Anyone who reads my posts knows a couple things about where I get much of my information. The first is economics Professor Mark Thoma’s blogsite economist’s view. It’s a fascinating aggregation of many blogs and it always, always elicits a robust outpouring of commentators, such as Beezer. The second is that Beezer regularly reads another blogsite called Baseline Scenario. This is a site written primarily by three authors, the two main ones being Simon Johnson, another economist and former chief economist of the International Monetary Fund (IMF) and James Kwak, a successful software entrepreneur, a former consultant at McKinsey and now a Yale Law School student. Johnson is also a professor at MIT’s Sloan School of Management.
Johnson and Kwak also co-authored the book ’13 Bankers’ that dealt primarily with the bank system’s role in the current recession.
That said as a long preface, what follows is two posts, one by Thoma at economist’s view, and the other by Kwak at Baseline Scenario. Thoma writes about the small town he grew up in and Kwak writes about a recent experience he had at Yale Law School–two very different posts.
But somehow they are related, in Beezer’s view. The issue is putting an understanding to why they are related. We’ll leave it up to whomever reads both, as we’ve done, to find what the connection really is, if any.
First, Thoma’s post.
As many of you know I grew up in a small town, it was just a bit under 4,000 people at that time, the same town that my mom was born in. I recently went back there for a high school class reunion (35th). While I was there, something struck me that I’ve been meaning to write about.
In the town I grew up in, pretty much everyone knows who the best doctor is, the best dentist, the best painter, the best carpenter, and so on. There were sometimes disagreements about exactly who was best, e.g. who had the best restaurant, but we all knew who to choose if you needed something done, something to eat, your house cleaned, lawn mowed, legal work, child care, whatever. The people who didn’t weren’t very good at these kinds of jobs didn’t survive for very long. I can think of three lawyers off the top of my head, and if I needed one, I’d know who to choose, or certainly who to ask (growing up, my next door neighbor was the county clerk, and she could be very helpful in navigating anything related to the courthouse — she saved me once when I was in court for going 95 mph and the judge thought a night in jail would be a good lesson — thanks to her I escaped jail, but I did get the message — losing my license for a month helped with that).
I thought about this again yesterday as I was trying to change dentists. I’ve lost confidence in the one I have, but have no idea who to choose. I asked a few people, and they had recommendations, people mostly say the like who they have, but it was nothing like the kind of comprehensive knowledge I had where I grew up. Same for choosing a painter, a car mechanic, or most anything else. I never really know if I can trust them when the initial choice is made.
In an environment like I grew up in, there is little need for many types of regulation, it is largely redundant. If I still lived there and needed a room added onto my house, I have a friend I grew up with who does that type of work and I would trust him to do it right. Period. And if it wasn’t right, he would make it good. These are people you see frequently around town, or hear about from others, people you grew up with from kindergarten through high school (even college since many of us ended up at Chico). Sure, the doctors and dentists and the like came from outside, but my grandmother was a nurse, one of my mom’s good friend worked for a dentist in town, people played golf with the doctors, dentists, etc. at the local 9-hole course, socialized with them at the Tennis Club — you knew what you needed to know. If someone got sick at your restaurant, it was over for the owner. Word would spread quickly and everyone would know. If you had a good story and a good reputation — being good in grade school and being known as honorable has its rewards — you might survive. The town, person by person, would make it’s call. That call wasn’t always correct, small town rumors, cliquishness and the like are known menaces, but for the most part the town took care of itself. So while it wasn’t always perfect — there are parts of the town I don’t miss at all — it managed well enough.
What I’m wondering is whether this can, at least in part, explain differences in attitudes toward regulation between more conservative rural areas and larger cities that are generally much more liberal. In a larger city, you are much more vulnerable to predatory type behavior, unfair treatment, much more likely to be dealing with strangers you have never seen before and will never see again. That uncertainty, and the experience of being taken advantage of if you aren’t continuously on guard, and sometimes even if you are — maybe a contractor did a lousy job and refuses to fix the flaws or refund money — might lead you to declare “there ought to be a law!,” or that “someone needs to stop this!” You would be much more inclined to think that regulation was needed.
That’s not to say that things are perfect in small towns, they’re not of course, or that exploitation of the weaker by the stronger isn’t present. It is. Farm labor comes to mind. And there is still a role for safety and other types of regulation. But there does seem to be a much stronger sense that people can take care of themselves without the need for a bunch of rules and regulations, and without the need for police looking over your shoulder to make sure that you comply.
And that’s just the town. If you add in all the farmers who live in the vicinity — the reason for the town to exist at all — farmers who are their own bosses and think they ought to be able to do as they please with the land that has often been handed down for generations, it’s easy to see how a “leave us alone to take care of ourselves” attitude comes about.
Just a thought.”
And now Kwak’s post:
“For a class, I read an old (1986) paper by Kahneman, Knetsch, and Thaler on fairness. It’s based on surveys posing various hypothetical situations where businesses can take some action. For example, most people thought that it was OK for a grocer to pass on a wholesale price increase to consumers (Question 7) but not to raise prices because there is a general shortage and the grocer has the only shipment of a certain item (Question 12). In short, people have an intrinsic sense of fairness the authors summarize this way: “The cardinal rule of fairness is surely that one person should not achieve a gain by simply imposing an equivalent loss on another.”
Today in class, the professor posed the first question from the paper:
“A hardware store has been selling snow shovels for $15. The morning after a large snowstorm, the store raises the price to $20.”
In 1986, 82 percent of respondents thought this was unfair. In class, it was about 50-50.
As the professor said, this is probably because there are a lot of business school students in this class. Business school students are classic Econ 101 robots. They know enough to know that if there is a demand shift, not only is it OK to raise prices, but you should raise prices in order to clear the market. In this case, supply is fixed in the short term, so raising the price won’t increase supply; the Econ 101 argument is that raising the price allocates the shovels to people who will derive more utility from them (because they will pay more), thereby increasing social welfare.
But this rests on a huge assumption: that willingness to pay is the same as utility. Unfortunately, however, this assumption fails in the real world; poor people simply can’t pay as much for snow shovels as rich people, and as a result a price increase will allocate shovels to rich people, not to those who need them the most.* But people who believe Econ 101 only remember the demand and supply curves they saw on the first day of class, so they think firms should raise prices.
I suspect that belief in Econ 101 is not only stronger among business school students (and the businessmen they become) than among ordinary people, but is also stronger today than it was in 1986. The free market ideology teaches not only that businesses can maximize profits by any legal means, but that they have a moral imperative to maximize profits by any legal means, including generating profits by imposing equivalent losses on their counterparties. (Essentially all proprietary trading fulfills this condition.) And three decades of this ideology have probably changed people’s responses to these types of questions.
More fundamentally, the 1986 paper shows that Econ 101 is diametrically opposed to human beings’ intuitive sense of fairness. Yet public policy largely follows the dictates of Econ 101. Is that a good thing?”
Beezer here. Somewhere there is a nexus here that helps explain the deep conflicts we now see in our political atmosphere. Small towns as described by Thoma would necessarily be very wary of government regulation because the small town intimacy takes care of what might otherwise require regulation. They’d be conservative about ‘big government’ in other words. Forgetting, of course, that small agrarian towns wouldn’t exist today without Agriculture subsidies.
And econ 101 posits that price is the only factor needed to ‘clear a market’ effectively. Forget that the real world might want to ‘clear’ the market a little less efficiently in order to protect a large portion of its citizens–to protect the commonweal.