Economists as Coordination Consultants

In her latest book, Cogs and Monsters, Diane Coyle takes a long hard look at the discipline of economics. She offers substantial proof that many things we care about are left out of the accounting in a traditional analysis. It’s a topic she is familiar with as she wrote another book about GDP which relays a history of the measure and suggests there are some missing pieces to the analysis.

Her peers are not to be persuaded. Frustration ensues when novel ways to approach issues are shuffled under a pile of papers and surreptitiously ignored. Here is the story of the shopkeepers versus energy waste through open doors.

As you walk down a high street in the winter, you will find many stores with their doors wide open blasting out heat in the entrance. This is not a desirable state of affairs either in environmental terms or in terms of the stores’ energy bills. So why do they continue to do it? Their fear of discouraging ambling shoppers from entering their store, when every competitor’s door is open, outweighs their desire to cut the electricity bill, or reduce emissions. No shop can shut the door unless the others do so. It is a classic co-ordination
problem, and the campaign aims to co-ordinate actions, but cannot succeed until a critical mass of door closers has been reached on every high street. A regulation banning open doors would achieve the same, and more effectively because individual shops could not backslide.

In today’s parlance, there is a tension between the ability of small business owners to make a profit and an edict from the state to preserve energy. It’s Mainstreet versus the government (or the activists, or the greens). The positioning is that people in business just care about making money and don’t do enough to contribute to social problems. The counter arguement is that businesses are suppose to look after the bottom line- that is the how the system works. Due to this dichotomy, a proposal to regulate shop doors is considered authoritarian. We the lofty intellectuals have made a calculation that- you- the lowly shop keepers must sacrifice for the greater good and close your doors!

If you read Coyle’s book closely, however, she has more to say. From what I understand, the mandate to shut the shop doors is meant to ignite the coordination of a beneficial activity. Clearly, shopkeepers care about more than their businesses, just as everyone does. They may choose to make concessions for all sorts of socially beneficial reasons. Perhaps their brother-in-law is a supplier, but not the cheapest supplier. Perhaps they close on Sunday for religious reasons. At every turn, business choices are made in unison with other interests. And there is a very good chance many care about the wasted heat slipping out their front doors.

The policy to regulate the shutting of doors isn’t a heavy-handed state mandate. What it does is give the group a chance to start a new norm, one which they would be open to if they had assurances that everyone would follow through, Once underway, the theory is that shutting of the door becomes a voluntary social norm with compliance and enforcement.

To see it in that light, it is necessary to put it on display in the public goods market. The fear is that one shopkeeper closing their door bears an external expense for her commitment to a social interest. Unless there is a good chance that the majority of the group are so environmentally inclined, the efforts will inevitably be circumvented and the efforts will fail.

So here is the important part. Coyle is making a judgment in a marketplace of energy-conservation interests that not 1-out-of-10, not 5-out-of-10, but 9-out-of-10 of the Mainstreet businesses will find this a favorable action with assurances. The question should be, how is she evaluating that market? Where does she see the numbers that say this group will go along with this policy, or that group will not?

Consumers of resources are regularly making calls about how much they are willing to sacrifice for their children, their environment, their commutes, and their churches… These are all done in shades of grey and not in thumbs up or thumbs down moral decisions. To implement successful coordination policies we need to be able to read the market so that the initial assurance of participation is followed by the development of a new voluntary institution.