Why do people hate the market?

Stardom sent me this clip about Seva Cafe, a restaurant operating the Radiohead business model: eat first, then pay whatever you feel like.

Instead of a warm glow, I feel depressed. Why are projects such as Seva Cafe so loved? Why is someone volunteering to do social service more respected than, say, an industrialist that creates tons and tons of consumer surplus? What is wrong with commercialism? Why do people hate prices, money, and the market mechanism itself?

One potential reason behind the markets' bad reputation is their worrying tendency to generate inequality when left unchecked. Most people, however, are not simply against free-market libertarian societies; they are suspicious of markets at the micro level, even when these operate within reach of the redistributionist arm of the state.

My feeling is that people suspect markets because the incentives of the seller are diametrically opposed to those of the buyer: the former wants the price to be high, the latter low (with the opposite going for quality); furthermore, and perhaps more crucially, the parties in the transaction are usually better off concealing information from each other, or communicating outright misleading information (seen any ads recently?). This is not a problem in the textbook model of perfect competition, but real-world markets can generate a lot of ill feeling amongst participants. Information is gold, and it's often hard work. In contrast, in a perfectly altruistic 'giving' economy, the incentives of the giver ('supplier') are fully aligned to the incentives of the receiver ('the buyer'): the former is better off the happier he makes the latter. I'm way more confident in the quality of the food my mom serves me than that of my local chinese. I feel way more comfortable with a friend that 'cares for me' than with an explicitly selfish business associate. I prefer a partner who loves me to paid-for company.

One problem with this is that altruism exists in very small amounts, and it tends to constitute a very unstable equilibrium (a few people deviating is usually enough to bring to whole edifice crumbling down). And even if that wasn't a problem and the objective was to organise an economy of angels, there is no technology that is nearly as good as markets in determining the relative value of goods. An 'altruistic' model can work - often very well - only at the most micro of levels (e.g. in the case of Seva Cafe) where the lack of information can be brushed aside and gross inefficiency can be 'subsidised' from outside the system. But it is no way to run a full-blown economy. Alas, this is not immediately obvious.

The implications of the public's mistrust of markets are profound. Simply put, it's the resource allocation equivalent of having invented the chainsaw and insisting on using your nails to cut down trees. What can be done to change public perceptions of markets?

Time-inconsistent preferences or not, this will help you lose weight

I am [...] fat. But now my wife, who is desperate, for some reason, to keep me around for a very long time, is turning the economics of obesity on its head, agreeing to provide me financial incentives to finally drop the pounds. It is a peculiar strategy, but it's not without merit: Economists have recently shown that if you pay people enough money, they will lose significant weight.

I thought of that the other day when I was talking to Barry Nalebuff, a professor at Yale University and one the country's top game-theory economists. He has studied weight-loss incentives extensively. When I told him what my wife was paying me, he said: "It's not going to work. It's not big enough. Not even close." [...] he suggested I enter into a contract in which I agree to pay him if I don't drop some pounds. "As much as people don't like to lose money, what they really don't like to lose is their own money," he said.

In fact, some of his Yale colleagues are in the final stages of launching a business based on this very concept. They have started a company called stickK.com that will allow people to take out a contract on themselves. They pick a price. If they don't lose a certain amount of weight, they lose the money, either to a charity, friends or family. Ian Ayres, one of the company's founders, said he hopes the Web site makes money by selling advertisements and forming corporate partnerships.

"The basic idea is to let economic incentives have a chance," he said. "It's been very hard to produce successful results through traditional weight-loss methods."

Ayres took out a contract on himself with another of the company's founders. He needed to get down to 185 pounds, losing at least a pound a week or forfeiting $500 for each week he failed. Sure enough, he dropped below 185 pounds. Now if his weight goes above 185 pounds, a penalty kicks in. He has avoided more than $21,000 in potential penalties. "It's been a free way to lose weight," Ayres said.

He added, "Thousands of studies have shown that people work harder to avoid losses than to gain a similar amount."

From the Washington Post, via Greg Mankiw.

xkcd

This is so good words fail me. xkcd: a webcomic of romance, sarcasm, math and language, I suggest you read all 340 scripts posted. Here's the blag.

Charitable giving

Datacharmer posted recently on the links between charitable giving and wealth, following work by Arthur Brooks. Brooks asserts that:

Emerging evidence—crunchy statistics from real data, not the mushy self-help stuff—supports the contention that giving stimulates prosperity, for both individuals and nations. Charity, it appears, can really make you rich.

To prove this, he regresses income on giving and, to prove causality, he uses volunteering as an instrument for giving. Now for volunteering to be a valid instrument in this case, it would have to be both well correlated with giving levels (fine) and unrelated to income levels (hmmm). While divine favour is promised to those who give, I don’t think this provides us with firm evidence. The trouble is in the number of ways in which income and time spent volunteering could be related. The data on which this work was done comes from the S.C.C.B. survey and a quick look at the variables shows that income is reported at the household level, not the individual. What is often the result of household income rising above a certain level? Stay at home housewives. What do housewives do when the kids are at school (or gone for good)? Volunteer. This is just one possible link between income and volunteering. Another is raised in a comment on the previous post – poor households have to work all hours to make ends meet. As income increases and the budget constraint eases, more time is available to volunteer. I would view the results of this IV work with extreme caution.

The other half of Brook’s work concerns higher levels of giving leading to greater wealth at a national level. I find this story far more plausible. Two of the major recipients of donated funds are universities (at least in the US – in 2006, 14% of total giving went to educational organisations) and organisations working with the socially disadvantaged. It is not hard to imagine a causal chain going from increased funds into education to increased levels of human capital and to increased wealth, or from more social work to greater labour force participation and to increased wealth.

So giving to charity might not make you richer directly, but it probably will benefit your country.

An alternate view of chritable giving is here. The authors propose a view in which giving is a status seeking activity (quite possible with alumni giving in the US) and as such is an inefficient use of resources. They show that under certain conditions it would be optimal to tax charitable donations, rather than giving the usual Pigouvian subsidy. Very interesting.

Friday Special 27

WikipediaVision, a map showing Wikipedia edits in near-real time

Along those lines: FlickrVision

Ski-gliding the Eiger in the Swiss alps

Preview of the 2010 FiFa World Cup venues

Unintended signals

If you have been to the cinema recently, you might have had the "pleasure" of seeing an anti-piracy advert featuring the cast of the (excellent) Pixar film, Ratatouille. Its main points are that pirate movies are terrible quality, have terrible sound and a terrible picture and that if you watch them, you will have a terrible time (and you run the risk of being called a ‘knock-off Nigel’). This ad is ridiculous for at least two reasons I can think of. Firstly, they’re preaching to the choir (we’re already in the cinema, they’ve already won the battle).

Secondly, the ad tells me precisely the opposite of what its makers want it to tell me. It signals to me that pirated films are actually fairly good quality and would be an enjoyable watch, not far off comparable with buying an official DVD. Why? Because if the reverse were true, if they were rubbish, then no-one would buy them (at least, not more than once). If no-one bought them, the big film companies wouldn't be worried about them and wouldn't spend bundles of cash telling me not to watch them. If something is crap, you don't need to tell me not to consume it, I will work that out all on my own, thanks.

We was robbed!

Watching Premier League football, you frequently hear claims by away team managers that they have been short-changed by a weak/incompetent ref, more often than not concerning penalties given or not given. Are these managers ever right or are they just suffering from a confirmation bias?

While it is true that opposition teams get far fewer penalties at Old Trafford, Anfield and Stamford Bridge, it is very difficult to determine whether this represents a big-team/home team bias. Man Utd playing at home will normally have more of the play and more penalty box action than their opponents and, as such, would be expected to win more penalties.

This very clever paper seeks to provide an answer by focusing on something that is completely at the referee’s discretion, the amount of time added on at the end of a game. In the authors’ words:

Referees have discretion over the addition of extra time at the end of a soccer game to compensate for lost time due to unusual stoppages. We find that referees systematically favor home teams by shortening close games where the home team is ahead, and lengthening close games where the home team is behind. They show no such bias for games that are not close. We further find that when the rewards for winning games increase, referees change their bias accordingly.

The data is from matches in Spain's La Liga and the authors find that the relevant mechanism is the size of the home crowd. In other words, the more fans a team has at a game, the more they will be favoured by the ref. The authors see this as evidence that social pressure affects referees' decision making. However, it is unclear why this should be the case. It is unlikely that the refs have been bribed (this is Spain, not Italy) and unlikely that refs are afraid of physical harm (again, this is Spain, not Bulgaria). So where is the benefit? Are referees being influenced without realising it, or are Spanish refs all utilitarians, seeking to maximise the welfare of the largest number of people in the stadium? Suggestions in the comments section please.