Last week’s post, provocatively titled Economists Don’t Care About Poor People, attracted two lengthy, substantive critiques. One was from Michael Rushton, with whom I’ve tangled previously on the subject, and the other from Adam Huttler. (Note to self: when your own boss writes an eleventy-thousand-word comment refuting your twelvety-thousand-word blog post, maybe it’s time to, uh, throw in the towel. Just kidding, it’s on!)

I decided to address Adam’s and Michael’s critiques together since there is some degree of overlap. Below, I’ll distill each man’s arguments into bullet-point form and number them so they can be addressed more clearly.

Adam thinks that I am overstating my case and “foster[ing] false hope in a bogus alternative.” He claims:

  • My example of the Costner memorabilia auction is undermined because the dotty old rich guy does not realize what he’s buying, and thus does not have perfect information. (1)
  • The goods cited in the examples given are “luxury goods” (goods in limited supply that have high demand), and thus do not typify markets in general (though Adam allows that the normal rules of supply and demand do not apply to luxury goods). (2)
  • I’m missing the point of Baumol and Bowen’s argument; the real point is that producers should have the option of claiming the full value generated by their product, and they do not have the option to do so if prices are regulated. (3)
  • Anyway, instituting a lottery system for ticket distribution just randomizes wealth, it doesn’t equalize it. (4)

Michael says that I’m too mean to economists and that most of them do have a heart. He writes:

  • Libertarians’ arguments don’t deserve to be taken seriously, so why am I even bothering? (5)
  • He doesn’t know “serious” non-libertarian economists who disagree with a vision of good policy that includes (among other things) a progressive income tax, publicly-provided health care and dental services, and public pre-school, along with most other things that the U.S. government currently provides. (6)
  • Most goods in a marketplace are run-of-the-mill products that are regulated by supply and demand, and that’s okay; the things I’ve mentioned are exceptions. (2)
  • “Efficiency” is a separate concept from “justice” in economics. (7)
  • Instituting a lottery system for ticket distribution just randomizes wealth, it doesn’t equalize it. (4)

OK, let’s see, taking these in order from least salient to most:

First, the appropriateness of using lotteries to distribute expensive tickets to arts events (arguments #3 and 4). Adam & M-Rush’s point that lottery systems randomize wealth rather than equalize it is fair enough – I didn’t necessarily mean to hold lotteries up as the be-all and end-all, but only mentioned them since Baumol & Bowen specifically seemed to think their solution (let the free market decide) was fairer than the lottery. To Adam’s point about commercial operators having the opportunity to claim their own value, I am more sympathetic, though even in the case of some commercial entities the question may not be as easy as all that (e.g., the Red Sox employ a lottery system for distributing hot-ticket items like Yankees games; one might argue that this would be justified as an enforced policy because baseball enjoys an antitrust exemption from the government which allows the Red Sox to have the grip on Bostonians’ identity that they do). And in an environment where nonprofit arts administrators across the country are tearing their hair out trying to understand how to reach new, younger, and more diverse audiences, a lottery system is perhaps a fairer way to distribute scarce resources than relying on market forces to distribute them according to society’s existing unfairnesses.

But I don’t want to let the lottery issue distract from what I see as the bigger fish. The real question here is how well what Adam calls the price =value equation (aka neoclassical pricing theory) describes the real world and how much it influences mainstream economic thought. So let’s begin.

Regarding argument #1, I thought about the issue of perfect information, but I could just as easily have made it a situation where he was buying the memorabilia as a gift for his wife, who divorced him a year later and threw out everything he had ever given to her; or if that’s not good enough, just that it pleased him in the moment to own this item and that he bought it for no real reason other than that he could. Either way, the point still stands, if not quite as dramatically. But this is supposed to be an extreme case for purposes of illustration. The price = value equation is challenged in much subtler ways all the time.

Which brings us to #2: I’m not convinced that these “luxury goods,” and the attendant supply-and-demand weirdnesses that go along with them, are such edge cases after all. Adam goes so far as to say, “while Price = Value in the aggregate, the formula doesn’t necessarily hold for any individual purchaser.” Huh? If the formula doesn’t hold for any individual purchaser, why would we assume that it holds in the aggregate? I’m open to the possibility that it could, if confronted with irrefutable empirical evidence, but I have a hard time believing a priori that the disconnect between utility and willingness-to-pay for individual market players doesn’t bias and shape the market in specific, systematic ways. And if anything, this seems like it would be especially true in the arts. After all, the original discussion that led to all this was about whether unpaid internships were a threat to diversity in the arts because low-income individuals could not afford to take them (and thus were at risk to remove themselves from contention at the front end for an important career stepping-stone towards more potential income later on). One might think of this “willingness-to-accept” problem as a kind of corollary to the “willingness-to-pay” issue that I pointed out with my post. We also looked recently at the possibility of pernicious effects on the socioeconomic diversity of artists that compete for recognition through competitions if entry fees were raised to nontrivial prices. And it doesn’t end there, certainly. Think about what kinds of investments are needed or helpful to jumpstart an artistic career: training, documentation (e.g., recording), production values, marketing, travel, living expenses in expensive cities, time not spent earning income. If anything, in many of these situations willingness-to-pay may be inversely correlated with utility/personal value, not one and the same–not even close.

Do economists understand this? Here’s where Michael Rushton and I just don’t see eye-to-eye (arguments #5, 6, and 7). I applaud his list of policy recommendations–clearly, he is living proof that not all economists are heartless bastards. And surely there are others – Paul Krugman, for one, and the fact that the latter won the Nobel Prize speaks volumes. Perhaps the kinds of economists I want to see are more in evidence in the international community. But here in the US, I wish I could believe they were as mainstream as he says. I mean, really? No serious economists would dispute that we need government-provided universal health care and a no-fucking-around progressive income tax? Has Michael Rushton not heard of the Chicago School? Are these people not mainstream? Have they not had a tremendous formative impact on public policy in this country over the past 30 years? The foundation of their philosophy is the very libertarian principles that Michael is so quick to reject as not being worthy of debate. Yet the shadow they cast over the national discussion of economics is tremendous.

Interestingly, my two contenders reserve their strongest criticism for things I didn’t even say.

Adam, for example, concludes:

Ultimately my concern with your line of reasoning here is that I can’t see how it leads to anything but trouble. Markets are deeply imperfect, but they’re the best tool we have. To the extent that they result in undesirable outcomes, then we should seek to tweak their functioning, not abolish them in favor of some kind of centralized arbiter of happiness.

OK, so I never suggested that we abolish markets. That would be pretty nonsensical of me–after all, markets are there whether we like it or not; they happen. I think of marketplaces like biological ecosystems. Sometimes, depending on what’s going on inside of them, they work extraordinarily well, with everything going according to Nature’s plan in a sustainable, virtuous cycle. Other times, though, again depending on what’s going on a the micro level, they get out of balance; portions flourish while others flounder, leading to displacement or the loss of biodiversity or even wholesale collapse. To fix the imbalance, one must help the system to function again. Whether we call it a market or not doesn’t really matter; it is what it is.

Meanwhile, Michael thinks that I want to achieve utopia through micro-manipulation of the prices of everyday goods.

My problem with IDM is that he wants to achieve income equality through a lottery of opera tickets, where poor winners could keep them or sell them, and the rich could still obtain them. But that’s…well, goofy. This just randomizes wealth, handing out valuable tickets to a lucky few and letting them trade them. I have a better idea…

Of course a lottery of tickets isn’t going to achieve income equality. At best these measures are a small band-aid on a much larger problem, and I’m planning to address that problem in a future post. In the meantime, though, a band-aid is better than salt, is it not?

If anything, in the last two years, my orientation towards markets has become more positive, not less; I now believe that markets are one of the most efficient and effective ways of advancing the social good, when they work. So I think Adam, Michael, and I are actually in quite similar places here after all, broadly speaking. It’s just that I think of markets as systems that occasionally bear a resemblance to the idealized marketplace seen in economics textbooks, but much more often don’t.


Here’s the point in all of this.

I have all the respect for Adam in the world (love ya too, boss!), but I remain convinced (or at any rate, I strongly suspect) that it’s the neoclassical model that’s the edge case, not luxury goods. How common is it, really, for people to have full and relevant information on what they’re getting? How common is it that their preferences are really rational? Just because your mind works that way doesn’t mean most people’s do. Likewise, I think Michael Rushton is a smart, smart cookie, but his campaign to limit the discussion to (what seems to me) a relatively narrow group of middle-of-the-road, professional academic economists does a disservice by ignoring the vastly disproportionate impact that the free-market purists have on the national conversation. Dude, if you want to call yourself an economist and be proud of it, you need to take some responsibility for the damage your crazy-ass colleagues are doing to the credibility of your profession.

Rushton thinks it’s unfair that I implied that William Baumol and William Bowen don’t care about poor people, when clearly they do. I agree that it’s an unfair characterization. But I need to explain something about that quote in my last post. For those who have not had the opportunity to read Performing Arts: The Economic Dilemma, the book is through most of its pages a model of “telling it like it is” understatement: the authors clearly identify the limits of their knowledge and analysis, every assertion is thoroughly documented, a host of alternative explanations are examined at every turn, and issues of class, race, and gender are given fairly enlightened treatment by 1966 standards. In short, they approach the issues at hand exactly in the way I would ask.

The outburst I quoted on page 286 is not an offhand remark taken out of context; it is part of an impassioned five-page rant that is completely at odds with the tone seen in the rest of the book. The authors offer no empirical evidence for their claims in this section, only a few quotes from historians and their own very obvious frustration (some of it perhaps justified) at overzealous regulation of ticket prices. Clearly, one if not both of the authors felt very strongly about this issue, strongly enough to break with decorum and tone to take a stand. That they did it while disparaging the notion of “public virtue” and ignoring the very obvious benefits to access for lower-income people (remember, it’s not like these were considered and dismissed, they weren’t even discussed) from one of the suggested solutions, a lottery system, is telling to me. It’s like even Baumol and Bowen suffered from a temporary bout with Econ 101 disease.


I’ve used the words “sickness” and “disease” before to describe what I feel is wrong with the economics profession. I do not use these terms lightly. I use them because, though I am ready to believe that the field has no shortage of thoughtful, level-headed, and compassionate people working diligently within it, I truly believe that as a field itself its foundations are rotten at the core. The neoclassical pricing model is not just some important but outdated anachronism in the history of intellectual thought, like Freud’s Oedipal complex or Marx’s proletariat. It is the active basis of the majority of economists’ working lives. It is the foundation of all economists’, and a lot of non-economists’, first instruction in the field. This conversation, again, was prompted by a debate about the minimum wage. If Wikipedia is to be believed, the empirical evidence that a minimum wage is even marginally detrimental to employment totals is inconclusive at best. Yet according to the same source, nearly all economics textbooks have a nice, neat graph that explains exactly why a minimum wage is detrimental to employment totals. It generally looks something like this:

That graph is in my textbook, too, Pindyck and Rubinfeld 5th Edition, right on page 299. I believe that practices like this foster an anti-scientific a priori mindset in the economics profession that hamstrings progress. It empowers those with libertarian leanings to pollute and distract the conversation with theorems proving the supposed moral righteousness of their views, and forces even economists who stray from the neoclassical model to define themselves in opposition to it, to acknowledge its primacy in the face of competing evidence. Assuming for the moment that textbooks are a reflection of what a field thinks about itself, if the textbooks started from the premise of, “this is how markets might work in a laboratory, but we recognize that real life is much more complicated than that,” I would be satisfied. If the textbooks started out by asking questions rather than providing answers, I would be satisfied. If textbooks treated micro and macro as the same thing on different scales rather than two totally separate disciplines, I would be satisfied. If textbooks addressed the issue of externalities and public goods sooner than page 621 (which is where they first pop up in mine), I would be satisfied. If every graph in an economics textbook was taken from an empirical study with true causal implications rather than from a calculus problem set, I would be satisfied. But so long as these things remain the way they are, no, I will not be satisfied with the economics profession.

  • I have all the respect for Adam in the world (love ya too, boss!), but I remain convinced (or at any rate, I strongly suspect) that it’s the neoclassical model that’s the edge case, not luxury goods. How common is it, really, for people to have full and relevant information on what they’re getting? How common is it that their preferences are really rational?

    Preferences don’t have to be rational for the price/value equation to hold. (As far as I’m concerned there is absolutely no rational reason to collect Kevin Costner memorabilia.) Preferences can be entirely irrational (as behavioral economics shows us they often are), but they’re still preferences and they still reflect what people value.

    Here’s a sample (actually all the ones I can remember) of the purchases I’ve made in the last few days (both personal and work-related):

    – train ticket to DC
    – cup of coffee
    – deli sandwich
    – bottle of water
    – 5 hours of babysitter’s time
    – 2 movie tickets
    – dinner at favorite restaurant
    – tank of gas
    – network switch

    As far as I’m concerned I had more than adequate information to make each of these purchases. They all pretty closely follow Rushton’s shirt model. Are these edge cases? Isn’t this mainly the kind of stuff people buy?

  • Wow, Ian, this is really gettin’ good: engaged, lively disagreement. The transparency in your blog is refreshing, and you must have noted that you have now become “IDM” – very close to a world class brand.

    Thank you for providing a valuable service to longtime theatre professionals such as myself, for whom economic thinking is a mystery. Reading your blog makes it possible to BEGIN to make sense of it. Do I sound like a groupie? So be it. I simply love your blog.

  • There are lots of thoughtful economists, so maybe the problem is more with the dysfunctional aspects of the neoclassical model and the textbooks.

    For prominent economists with other views, beyond Paul Krugman, there’s Stiglitz, Robert H. Frank, Schiller, Akerlof, and Jeffrey Sachs. In the UK, Richard Layard, and this group:

    And there’s Muhammed Yunus, who is trying to reconfigure capitalism to solve poverty.

    Historically, one could probably include Keynes, as a pragmatist and student of human nature, and Simon Kuznets, on whose work in creating the GDP the foundation of the American economy rests. Kuznets was explicit in pointing out that GDP was an incomplete measurement of the well being of society.

    That’s a critique on GDP echoed here by Douglas Rushkoff, whose book is worth reading:

    If that measurement is wrong, much of the economics that follows from it will also be wrong by some undefinable amount.

  • @Adam: I think we’re still talking past each other a little bit. If the economy consists only of you and the items you want, then yes, of course your purchases will reflect your preferences. What I’m talking about is how different people’s options (from which their preferences are necessarily derived) are constrained by factors beyond their control.

    Take the five hours of babysitter’s time, for example. Child care is arguably a luxury good. Many people can’t afford to have babysitters, so they pass the responsibility off to other family members (often their parents or siblings), or if that’s not an option work longer hours or a second job so that they can afford to pay for someone to watch the child. That affects what kinds of choices they can (realistically) make — for example, they may not get to take that train to DC because they have to work a second shift at the other job. If, on the other hand, they decide to look out for number one rather than the child, the child’s options in later life (affecting everything from what kind of job he is eligible to compete for to what kinds of shirts and cups of coffee he can afford to buy) may be severely restricted as a result of choices that he didn’t make.

    Obviously, income/wealth is a big exogenous factor affecting preferences, but there are a million other reasons one’s options could be constrained, including geography, other people’s choices and actions, the culture, society, and era in which one was born, one’s own personal traits and characteristics, and on and on.

    My beef with the price=value equation is that it tries to talk about (and, importantly, predict) people’s choices as if they were separate from these factors, when to my mind, they are not only related but absolutely central. As I said above, if economists generally were satisfied to build the models but admit that they only begin to describe reality, I would be fine with that. But it seems like too many of them want to dictate policy based on those graphs in the textbook, and too many of them have gotten the chance to do just that.

  • I get that price = value doesn’t explicitly account for the fact that people have different options and limitations. But I’m not persuaded that undermines the fundamental concept. It’s almost a corollary that things that are highly valued and have limited supply will be inaccessible to some (or many people). When supply is essentially unlimited of a good that people value (e.g. tickets to a blockbuster movie), then prices are still low enough to be minimally exclusive. When supply is highly limited (e.g. tickets to a red hot Broadway show), then those who can afford to pay more drive up the price to a level that is highly exclusive but not so high as to prevent 100% consumption of available supply.

    It sounds to me like you’re saying economists would claim that the fact that poor folks don’t buy tickets to hot Broadway shows means they don’t value Broadway theatre. I don’t *think* anyone’s suggesting that, and I certainly don’t believe price = value implies as much.

    But perhaps I’m still missing the point…

    One last thing: I did a poor job annotating my purchase list above. My point wasn’t that it reflected my personal preferences. My point was that I had absolutely adequate information to make all of those purchase decisions. I was attempting to refute your claim that the majority of purchases are made by purchasers with insufficient information. Of course SOME purchases are like that (custom software is one I deal with all the time where most customers are totally unqualified to assess the value of what they’re buying). I just think those cases are relatively rare.

  • It sounds to me like you’re saying economists would claim that the fact that poor folks don’t buy tickets to hot Broadway shows means they don’t value Broadway theatre. I don’t *think* anyone’s suggesting that, and I certainly don’t believe price = value implies as much.

    Well, I’m glad you’re not suggesting that, but if you don’t believe “price = value” implies that the price of tickets reflects how people value them, then I’m not clear what you mean by the “price = value.” It sounds to me like the equation you’re talking about is “price = price.”

  • Perhaps we really are talking about two different things… This goes back to my initial comment on the first post, when I said that price does not necessarily equal value for any specific purchaser, but that it’s an aggregate representation of the value that all purchasers place on the item. To clarify, I would add that this formula is closest to precise when there are no constraints on supply. When supply is constrained somehow (either due to fundamental limitations or to intentional restriction by vendors), then the supply/demand curve pushes the price upwards. This is basic microeconomics, right?

    So where’s the disconnect? At the end of the day, I think you’re trying to make a social justice argument that this supply/demand curve is inequitable because when supply is constrained, then only a subset (generally the wealthiest portion) of would-be purchasers can afford the item. Is that right? Is this just a fancy pants way of saying that it sucks that some people are poor and some people are rich? 😉

    I’m intrigued by your comment here:

    My beef with the price=value equation is that it tries to talk about (and, importantly, predict) people’s choices as if they were separate from these factors, when to my mind, they are not only related but absolutely central.

    What behavior predictions do you see going awry?

  • Adam,
    Yes, I would say that my last two posts on this topic are written largely from a social justice standpoint, but my critique of economics goes well beyond that. There are actually a number of different issues at play, which makes it hard to present a coherent and concise distillation of that critique, but I’ll give it a shot. I’d say my two core issues are with (a) the failure of the neoclassical model to consider exogenous factors such as income and externalities; and (b) the practice of taking markets at face value when interpreting them for policy purposes despite these imperfections described in (a). These two criticisms are then exacerbated by (c) the oversimplified way in which micro is usually taught to undergrads, which perpetuates (b); and (d) the anti-scientific practice of fitting observations to the models rather than building the models around observations, which perpetuates (a).

    You’re going to have to help me understand your argument that the price of an item is an aggregate representation of the value that all purchasers place on that item. You’re equating value with utility here, right? So if I’m understanding you correctly, you’re saying that # of purchasers x price = aggregate value. But won’t some purchasers value it more than the price they actually pay? And if people value it less than the price, then they’re not purchasers, right? So won’t the aggregate value almost by definition be more than the price x # of purchasers? Or maybe what you mean is that the # of people in the marketplace x price = aggregate value. I could get on board with that being reasonably true reasonably often. But it only works for low-cost goods with effectively unlimited supply. Something like a Honda Civic, for example, is a mass-produced item that is not really supply-constrained. It’s not a luxury item in the usual sense. But because they’re so expensive to make, it’s a fair bet that many, many more people desire a new Honda Civic than will actually purchase one this year.

    The bigger problem with this analysis, though, is that we really have no way of measuring how much people actually value a good. The best we can do in most situations is an approximation based on whether they buy it or not. That’s good at capturing people on the edges of the decision to buy or not, but it does little to distinguish people at the extremes from people in the middle. Moreover, it does nothing to capture why people make the purchasing decisions they do – for example, whether that decision is completely voluntary or made for them in some way by factors outside of their control.

    This all begs the larger question of what is meant by “value.” It sounds like you are defining it in the utilitarian sense of personal preferences. My problem with that is that personal preference is a slippery concept; what I prefer may change from one moment to the next based on new information, changed circumstances, or simply my whim. So under the utilitarian definition, yes, the market price of a good at a particular moment is a decent proxy for the aggregate preferences of potential consumers at that moment. But I worry that we often read more into that proxy than is warranted – especially when setting economic policy. I prefer to think of value as a more holistic, collective, long-term concept (something more akin to happiness), and contemplate how markets might be employed, shaped, or curtailed to maximize that. Google might be more profitable if it sold crack instead of software, but it doesn’t mean the world would be better off if they did.

    I think I may have led you astray by implying that predictions about consumer demand are undermined by exogenous factors for goods with effectively unlimited supply. It’s possible that they might be (for example, think about shirts sold in a tourist gift shop on a Caribbean island vs. the same shirts sold to locals down the street in the flea market – I’d think the neoclassical model would predict that more tourists seek out the cheaper shirts than actually do), but that’s not really what bothers me so much now that I give it some more thought. What bothers me most is criticism (b) above: when economists interpret market activity, especially for policymaking ends, without the context of exogenous factors that the marketplace itself doesn’t take into account (like externalities) or that may be distorting the market (like income levels or short-term incentives in conflict with long-run preferences).

  • You’re absolutely right – I meant something more like the universe of “potential purchasers”. (The aggregate value of all *purchasers* obviously lies somewhere ABOVE the price paid.)

    I get the appeal of “happiness economics”, I really do. I’ve just yet to see anything remotely approaching a good set of metrics for measuring something this nebulous and abstract. In the absence of such tools, I think we’re in dangerous territory, because the natural instinct is to assume (consciously or not) that most folks’ quirky, irrational preferences mirror our own. This quickly descends into creepy Orwellian paternalism.

    I am intrigued by new efforts to, e.g., replace the GDP with something that accounts for environmental and other indirect costs that are obscured by conventional economic measurements. But even something like water quality can be quantified according to largely universal criteria far more easily than something like cultural vitality can.

  • Well, it seems like we’re finally approaching convergence. I don’t disagree substantively with anything you’ve just said. The main difference in perspective, I think, is that I am both (a) more confident that a reasonable proxy measure for happiness (or at least long-term preference) is within reach of current social science, if not now, then within our lifetimes, and (b) less distrustful of the idea of setting policy in the absence of such tools [though I agree with you 100% that we shouldn’t do it just based on hunches]. In fact, I think your discomfort with messing with markets in the absence of evidence that they don’t work is more or less the mirror image of my discomfort with allowing markets to run amok in the absence of evidence that they do work. That’s more a matter of faith/prejudice than anything else, probably.

  • Hey Ian,

    Interesting posts! I’m probably missing a lot of the context since I’m not immersed in the arts world and the relative significance attached to certain concepts and arguments that have bearing on arts policy, but I did want to chime in with a simple critique of the Costner example.

    Imagine for a moment that we’re dealing with two people, of equal age, but that one is a billionaire and one is not. If the Kevin Costner memorabilia were truly that valuable to the person who is not a billionaire, then why didn’t that person make more money? Though it’s lamentable that the girl you describe in the situation didn’t have enough money to purchase what was clearly more valuable to her, if we consider how much more the billionaire (in theory) worked to have the purchasing power he does, and consequently how much less the girl worked, it would seem unfair to award the girl the memorabilia when she could’ve worked harder.

    To tie it in with the price/value debate and to a less extreme context, when it comes to Broadway shows, if you really value the experience of watching Broadway, then you should work harder to the point you can afford Broadway tickets. The fact that poor people don’t go to Broadway shows simply reflects their preferences for goods and services in a free market (and the value they ascribe to work/leisure). They may “value” Broadway shows in the way that you’re describing, but on a value/$, they find other things a better buy.

    For me, the salient issue isn’t when people can’t afford things that they would like to have, but rather, when people don’t have the economic mobility to maximize the value they create as individuals. If you’ve decided to live a stress-free life working at a used bookstore and can’t afford Broadway shows, forgive me if I don’t have much sympathy. But if you’re working 50 hour weeks without benefits as a janitor when you have the potential to be more but aren’t able to realize your value, then I want to help you. But I wouldn’t do it by offering a lottery system for tickets – there’s more effective ways to compensate for inequalities than at the point of purchase for various products.

  • Hi Tony,
    Thanks for your thoughts, which I find intriguing as always. I feel that I could critique your argument from several directions, but let me start with this one. You state that “it would seem unfair to award the girl the memorabilia when she could’ve worked harder.” (emphasis added) Implicit in that statement seems to be a value that equally hard work should be rewarded equally, regardless of context. Right? I mean, you didn’t say, “it would seem unfair to award the girl the memorabilia when she could’ve worked harder, or chosen a higher-paying profession, or come from a wealthier family, or been 10-20 years older than she was and therefore eligible for the kinds of jobs that would have enabled her to work hard enough to afford this item in the first place.” Instead, you focused specifically on effort for your defense of price=value.

    You seem to be aware of this when you give the example of a janitor working 50 hours a week without benefits. But how can you get around the fact that the market rate for some jobs that are “easier” is higher than the market rate for some jobs that are “harder”? Is 50 hours a week without benefits as janitor easier than 50 hours a week with great benefits in some office’s HR department? Who’s creating “more value” here, to go back to an earlier conversation we have had?

    The problem with price = value is that it artificially slaps a moral judgment of fairness on a system (markets) which are fundamentally neither fair nor unfair – they just are what they are. Markets reinforce existing inequities, except when they don’t. Markets broaden access, except when they don’t. Markets create wealth and improve standard of living, except when they don’t. I deeply respect your valiant efforts to interpret these dilemmas within the context of standard pricing theory, but I will tell you that wrapping one’s mind around them becomes a whole, whole lot easier if one just takes the simple step of throwing price = value out the window. My equation? Price = aggregate short-term preference (as shaped and limited by exogenous factors having nothing to do with choice) divided by supply. Value is a separate concept altogether. I say let’s stop confusing the two.

  • Hi Ian,

    Thanks for the reply; I think I see where you’re coming from. And you’re absolutely right, price doesn’t reflect absolute value. In the same way that an extra dollar of income for a poor person doesn’t hold the same value as an extra dollar of income for a rich person, so too can we describe any kind of good or service. However, I would still contend that price does reflect a person’s willingness to pay for a good or service and helps determine relative value within a person’s own spending. Although it’s hard to determine whether a $100 ticket to some performance is more “valuable” between a rich person who buys the ticket and a poor person who does not, we can at least say for the poor person that the ticket was not valuable enough compared to other goods and services that the person did buy with his income.

    But to jump from price does not equal to value in an attempt to justify futzing with free markets at the point of consumption is for me deeply problematic. When the billionaire buys the Kevin Costener memorabilia, I have to think that attempting to redistribute the memorabilia is not the way to go. You’re right that the existence of markets shouldn’t be equated with the existence of fairness. But markets are a fair and just system for an unfair and unjust world. The fact that the billionaire and the girl don’t have similar purchasing power or capabilities to have, earn, or inherit wealth is not a problem with markets, but a fundamental problem of cosmic inequality.

    Should we be attempting to reshape markets to address these inequalities? I think so, at least on a voluntary basis. But how? Should we attempt to redistribute wealth by taking some of the billionaire’s wealth and give it to the girl or diminish his purchasing power by removing his ability to purchase the memorabilia outright? Or should we attempt to increase the wealth generation abilities of the girl so that she can compete effectively with the billionaire in amassing wealth? The former has the effect of disincentivizing work whereas the latter increases the total output of everyone and can be considered to be more fair, since it does not redistribute the fruits of one’s labor, but rather, improves the ability of others to reap the benefits of their own.

    I’m not sure where this leaves you in your overall thesis, but I’m not one for abandoning pricing theory just yet. I think setting prices at traditional equilibrium points is still the way to go.

    Disclaimer: These are just the thoughts that immediately come to mind and in no way represent any definitive view on my part. I reserve my right to equivocate.

  • From the post: “Adam goes so far as to say, “while Price = Value in the aggregate, the formula doesn’t necessarily hold for any individual purchaser.” Huh? If the formula doesn’t hold for any individual purchaser, why would we assume that it holds in the aggregate?”

    There’s actually a very good and very simple reason why price could equal value in the aggregate and not the individual case. The aggregate value is basically the average value placed by all purchasers. If you were to see one individual placing a very different value on the same thing in the data, a researcher wouldn’t even blink, because it would be an example of statistical variance. All real life data has variance, and it is a fallacy to think that variance makes a theory wrong, just like it’s a fallacy to think a theory holds for all individual participants in the market. The theories explain what happens in expectation, in the average case.

    Variance is certainly not ignored by neoclassical economics (though I’m not a huge fan, either). It is actually the basis for diversification in investing. It has been clearly shown (by a whole lot of data) that if you can spread out your bets among a lot of different financial investments with different fundamental risks, the variance of the whole portfolio in aggregate will be greatly reduced. Eugene Fama, a financial economist at the University of Chicago, demonstrated this quite clearly with data, not theory.

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