Do free-market capitalists really disregard the importance of well-informed, -educated consumers?

Great Debates
21

This is only somewhat true. Most interesting and useful economic results demonstrate quite the opposite: individual decision-making under constraints leads to quite irrational collective outcomes. Even the basic belief, that people buy the best and cheapest in equilibrium, is subject to some heroic assumptions. There are big problems with the Walrasian equilibrium: researchers like Hirschman have demonstrated convincingly that under certain constraints, if a society cannot quite nail Walras, it is actually worse off the more its conditions approximate but do not quite reach those of the Walrasian model.

Under certain circumstances, if you take this model to its logical conclusion, you end up with 100% dissipation.

This is not even wrong.

Rationality has a very strict meaning in this context. Rationality places no constraints whatsoever on the decision-making capabilities of the actors and it certainly does not require perfect information. You demonstrate breathtaking disregard for what economists actually do with statements like this. For example, there is a very large subfield of game theory devoted to “games of imperfect information” in which the players are presumed to be rational maximizers.

Rationality is very “thin”: it only constrains the structure of individual preferences. The objection that people “aren’t rational” is typically misinformed and superficial. It tends to hijack debates on actual economics and sends them off to normative hell.

Formally speaking, “rationality” requires only two things:

  1. Completeness

All possible outcomes must be well-specified to the extent that they can be meaningfully compared against each other. In the set of preferences over ice cream, you have to be able to compare vanilla to chocolate to strawberry and all permutations thereof.

  1. Reflexivity

This just means that a given outcome has to be at least as good as itself. Vanilla must be at least as good as vanilla. Most people do not think this is a very challenging assumption.

Transitivity is nice but very frequently not required for rationality. The rules we use to elect officials are not transitive.

You can make all sorts of useful arguments that people misevaluate probabilities on the margin, that payoffs are not symmetric, etc. Cutting edge economists incorporate these innovations quite regularly into their research. But the objection that “people aren’t rational” or that rationality imposes huge and ridiculous constraints is quite misinformed.

This is somewhat less wrong. Competitive markets are social welfare maximizing. Capitalism typically requires private ownership. This distribution of property rights is not implied nor does it imply competitive markets. This distinction is important because half-understood principles can drive really bad inferences.

22

comrade Voyager,

American Medical Association is a quasi-governmental body that is involved in significantly restricting the market. There are many other such bodies e.g. teachers unions or the ABA. It doesn’t have to do with lawsuits directly - lawsuits is a separate issue. Reading comprehension is good for you, especially in order to function well in free market capitalism, ehh?

At present government regulation is bigger problem than corporate monopolies. It was different a hundred years ago, but that was long time ago. It’s not a corporate monopoly that keeps medical and lawyer expenses too high, is it?

No, any quack shouldn’t practice medicine. Nevertheless, Japan avoids that while wasting much less money on malpractice suits. Why not learn from them?

Hiring incompetents because of their skin color is wrong. Just wrong, comrade, especially in a country whose economy is close to free fall. Rich countries can afford foibles and giving unearned gifts to people they like (be that minorities in America, bankers on Wall Street, quake victims in Haiti, the government of Israel or other assorted aid recipients). The poor cannot afford that.

The green stuff… well, that’s too preposterous to deal with. American engineers can figure out the “long run” better than comrade Al Gore and the likes of him. They always did and they always will.

23

I’ve functioned quite well, thank you. I also can write clearly when I have the time, which is even more useful. That the AMA limits the number of doctors is of course not in dispute. What is the optimal number of doctors can be debated. What I hope shouldn’t be is whether any person with a Fisher Price doctor kit can call himself a doctor in the true spirit of free enterprise. Is this your position? You ignored this point.

Perhaps the reason that corporate monopolies are not that big a problem today is government regulation? The meltdown might also show that lack of regulation causes massive problems also. The number of doctors has been regulated for a long time, so you’ll need to give some reasons why it has caused problems now. Ditto for lawyers.

What exactly does the supply of doctors have to do with malpractice suits?

If you are implying that I am a Communist, I’ll have to ask you to apologize. I was a card carrying member of the Conservative Party in New York in the late 1960s, and spent quite a time campaigning for candidates. Insults are not allowed in this forum.

I absolutely agree with you that hiring incompetents based on skin color is wrong. I’m sure the banks and AIG could have hired much more competent CEOs if they didn’t limit themselves to white people. But I know what you are really getting at, and share your outrage that the full of minorities Republican party was allowed to destroy our economy.

Being an American engineer, and having been one for 30 years since I got out of grad school, I’m sure you will believe me when I say that Al Gore has it right.

24

Actually (and this is coming from a medical student), this was an apt example.

Voyager, you’re a smart guy, and I have absolutely no doubts that you could master the intricacies of delivering basic cosmetic Botox injections in a matter of a one to two month apprenticeship and provide outcomes and safety on par with any physician. And yet, if you go out trying to open Voyager’s Botox Shack without a medical license, you’ll very quickly find yourself in a heap of legal trouble.

This is an example of how government intervention and legislation has created walls around a particular service in terms of who can provide it. Without this government intervention, I’m relatively confident that Botox injections would rapidly achieve a significantly lower price on the open market.

I’m not suggesting that lay-persons could so quickly train to be an adept practitioner of most important services in medicine, law, or any other profession, but you have to admit that there is some potential low-hanging fruit there which is protected by that government provided fence.

25

The AMA is a typical example of a union that requires a closed shop and compulsory membership. Mancur Olson has a pretty good (if outdated) discussion of the AMA in The Logic of Collective Action starting on page 138. You can find the book here. It really is well worth reading for an informed decision on the AMA, the bar, and other closed shop unions that have been able to enforce compulsory membership due to influence on the government.

26

Just for fun, a link to a thread where I got into it regarding the unauthorized practice of law regulations. It gets quite hairy when the lawyers catch wind…

Of course they protect their own!:stuck_out_tongue:

27

I don’t know about capitalism necessarily, though it seems to be a theme. But I’ve gotten it directly from the horse’s mouth regarding political campaigns. In that last Mayoral campaign I complained to someone who was intimately involved with the campaign of the candidate who lost that he didn’t have any substance, that I might have voted for him if he’d said anything substantive on the issues. I was told that it was part of the strategy to Keep It Simple Stupid, in order to get the brand recognition out there and not confuse people with the issues. I was told that people like me who try to educate ourselves about the issues don’t enter into the calculus. So he campaigned largely on a, “I’m not Mike Bloomberg”, campaign. Who was the candidate in question? Well, he was not Mike Bloomberg, that’s for sure. I voted for the guy who actually had an identity.

28

Are you familiar with Tversky and Kahneman’s 1981 experiment? They gave two sets of people the following problems:

  1. Which of the following options do you prefer:
    A. 25% chance to win $30
    B. 20% chance to win $45.
    For n = 81, 42% choice the first, 58% the second.

Problem 2. Consider a two stage game. In the first stage, there is a 75% chance to end the game with no winnings. In the second stage, you have a choice of
C. A sure win of $30
D. An 80% chance of winning $45.

74% chose C, 80% chose D

The problem with the rational view is not that people have incomplete information, nor that sometimes people guess wrong, but that people with perfect information make choices not in their best interests - as this case shows. (For those who don’t want to multiply the numbers out, case A and case C are identical, as are cases B and D.

Certainly people misestimate probabilities in the margins, but they also do so based on availability, and they do estimates affected by anchoring. We also see asymmetric evaluations of the worth of gains and losses due to loss aversion.

Given adequate information, isn’t there an assumption that economic actors will make decisions in their best interest? Do you really think that every decision maker has the mathematical and cognitive skills to compute what this is? Or that they do?

Rational is a loaded word and I’d prefer not to use it, but there is tons of experimental evidence that you can’t understand decisions without understanding psychology, and that you can’t predict decisions using the classical model alone. One big argument for pure free market capitalism is that people do not need to be protected because they will make optimal decisions without government intervention - given adequate information, the provision of which the free marketers support. If this were true, then the purchasers is sub-prime mortgages were either or knowingly put themselves into an untenable situation. The alternative explanation was that they were unable to properly understand the risks. Which, it seems, can be said of Bank CEOs also, judging from their testimony.

To go off on a tangent, we can also say that rationality is not going to prevent disaster. The increasingly risky investments made were done for short term gain, and were eminently rational in satisfying the demands of shareholders for better returns and the desire of the managers for better bonuses. Clearly Greenspan thought rational managers could never drive off a cliff - he was wrong.

29

No problem with that argument - though Botox is nasty stuff, right, and I’d have to research potential side effects before I agree totally. However, in areas where medical treatment is discretionary, like cosmetic surgery or LASIK, we see a fairly robust free market at work, even under the strictures of reduced supply. However those who do non-critical specialties get a free ride. And I agreed that the AMA did limit entrance, and did not even begin to say that the current levels are perfect. However, I think he was talking about malpractice suits, not suits about practicing without a license, which I believe are criminal, not civil.

Engineers grouse all the time about how if someone restricted the supply like the AMA does for doctors or the ABA does for lawyers, we’d all be making a lot more money. A lot of the support for professional licensing comes from this. Engineers working on life-critical specialties (like Civil Engineers) do get licensed, however no one seems to have been clever enough to limit the supply.

30

Of course. I am very interested in the heuristics and biases literature. There has been a lot of ground covered since this experiment. But all of this, when the results are actually replicated, can be (and is) incorporated into a rational choice framework. The work to be done is fine-tuning the models, not throwing away the basic assumptions of social choice.

It is self-evident that people do not make choices that are in their “best interests”. No one doubts this, nor did anyone before K&T 1981. That is not even really the question. There is a big difference between maximization ex ante and best interest ex post. Economics has a lot to say about the former and rather less about the latter.

We as a country voted for Bush twice, after all. I have no doubt that voters were maximizing.

No, no, and no. People often make decisions that ex post are not in their best interests. And further, people have managed to make decisions for a long time without the intervention of the formal mathematics of economics. It models reality; it is not normative. So much human thinking and decision-making is not explicit, and it does not have to be. Models are just conceptual maps that are occasionally useful.

I also loathe the word rational. I live in political science, where we tend to use the term “positive”. If by “classical” you mean the Walrasian model, well, it ceased to be useful a long time ago.

There are many other alternative explanations. I find the moral hazard argument particularly appealing. Typically the people who bray on the loudest about how people do not need to be protected because they make optimal decisions are semi-educated market fundamentalists who don’t know what the word “optimal” means. Typically, they are wrong.

Rationality in the colloquial sense can lead us off a cliff in highly predictable and often interesting ways. Teasing this stuff out is what economics is all about.

31

Also in my experience working in media. Educated consumers generally like ‘niche’ markets. By that perspective Sci Fi is considered a niche market. As such this is a big reason why a lot of the better stuff is not as successful. Even if you can say that something will have millions of fans, it can still be considered small and niche. Why invest 2m for 1,000,000 viewers when you can invest 10m for 7m viewers?

32

If we did away with the AMA, we’d still have to restrict access to the medical profession, right? The restriction would be based on demonstrated competence, not the financial requirements of practitioners, but those dead set against government involvement in almost anything would probably be just as upset. In this case there would still be charges against those practicing without a license, and I doubt the number of malpractice suits would decrease. I’m not against this alternative; I just think it isn’t relevant to the discussion.

33

Maybe, but aren’t there plenty of niche markets not occupied by educated people? Science fiction used to be a lot more niche than it is today; I remember the days before any sf book would get on the Times Bestseller list, and in the early 1950s with very few exceptions only specialty publishers would even touch an sf novel.

It is true that those well educated in certain areas like sf, but those well educated in others do not, and I’m not sure that a majority of sf readers are educated in any sense.
However, I must remind you that an sf movie has just made well over a billion dollars. Not very niche, is it?

34

Since this is the dope, such a claim is wildly inaccurate as it regards the AMA. The AMA is a lobbying group of physicians, but you sure don’t have to be a member to be a practicing physician. Less than 1 in 5 American physicians are members of the AMA. Perhaps your post might apply more accurately at the medical profession in general, but I think its clearly wise to enforce some level of standards in medical professionals. I grant that the public will pay some premium for it, but the externalities of permitting medical practice by wildly incompetent or under-trained people cannot be included in the costs charged by such people.

Most of medicine isn’t Botox.

35

Well you have to realize that a successful Sci Fi novel usually is one that sells 50,000-100,000 copies as opposed to your average crime or spy thriller that sells millions. On Television, a few million can be considered a flop when they are seeking over 10m.

Well I was just using Sci Fi as an example.

Movies generally have better success with SF than other forms of media.

36

Absolutely, I misspoke and skimmed part of the passage that I should not have. Professional licensing is compulsory, but actually being part of the AMA is not. It has several inducements for membership, since doctors can reap some of the political benefits captured by the AMA whether they are members or not.

FWIW, a quick search suggests that closer to 30% of doctors are members.

I don’t disagree with you that standards are necessary. I am not even arguing against the AMA here. I just linked what I think is an interesting discussion in three pages of a classic book.

37

Not at all, in the case of lawyers and doctors; it’s a matter of supply and demand. If there were more doctors, they would be cheaper. It’s in their interest to keep the standards high, so that the total pool is smaller. It’s the education and subsequent licensing that keep the prices high, not the knowledge that they have; anyone can go buy legal books and probably even audit classes, but you can’t pass the bar in most states without a JD, so it’s not even useful to have the knowledge.

One mistake you’re making is equating “worth” to cost. They aren’t the same thing. If I buy a half-dozen apples, a bag of flour, some butter, some sugar, and some cinnamon for $10 (wild-ass guess) then proceed to bake some pies with it, the cost of the pies is the cost of the ingredients + the labor put in. Probably on the order of $4 bucks, I’d guess.

The value of that pie isn’t $4. The value is what someone’s willing to pay for it. Let’s say it’s late November, and I’m selling my pie. Someone’s going to want a homemade from scratch apple pie, and may be willing to pay $10 for it, assuming it’s good.

Let’s say that I’m some sort of virtuoso baker- it may be worth $15. Or if I suck horribly, it may be worth less than $4 if it tastes like shit.

The free market value of a pie would be the aggregate value of all pies out there- remember, my homemade pie is in competition with Sara Lee, Mrs. Edwards, the grocery store bakery, etc… in that people aren’t going to pay $20 for my pie if they can get the other kind for $8, unless there’s some perceived value due to quality.

Cost doesn’t come into it; the value is of the pie, not the sum of its parts. People are willing to buy a $10 pie, regardless of whether I got my apples free, or bought them at a premium. That’s part of the reason for concentrating on economies of scale and vertical integration- they’re a sort of “something-for-nothing” situation- people will still buy your pie for $10, and they’ll buy your neighbor’s pie for $10, because they’re both good homemade pies, but you’ll make more money because you have an apple tree in the backyard, and your neighbor has to buy her apples. (simple vertical integration example) Why should it matter that you get yours free, and she has to buy hers? Your pie is still worth just as much as hers is.

And people do make TVs cheaper than Sony; for various reasons, they don’t outsell Sony- it’s a combination of brand perception, technology, marketing, etc… it isn’t just enforced consumer ignorance.

38

I see. Part of my reason for taking umbrage is that, frankly, as you’ve cited, the AMA has done some crappy things from a public health perspective in the past that I would not like to be associated with. I would agree that it has cynically sought to crimp the demand of physicians to below what was, “really needed,” in the past, although I also perceive that the organization has radically reoriented their priorities in the past decade from, “physician salary above all else,” to a more holistic view.

People that lump all physicians with the AMA often claim that there are no new medical schools in the United States or that the number of med-school spots is not expanding to meet the demands of an aging population when neither is true. We’re quite fortunate that physician are no longer so focused on artificially constricting the size of the physician workforce.

http://www.thecommonwealthmedical.com/

Just my soapbox issue.

39

The average spy or crime thriller sells millions, does it?

40

Feast For Crows topped the NYT and WSJ bestseller lists. It is by no means uncommon for other SF/fantasy novels to do the same.