Your Economics Lack Context

This is usually a Communist mistake, but I've noticed it a lot, because referring to the aggregate of individual decisions and valuations that the market consists of as a single entity named "The Market"¹ is a lot easier than "the aggregate of ungainly sentence fragment." However, it's an important and necessary distinction to make, because most of the following fuckups flow out of it. The Market is a medium by which information is transmitted; it has no will nor independent thought process; it is the wisdom of crowds manifest, and nothing more.

This always comes up when someone complains about the quality of goods they cannot manufacture independently. "The market dictates that [subpar quality] is fine!" they shriek, in defiance of what should be a self-evident truth.

Let us put the "conceiving of the market as a single entity" issue to one side and focus on the issue at hand. The Market conveys one type of information: price. Now, Hayek states that price is a singal wrapped in an incentive, which is true². However, what exactly that signal is is up to interpretation³, and is often misinterpreted⁴. The conservative view⁵, therefore, is that the only absolute symbol you can get out of a market is whether or not something is economically viable at the present moment⁶.

This leads to interesting moments, like where Michael Druggan criticizes AI bears for simultaneously believing that AI is low-utility and that their livelihoods are put at risk with widespread AI adoption while simultaneously acknowledging the above point. It is entirely reasonable to believe that lower-quality work will be, in the aggregate, more economically viable since it keeps happening, but he refuses to acknowledge this as anything more than "cope"⁷.

This is also why arguments that free markets will inevitably arrive at higher-quality goods is a poor one, because it is only true if the members of The Market are concerned with the goods they produce and consume being high-quality, and thus make them economically viable⁸.

This is a fun one, because it's a rehash of a problem that occurs over and over again: you aren't actually answering the question. Let's take a look at a proposal to disincentivize tanking in the NBA's late season. Now, it seems fairly reasonable, and it might even work⁹, but its underlying assumption is that tanking is Bad, and shouldn't happen. But is it?

The argument given by the creator is the maximize the incentives that bad teams have to continue to compete late in the NBA season (to push for a national title). However, teams usually only start tanking after it is assured that they will not be in competition for the natty; a tanking team's season is already over, barring a few more weeks of exercise for their two-way players. This is priced into the fan experience and not really a big deal, and, more importantly, unsolved by the "tanking solution!" Under this system, teams would be required to compete for something they already know they will not be able to attain, placing them in a riskier position¹⁰ for no real benefit. The fans wouldn't benefit either; a team that has sucked all year honestly is unlikely to stop sucking even if you take away their reason to suck on purpose.

Another case is that of scalping PS5s. The PS5 came out during the COVID-19 pandemic, and was extremely scarce and in high demand due to the chip shortages that occurred during that period. Naturally, scalpers jumped on the chance to make a quick buck, and there was a lot of criticism towards them that it has now become popular to countersignal¹¹. However, this ignores a relevant fact: game consoles are loss leaders to get consumers into the ecosystem of the company selling them. In Sony's case, selling consoles at below-market prices is in its best interest, because it gets them PS+ and video game customers, which are the products with significant margins. Therefore, a PS5 sitting as scalper backstock is less efficient, because it is restricting the trade that is created by PS5 ownership¹².

This is another big one, if only because you can really only test it by implementing the policy and seeing what happens, which is awful. On the bright side, this the point where the free marketeers get a demonstration of them being correct!

New York City implemented a congestion fee earlier this year, a controversial change that hinged on a single assumption: that demand for road space¹³ in Manhattan Central Business District was elastic. There was a lot of back-and-forth in the period leading up to the implementation of the fee, but the fee worked and the assumption was proven correct. Great success!

However, this could have easily gone the other way had the assumption been correct. While charging maximum prices for goods with inelastic demand is celebrated¹⁴, it would have been a hollow victory in this case, as the goal of the congestion fee would not have been accomplished.

We can see the results of falsified assumptions in general scalping. As I said before, scalping is becoming a cause celebre, because it's something extremely unpopular that nevertheless conforms to¹⁵ free-market principles, under the assumptions that scalpers set their prices correctly and that there are people willing to buy from them at the "market rate". However, these assumptions are false¹⁶.

For the first, let's take a case study from a place near and dear to my heart: Braums. Earlier this year, Braums partnered with Simple Modern to release two lines of Braums-themed insulated cups, retailing for $30-40 a pop. They sold out instantly¹⁷, and the scalpers began dutifully began placing them up for sale on eBay at ridiculous prices.

Now, before the free-marketeers reading this begin crowing about how this is a Good Thing, and that I'm a sour grapes pleb who is getting justly priced out, take a look at the time and date at the bottom right of the page. Oh yeah, these dipshits have had their inventory sitting around gathering dust for OVER A MONTH because they don't actually price things correctly¹⁸.

The second part is something that tends to go conveniently ignored in these discussions, but I'm dragging it out here because it's actually extremely important: scalpers aren't trustworthy and people don't want to buy from them¹⁹. For as long as this remains broadly true, scalpers remain a parasite on the market, removing utility without adjusting prices, and will continue to use suckers like you to defend them.

Let's hit on a few more common assumptions, quickfire style:

• The market isn't actually free (government regulations, etc)
• Scarcity can be present only instantaneously (not in the long run)
• Solving instantaneous scarcity will not necessarily solve long-run scarcity
• The market isn't actually efficient (monopoly, monopsony, etc)
• The market doesn't tend towards efficiency (i.e., The Market's participants don't want efficiency and will counter any attempt to create efficiency)
• Transactions don't settle instantaneously
• Information is not perfect
• Information is not even close to perfect, and there are no incentives for trying to spread information

This is a standard economic technique, because there are infinite variables in real life and it's not possible to develop a theory that accounts for all of them, but it often goes too far.

The one that comes to mind (because it's the one I've been contemplating most recently) is that of multidimensional opportunity cost. @yah5us will disagree with me here, but his reasoning is poor, and here's why: non-monetary costing methods (time, skill, etc) allow for greater liquidity in a multidimensional market. Compression to monetary prices only is useful for calculating on a spreadsheet, but in implementation amounts to creating a stock market without instruments more complex than single-share purchase and sale. This results in a lot of inefficiency and dissatisfaction for all the parties involved²⁰.

You also end up with scenarios that overindex on one measure to the detriment of others while designing incentive systems, and ignore powerful forces that have illegible but nevertheless concrete effects. To harp on the scalping issue again, goodwill is on the balance sheet and allowing scalping²¹ drives away future customers²². Moreover, a willingness to wait in line or for a future release when more stock is made is in fact a form of increased price that can and is paid^{23 , 24}.

Spreadsheet legibility via simplification will often result in nonsensical answers, which brings us to…

The infeasible optimal solution is a favorite of the Xitter intelligentsia, because it can be demonstrated in a thought experiment and have its actual implementation handwaved. However, I went to college to be an ops guy, and as such refuse to accept the handwave, so let's get into it.

Our first case is going to be fully-dynamic pricing, everywhere²⁵. The argument goes that, with price tags that update in real-time as transactions settle, market-clearing prices can be established everywhere and efficiency would reign supreme. Putting to one side whether or not that would actually occur²⁶ or if it's even desirable²⁷, it isn't feasible due to the infrastructure required. The New York Stock Exchange is a toy compared to the system required to handle this, and it has had decades of refinement and billions of dollars invested in making it work smoothly for the tiny fragment of the population that devote their professional lives to using it. To create a system of the same sort accessible to the layman that can handle the volume and stability required to function correctly would require a budget and timeline so massive that the original purpose would be forgotten and the whole thing would fall over before the first day of trading²⁸.

Another point is the legalization of insider trading. "But it adds information to the market!" shriek the free-marketeers. Not necessarily, since there is nothing in the definition of insider trading that implies that it is necessarily used to adjust the price of a firm's stock to what it "should be." In fact, the opposite likes to happen, because people are dishonest and are willing to mislead the other participants in The Market if it is to their benefit.

Can't wait for the hatemail I'm going to get on this! Let me just remind you that economics is supposed to manage scarcity, and if you're doing that by assuming scarcity doesn't exist or by creating more scarcity, you're a fuckup.