promise not only for users in small markets, but those in larger ones as well.
in a world of scarcity, some preferences are more important than others. those preferences will be catered to and others will not. that’s just a fact of life. markets are just another way of ranking those preferences, and it does a good job of doing so. if there is any ‘tyranny’ it is the tyranny of scarcity and an unfair universe. most of us get over this and move on. it seems like waldfogel can’t, and blames markets when he should blame god.
The recent issue of Wired poked fun at this new breed of trashy economic best-sellers. On page 54 of the October 2007 issue:
“How a Catchy Title and Argumentative Premise on a Transparent Trust Will Change Your Business, the Web, Culture, and Your Bank Balance Forever.
I agree with the poster who said this guy’s Ph.D should be put in jeopardy. I’d like to hear Justin Wolfers explain why he finds his “friend’s” theory interesting. I don’t see as anything other than a transparent attempt to profit from the economic ignorance of the masses.
“This book looks like it posits market imperfection without providing a viable remedy, except for the implied remedy of government intervention.”
No, I think you guys see regulators behind every tree. That’s what I meant when I said above, “I think many are taking this in a strange way.”
I really don’t think some of you can read this at face value, you are too used to looking between the lines for your mortal enemies.
(i love markets!)
This article describes what anyone who spends any time in a market economy will see … but perhaps we shouldn’t talk about it, because we are insecure in our belief in markets … and must uphold the myth that they are perfect?
You guys are coming across very strongly as ideologues, rather than as ‘market players’ enjoying the benefits (and the idiosyncrasies) of the system.
And of course this is about “personal disappointment, or unsatisfied want” … perhaps by those who do not put ideology first.
OK, that’s a hint, I’ll give you that.
On the other hand, they seem the voice of moderation. They neither endorse the mythic happiness of the socialist utopia, nor the kind of libertarian fantasy only found in (and best left in) bad novels(*).
A regulated market economy, which remains “mostly market” is proving to be the best thing humans can arrange. It succeeds world-wide, while more ideological extremes fail, falter, or need adjustment. Those who have read that old P.J. O’Rourke book, Holidays In Hell, surely get that.
* – ok, some good novels, but that was a fun line to type.
Doesn’t Waldfogel himself praise on-line book sellers?
“Waldfogel says there are some business-to-the-rescue stories, where technology and other advances are addressing the downsides to the market. On-line booksellers and movie purveyors can offer more titles for a wider variety of tastes than your neighborhood book or video store. [...]”
(from the last link in the article above)
FWIW, I think the best word from that article is the word “messy”, as in:
“The Tyranny of the Market is based on academic papers that Waldfogel wrote over the past decade. He says he has repeatedly made the argument to his fellow economists that markets share some messy features of politics and are far from perfect.”
Human societies are messy, an no one human endeavor (markets?) is perfect.
and free market all around the world would allow a 6 billions or more market place wher would be easier to find enough people to make goods affordable no matter how exclusive your tastes are
I’d think the quality and distribution of libraries are another example of messiness. In my experience wealthier towns (those in least need of them) have the best libraries.
Though still unconvinced of the unfettered free market argument so often put forward on these pages, I fail to see what good government intervention would do is this case. Nobody is accusing Nike of discrimination and I heard of no news stories of American Indians protesting the lack of stylish footwear. What is not answered is why Nike started to make the shoes. There is a reference in the Slate article that “according to the Associated Press, the new sneaker “represents less of a financial opportunity than a goodwill and branding effort.”" I doubt this as it would be a very limited branding effort and is more likely a change in manufacturing and distribution technology.
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