Tag: institutions

Market Failure was used as the signal– but what now?

In days of yore, there was the market and the state. Two separate spheres of activity coexisted. And when private industry did not come through for the people, in the way they thought it should, market failure was the name given to assign blame. When the market failed, it was up to the state to address the lack of supply in areas such as medical care, poverty alleviation, housing, and the like.

One of economist Tyler Cowen’s first books addresses this trigger for state action in a compilation of thoughts on The Theory of Market Failure: A Critical Examination. But he isn’t convinced. He seems to say that when you look so closely at a tiny segment of a large system, you don’t see anything at all.

Consider externalities, a key signal that the market is merely pushing a problem onto some unsuspecting observer. He claims that (nearly) every single transaction has a positive or negative external effect. And, if you think about it, it’s true. We are social creatures. Although many consumptions are deeply personal, in the end, we always touch the lives of others.

The scope of the externalities/nonexcludability issue is vast. Nearly every concern of economic policy, from environmental considerations to research and development, involves externality problems. No one would claim that every instance of an externality warrants state intervention. There is no doubt, however, that the existence of externalities is one of the most powerful arguments for public sector involvement in the provision of public goods.

This isn’t the proper trigger for government intervention.

What about when the price seems too high, as in housing, or too low, as in wages? Whether a good is mediated through the private or public sector, prices still carry the most valuable form of comparative value information.

As noted earlier, the theory of public goods and externalities implies that if a good is characterized by nonrivalrous consumption, allowing additional individuals to consume it entails zero marginal cost. Demsetz’s arguments (1964; 1970) imply that this is only true in the presence of perfect information. Otherwise, allowing additional individuals to consume a good free of charge results in the abandonment of the price system in that sphere of activity. Since the publication of Hayek 1945, the role of prices in communicating information has been well known. In the provision of public goods as well as private goods, sacrificing such information may entail significant costs.

Prices are the most critical form of encapsulation of what groups of exchangers say about an exchange. We may not always conduct a thorough analysis of prices. That might be where the problem lies.

For instance, the exchange might be telling something vital about a group of people that others are simply not attuned to. People join various clubs throughout their lives. And these associations create structures of value.

The next two selections in section 2 of this volume discuss the nature of local public goods. Because such goods, by definition, can be provided to only a segment of a nation or community, determining which individuals will receive them becomes part of the economic problem. Once club or community membership becomes endogenous, many of Samuelson’s conclusions do not hold.

When people leave or join a club, when they exit or stay loyal, they impact how much of a surcharge the group of people in the club can charge.

The Tiebout model avoids the preference revelation problem; an individual’s preferences are revealed by his choice of location. It also avoids the free-rider problem; those who choose to belong to a given community are subject to the taxes or user fées that finance the provision of goods. Nor is pricing inefficiency a problem. If an individual is inefficiently excluded from the use of a public good or service, he can simply move to a community where that exclusion is not practiced.

The introduction written by Tyler Cowen is comprehensive. To the engaged observer, he dispels the dichotomy between industry and the state. There’s something pluristic out there. It’s big, messy, and complicated. It dovetails into many of the things people talk about under the titular of institutions. But it has structure– once you stand back and take a look.

That’s the project of the moment: a unified theory of price.

Patriotic Choice

James Buchanan is renowned for charting a new direction in economic theory with the introduction of Public Choice Theory. This theory emerged from the realization that politicians are not solely altruistic public servants, but may also be swayed by self-interest in their political roles. It should follow then that when a politician takes action in the form of an exchange, it is possible that that behind the choices lie blended motives. And in general, people can use trades to general a gain for the self as well as the tribe.

After all, purely altruistic action is most commonly seen between parents and their children. When exerting effort during the trying toddler years of dependency or spending down savings for higher education, few formulate a cost-benefit analysis. Perhaps in the back of the parent’s consciousness there is a thought that a healthier, better-educated adult will be a kind caretaker to their elderly parent. This deep bond between parents and children often leads to countless unnoticed acts of selflessness, like a parent waking up in the middle of the night to comfort a scared child or a child sacrificing personal time to help a parent in need. These acts of love and sacrifice form the backbone of familial relationships and lay the foundation for a strong, supportive family unit. Over the years, the selfless actions of parents continue as they guide their children through life’s challenges, always putting their children’s well-being above their own. And as children grow older, they often reciprocate these selfless acts, showing love and care for their aging parents, thereby perpetuating the cycle of altruism within the family.

Blended motives are becoming increasingly prevalent in modern society, as individuals seek to align their personal goals with larger social or environmental causes. In the workplace, many employees are drawn to non-profit organizations, where they can pursue their professional ambitions while also contributing to a meaningful collective mission. Similarly, in the realm of leisure and tourism, the popularity of eco-tourism continues to grow, reflecting a desire to explore the world while supporting sustainable and environmentally friendly practices. Moreover, in the consumer market, there is demand for organic foods and battery-operated vehicles, driven by a dual concern for personal well-being and environmental responsibility. These diverse examples all underscore the complex interplay of individual and collective motivations in contemporary decision-making processes.

This holds true in institutional pursuits as well. Recently, a juror in our area promptly called the FBI instead of keeping a bag containing $120,000 in cash in exchange for an acquittal. This act of integrity serves as a testament to the essential role that individuals play in upholding the principles of justice and fairness in society. Where would we be if citizens didn’t react in a judicious and expeditious manner when confronted with such moral dilemmas? The swift and decisive action taken by this juror ensured that the would-be bribers were tracked down and held accountable for their actions. Such incidents underscore the pivotal role that individuals play in preserving the fabric of justice and upholding the rule of law.

This democracy is made up of individuals like all the ones who will share a 4th of July picnic around BBQs in backyards today. These are the folks who, in actions large and small, blend into thousands of choices made every year, work and contribute to the ever-evolving project of America.

To write or not to write

“Get it in writing!’ is the advise offered when entering into a contract. Too true. In particular when the parties have no relationship. If you want the law to back up your claim in an agreement, then it is a lot simpler if the terms are written out and both parties have signed in acknowledgement.

However, things aren’t always spelled out in a contract. A while back, in small claims court, I listened to a judge pull the rental agreement between a duplex owner and a tenant, one question at a time. It was clear he had some experience ferreting out these types of arrangements, to help settle who owed what to whom. He didn’t seem aghast that the plan at hand was verbal not written.

And before you judge, how many times have you clicked through the ‘I accept’ box without taking a moment to read what it is you are accepting? Written out yet neglected. We rush around our lives assuming the best.

Sometimes no one is clear what that ‘is’ is in particular. Technology has generated some truly stunning options, options unanticipated. When facebook provided that opportunity to reconnect with childhood friends around the world, it was intoxicating. Did I click right through the user disclosures agreeing to let their algorithms stalk my life and sell the information to advertisers? Yep. (or wait–were their any concerns of data privacy at the start?)

Written or not written. It’s not practical to put every moment of our lives into a written contract. Say you wanted to ride share with another family. You divvy up the chore, one takes the girls to girl scouts, the other to lacrosse practice. Stuff happens. Things get cancelled, rearranged, people have to be flexible.

Maybe one family does bare an larger burden. There’s no official settling of accounts, but for the relationship to sustain further commitments of work towards the children’s on-going experiences, more than likely there is some sort of make-up. Interaction continues. And this pattern can be seen in workplace groups, covering for each other or coordinating on projects. Work, exchange, work.

And when this pattern continues over a long period of time, people trust it. They rely on it. Home buyers, except for rare exceptions, diligently sign the stack of documents as indicated by the manicured finger of their closing agent. There’s no flinching at the part where the bank can foreclose for non-payment. Buyers rely on the knowledge that banks are competitive, consistent and regulated.

Consumers rely on a business climate. That many thorny issues have already been washed through mediation or courts by objectors who took their time to point out injustices. How can that be? It’s certainly not true everywhere in the world. The answer might be something like, “In the US we have institutions which allow consumers to trust the mortgage financing system.”

So in effect, institutions are the culmination of work which goes to enforce unwritten contracts on how to behave in (this case) the mortgage business. We have written contracts too, of course. But the trust in the system, the cart blanche, ‘I don’t need to have an attorney review this’ part is a trust based on social behavior and outcomes. Based on the knowledge that others have gone to bat and secured enforcement or change. That people were consistently able to work toward an outcome secured in the spirit of the transaction.

People often refer to institutions as a set of rules. I see institutions as the structure which allows work to occur and be captured in a non-fungible manner within a community. The greater the repetition, the greater the trust, the stronger the institution. We may even discover the value of unwritten contracts to far exceed the value of ones spelled out in ink on paper.