Why Free Markets Make Fools of Us

http://www.nybooks.com/articles/archives/2015/oct/22/why-free-markets-make-fools-us/

by MaysonL • 11 years ago

73 98 11 years ago

doorty3• 11 years ago

"If a company can make money by deceiving or manipulating people, someone is going to create such a company, and it will prosper (unless the law regulates it). And if it prospers, companies that do not deceive or manipulate people may well be at a competitive disadvantage."

EDIT: I was just quoting the article for discussion purposes. There's no reason to down vote.

jevgeni4• 11 years ago

And if a law does regulate it, the bureaucrat enforcing said law will prosper.

doorty3• 11 years ago

How will he "prosper"? You mean he will have a "job" because he's preventing deception.

javert6• 11 years ago

The only companies that I sometimes continue to engage with after they deceive and manipulate me are governmnent-granted monopolies, like Time Warner Cable.

doorty3• 11 years ago

This assumes you know that they are deceiving you. If the company is successfully deceiving you, then you will not know it.

TeMPOraL22• 11 years ago

Upvoted. It's a great quote, stating the obvious truth that somehow still eludes great many people. The market rewards things that are effective, discriminating against any value that hurts the profit. If honesty is effective, it will be rewarded. If it hinders profitability, it will be discriminated against. Thus in time the optimal amount of honesty will be found.

Given the obvious information asymmetry between the seller and the buyer we shall not expect that amount to be high.

javert6• 11 years ago

But dishonesty does hinder profitability. You can't get away with much of it for very long before customers leave, and you get a bad reputation.

Given the obvious information asymmetry between the seller and the buyer we shall not expect that amount to be high.

There really isn't that much. You can't concretize this (i.e. give real examples) because it's easy for customers to do some research.

There is a lot of "theorizing" going on here that is no good because it is not empirical enough.

javert6• 11 years ago

EDIT: I was just quoting the article for discussion purposes. There's no reason to down vote.

Copying and pasting a quote without providing any further context is implicitly endorsing it.

People are downvoting you because they don't agree with the quote.

UK-AL• 11 years ago

I thought people were naturally pessimistic more than optimistic.

jevgeni4• 11 years ago

I respect Robert Schiller a lot. And I think there are legitimate areas where people are being manipulated into buying expensive things (recent news on pharma companies are a good example of this). But the book (as presented in the article) is incredibly overreaching.

There is an easy solution to the phishermen/phools problem in many cases: don't buy what you are pushed by others to buy. Combine that with the proverbial "there is no free lunch" and you are more or less safe.

I remember when I was a student during the heyday of the financial swing that led to the 2008 crash, I was walking thorough the Hamburg airport and a young representative of American Express caught me and tried to convince me to sign up for American Express Gold (afaik, a product tier two steps down from the mythical American Express Black).

"What is your income?" she asked me. "I don't know. I'm a student, I live off 400 Euros a month." "Alright, I'll write 40 000 EUR annual income in the form."

At that point not alarm bells, loud ass alarm sirens were going off in my head and I've politely disengaged and walked on. And that was the suprisingly easy way how I avoided crippling credit card debt.

The problem is really not in the free market per se, but industries that don't allow robust competition and that aren't scrutinized by consumers. The first part is achieved by regulation. When was the last time utilities, energy companies, banks, and pharmaceuticals were challenged by a newcomer? The second part is made possible by us not caring what we buy or continuing buying something purely out of emotion. "What's that? Google now allows companies to directly put ultra-targeted adds in your inbox? That surely doesn't sound like legalized spam. And they say they're not evil."

ZeroGravitas• 11 years ago

This is not an individual problem. We may be smart enough, well-rested enough, with enough financial reserves etc. to avoid these scams in most cases, but the whole market is warped by what works on the average person. You shouldn't have even been put in that position, the lady trying to hook people into debt should have been contributing something useful to society, as should the people who get hooked into debt and end up funding the next generation of scams.

I believe in the power of market competition, that's why externalities scare me so much.

bufordsharkley2• 11 years ago

I've been trying to live by the dictum "anything advertised is not worth buying," and I've rarely been forced to find exceptions. Buy what you need, and only what you need, and one can live very comfortably.

Swizec• 11 years ago

"anything advertised is not worth buying,"

Then how do you find out about new products or services? Remember, reading about it in a news paper or a news site or even a blog is also advertising. Paid for one way or another.

Basically any time you hear a brand name or see a brand name or read a brand name, that's an ad. A paid-for ad. Even your friends' t-shirts and computers and cars and stuff having their brand name on them ... that's an ad.

So if you never buy anything advertised, what then do you even buy?

jevgeni4• 11 years ago

I think this is a good approach. Let the product speak for itself.

a_bonobo• 11 years ago

don't buy what you are pushed by others to buy

I think this is much easier said than done - your example of credit card pushers is an extreme example of pushiness.

I think in the majority of cases where you buy something, you may not realise that you've been pushed to buy it. Shopping in supermarkets is one example - they make a "path" for you to follow, stuff you may not usually buy is positioned in such ways that you stumble over them, things you usually wouldn't buy are on offer, your loyalty card gives you an offer on the stuff you usually buy, more examples here: https://theconversation.com/conspiracy-or-commercialism-are-...

You then wind up buying these things ("oh, I haven't cooked X in a while, that should be fun") without realising that the supermarket created the situation in which you thought this buy to be desirable, without explicitly pushing you.

paganel3• 11 years ago

Shopping in supermarkets is one example - they make a "path" for you to follow, stuff you may not usually buy is positioned in such ways that you

That's what Ikea does, and I hate them for that. I find it to be really condescending/paternalistic in relation to its clients, on top of the manipulative "buy-this-stuff!" thing.

your loyalty card gives you an offer on the stuff you usually buy

My solution, which, granted, is not so great but works for me, is to never ever accept loyalty cards from stores. I understand that that implies that sometimes I pay 5% or 10% more, but I think it more than evens up by me not buying stuff that I don't really need because of the 5-10% price reduction. I also very rarely look for special prize offers on stuff I buy day to day, like food items, it only encourages me to buy more of it.

jordanchan4• 11 years ago

Anything can make fools of gullible people. Free markets or oligarchies.

TeMPOraL22• 11 years ago

The key insight being, every single human being is gullible when you attack from the right angle.

jordanchan4• 11 years ago

Indeed. Everyone has their sensitivities, vulnerabilities and emotional/other needs. A company that has figured out how to push the right buttons in its sales pitch/ad has found its subset of "gullible people" - who will be driven more by animal passions than by reason. Humans are very well capable of overlooking potential long term harm in favor of short term pleasure, or even convincing themselves that the ill effects won't apply to them.

That being said, I wouldn't agree that every single human being is gullible when attacked from the right angle. Example: there are many stressed out people who don't smoke, it doesn't matter how or how much you try to convince them. One can peddle snake-oil on the streets, but only a subset of passersby will stop by and an even smaller subset will buy it - this does not imply that only the most afflicted are the ones making the purchase.

littletimmy• 11 years ago

Despite this and all other evidence to the contrary, I don't understand how some people still stick to the idea of efficient markets and speak against government intervention. The market system must be our slave, not our master.

TeMPOraL22• 11 years ago

Indeed. There is this common meme among religious people that some men make money their god. Sometimes it's even illustrated with people worshipping riches. It always seemed to me to be a stretch. I've never seen anyone worshipping money like they would worship a god.

But what I am seeing every day is people worshipping Moloch[0]. Men and women so sure that The Market will save us if we only leave it alone. It's not the money that's the deity, it's the perfect, efficient Market that promises riches if only you could get that pesky government out of the way.

[0] http://slatestarcodex.com/2014/07/30/meditations-on-moloch/

pdkl952• 11 years ago

You may be interested in Mark Blyth[1]'s take[2] on this, in which he also blames the seductive quality of mathematical models. Math can give an illusion of accuracy, when the real world is chaotic and often has far more confounding variables than you know about in something as complex as "the economy".

Treating "efficient markets" as if it was a law of nature is probably inevitable when you combine a trust of bad models with the greedy side of human nature (Moloch) that is biased to overlook the differences between reality and a model that tells you what you want to hear

[1] Prof. Econ. at Brown University, who is probably most well known these days for his warnings about the dangers of "austerity" (e.g. https://www.youtube.com/watch?v=B6vV8_uQmxs#t=673 )

[2] https://www.youtube.com/watch?v=hmWbkPezgtU

gone35• 11 years ago

I don't understand how some people still stick to the idea of efficient markets and speak against government intervention.

I would say ideology, motivated reasoning and dichotomous thinking, inter alia.

zo13• 11 years ago

Care to elaborate?

icebraining5• 11 years ago

Well, many oppose government intervention because they don't agree that it makes the market system our slave - any more than the government itself is.

TeMPOraL22• 11 years ago

The way we accept this at the level of society is also worrying. See, if a friend tried to do to you the things advertisers do all the time, you'd punch him in the face. But somehow we have no problems being intentionally manipulated, lied to and deceived by companies every day. In fact, we turned it into a legitimate occupation.

pdkl952• 11 years ago

https://www.youtube.com/watch?v=oRzYJullFOs

Max Headroom, Season 2, Episode 13 "Lessons"

    Have you any idea how suc-suc-suc-cessful censorship is on TV?
    Don't know the answer?
    Hmm...
    Successful, isn't it!

Before something can be considered a threat (or even worthy of strong opinions), they must first realize it exists. Systems that depend on people forming such opinions - such as democracy and capitalism - should really consider anything that blocks or corrupts the dissemination of knowledge as an existential threat.

TeMPOraL22• 11 years ago

Indeed. Moreover, the fundamental glue of the society - the thing that enables a peaceful governance, whether democratic or not, and flourishing free trade is trust. Trust people have toward each other, trust they have in their companies and officials. Lying is an existential threat to society itself.

Many people are surprised by anti-vaccination movements, or anti-GMO and anti-nuclear crowds. One will say: "surely they must be stupid, they reject the science, the well-tested and replicated results of countless of studies". But they aren't, in fact, any more or less stupid than you and I. They had their trust in the system broken. They've seen enough shit pharma does to stop trusting doctors. They've witnessed enough scandals and have been victims of enough frauds to stop trusting the government or the big bio/tech businesses.

Those "anti-science" movements are only a symptom of the greater problem, of society losing trust in the authority. The trust that has been eroded by constant and countless lies. So yes, if you're a journalist or an editor who writes and publishes lies to "spice up the story", you're responsible. If you're a marketer or a salesman or a businessman who lies to people to get them to buy your product, you're responsible. If you're a scientist who manipulates results to get publications, you too are responsible. As much and as little as the system may have made you to do it, but you are responsible. Responsible for the blood and the deaths, and the fall of the civilization if it happens.

Asbostos2• 11 years ago

But what's the alternative? In many cases nobody really knows what's in our best interests. So with any protection from "phishermen", you'd suffer from other inefficiencies or harm caused by good opportunities being blocked. Just the fact that research is still ongoing as to the effects of alcohol says that nobody could really decide if it's a net positive or negative for each individual.

You only have to look at laws forbidding marijuana use or homosexual acts to realize that governments aren't competent to make these decisions since they just reflect what the popular opinion of the "phools" already is.

TeMPOraL22• 11 years ago

In many cases nobody really knows what's in our best interests.

I may not know what is in my best interest, but I know what isn't - someone else lying to me and cheating me to pursue their own interest. The problem is hard because perfect solution is AI-complete and pretty much requires mind-reading. But we can at least try and eliminate the obvious problems. We could, for instance, start punishing marketers and salesmen for lying.

Asbostos2• 11 years ago

I'm sure most developed countries do that by fining businesses for false advertising, which would incentivise the businesses to pass the punishment on to the staff who did it. Lies aren't really the problem though, fooling us with truths we don't understand is.

About tobacco causing lung cancer? That's been widely known for decades but rates of smoking are increasing globally so it's not just false information.

zo13• 11 years ago

"We could, for instance, start punishing marketers and salesmen for lying."

We already do, and it's called misleading advertising, or plain out fraud.

Edit, I see someone else also pointed this out.

jensen123• 11 years ago

And of course, the people in the government who write the rules and regulations, aren't rational humans, either.

alienjr5• 11 years ago

No, they're prefect robots, always rational, and always taking care about the humanity and never themselves.

asgard10243• 11 years ago

In addition to what TeMPOral said, we could ask for more balance in access to information. For example, why couldn't everything that the producer knows about the product (results of internal testing, how it was produced, what were the costs involved) be available to the customer? It seems only a fair deal to me. And it could be done in manner of not "forcing" anyone to do that - for example, only companies that do that would be eligible for government subsidies or contracts.

(Ironically, the optimal price by free markets is only proven when access to information is perfect and actors are rational. But then you don't really need the price to make the decision, do you? You can already calculate everything in your head.)

But in general, there is problem with complexity of things getting out of hand. It's impossible to ask the customers to rationally evaluate everything, experts need to do that anyway.

And I think, similar to what Chomsky said in "Responsibility of Intellectuals", I believe there should be a moral code for engineers to provide good solutions. Today, technical experts to often wash off their hands by thinking that the customer knows the best (usually in indirect way - by not pushing enough against businessmen, by believing too much in individualism).

icebraining5• 11 years ago

For example, why couldn't everything that the producer knows about the product (results of internal testing, how it was produced, what were the costs involved) be available to the customer?

How would you know that the public is getting everything that the producer knows about the product?

alienjr5• 11 years ago

On the silly "inequality is getting worse" claim:

"Contrary to the author's claim that the rich are getting richer, not due to underlying economic trends, but by using their power and influence to enrich themselves, I have in this column more than once suggested that the real reason is the enormous expansion of the world supply of unskilled and semi-skilled labour brought about by falling transport costs and trade barriers. With globalization, a billion or more rural people in Asia could be recruited into the urban industrial sector and produce the tradeable goods that undersell the goods hitherto produced in the United States and Europe. Until this new Asian labour is wholly absorbed and its wages rise to Western levels, U.S. and European unskilled wages will remain depressed and the share of profits in value added will rise. Ironically, while this sharpens inequality in the West, it promotes equality on a world scale as Asian and eventually also African peoples are lifted out of misery." http://www.econlib.org/library/Columns/y2012/Jasayinequality...

+ Even if there exits market failures, we don't want to replace them with government failures, which are usually even worse.

paganel3• 11 years ago

Which is great for those Asian people, in the last 30 years alone around 500 million Chinese people have been lifted out of extreme poverty. Let that sink in, that's the entire population of present-day Europe.

But, as an Eastern European I'm of course biased. I grew up in the economy-controlled '80s when we were experiencing toilet paper shortages, among other things (question for the anti-free market people: how do you centralize the production of things like toilet paper? How do you decide how much toilet paper to make, in the absence of a free market?)

alienjr5• 11 years ago

"I grew up in the economy-controlled '80s"

Me too! I'm from Poland. And that's why I'm so sick of all those inteligentsia do-gooders who want to impose their own preferences on everybody else because they know better and this legitimizes them to orchestrate the society.

bildung4• 11 years ago

But, as an Eastern European I'm of course biased. I grew up in the economy-controlled '80s when we were experiencing toilet paper shortages, among other things (question for the anti-free market people: how do you centralize the production of things like toilet paper? How do you decide how much toilet paper to make, in the absence of a free market?)

As Eastern Germany (where I grew up) was not experiencing toilet paper shortages in the '80s, I'd say the main source of the problem wasn't the planned economy per se, but other contributing factors.

Amartya Sen makes a strong case for authoritarianism being the culprit, as there are numerous examples of famines and shortages in market-regulated, but authoritarian economies (like the 1943 Bengal famine, where millions of people died).

ZenoArrow9• 11 years ago

"question for the anti-free market people: how do you centralize the production of things like toilet paper? How do you decide how much toilet paper to make, in the absence of a free market?"

Why do you have to centralise it? You could split the task into regions. How many regions? Enough regions until it becomes efficient at measuring and responding to needs.

To use a phrase... think global, act local.

bildung4• 11 years ago

I was under the impression that Piketty et.al. showed pretty conclusively that a) inequality indeed got worse and b) it's a matter of policy, not globalization per se. The paper you linked predates the publication of Capital in the 21st century, so the author had no chance to react on those findings.

alienjr5• 11 years ago

No, Piketty showed that inequality is getting worse in the West. Inequality is getting smaller in global and it is an empirical fact. Anyhow, his theory has serious flaws: http://www.econlib.org/library/Columns/y2014/Jasaypython.htm...

Why Free Markets Make Fools of Us

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