The price of a blender and the market economy

 

The other day, I stopped at a yard sale with a friend. He had spotted a blender as we drove by and wanted to take a look at it. He picked it up, pulled out the glass jar and examined all the blender’s parts. After determining it would serve as a suitable replacement for his worn-out blender at home, he asked the homeowner how much she wanted for it.

She pondered for a moment and then threw out an offer, “How about $3?” Her manner indicated that she was likely new to the yard sale business and had little knowledge of what her blender might be worth. I thought for sure my friend would accept the offer. He replied, “OK, I’ll think about it.”

After perusing other items available and deliberating the blender offer, my friend informed the woman he wanted only the blender. When she said, “Great, that’ll be $3,” my friend replied, “I’ll give you $5. I think that’s a fairer price.”

After we left, I asked my friend why he paid $5 when he could have gotten the blender for $3. Here was his response: “I know, but I would have felt bad giving her $3 when it’s definitely worth at least a little more than that.”

To many people, and especially to economists, my friend’s reasoning may sound absurd. Who in their right mind would offer to pay more than the seller offered? Where did he learn to negotiate? If anything, should he not have taken advantage of her apparent ignorance and negotiated for an even lower price? Wouldn’t such a deal be a natural outcome of the free market – you know, supply and demand?

This experience reminded me of an important fact: Economics are not everything; they are not the summum bonum of life.

The market economy is not everything

As economist Wilhelm Röpke wrote, “The market economy is not everything. It must find its place within a higher order of things which is not ruled by supply and demand, free prices, and competition.”

Without a doubt, we all need to make economic transactions with others to survive and prosper and, ideally, our transactions and the economy as a whole will be as efficient as possible. But we must remember that other things often matter more – economics, efficiency and prosperity are only means to other ends.

My friend’s concerns about fairness, integrity and the well-being of the seller superseded his desire to make the most economically efficient transaction available. He chose not to take advantage of the woman’s ignorance but instead chose to pay what he believed a blender of that quality and condition was worth.

This experience also reminds me of another story. It is said that one day the economist Röpke was walking along with a more libertarian-minded friend while observing garden plots planted by the locals. His friend asserted, “A very inefficient way of producing foodstuffs.” Röpke replied, “But perhaps a very efficient way of producing human happiness.”

Sometimes in our earnest quest as human beings to provide for ourselves and maximize our economic well-being, we elevate economic efficiency over other equally (if not more) important elements of life. And this error often creeps into law and public policy, especially during times of economic decline and uncertainty.

As vital as the market economy is to our survival and happiness, we must remember that it is not everything.

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8 Responses to The price of a blender and the market economy

  1. Economics not everything, but it sure as heck does a better job of describing reality when dealing with large numbers and large amounts of people than anything else. Further, until someone comes up with a way to measure and quantify happiness, economics is about as close as we can get. 

    It’s a rough tool, but it is a tool. The Golden Rule and all that is good and right to teach and practice, but you can’t legislate it or measure it, not without economics.

    • Anonymous says:

      Agreed that economics help measure on the macro level. 

      Do you think it’s important we have tools to measure everything? And does it distort our view of humanity when we attempt to measure the unmeasurable and make policy based on those attempts?

      • When we are making public policy? I do think it crucial that we measure. If we cannot tell the effect of a policy on the population, why are we making the policy? How will we know if a policy is a good one but by measuring effect?

        If you want a view of “humanity,” read history or literature. But if we are to make public policy, then we must measure its effects on the population.

        • Anonymous says:

          And yet we cannot measure everything, so does that mean we create policy only in relation to things that can be measured? How do we account for non-measurable factors. An example: we can measure how many people marry, how many divorce, how many children divorcees have, etc., but to measure the full emotional, mental, and social impacts of divorce is extremely difficult.  We can try to measure these consequences, but if we can’t do it with any degree of certainty or accuracy does this mean policy should not be designed in a way to discourage divorce, even though it seems logical and intuitive that children are usually better off in a two-parent family? 

          • Any economist can tell you that you can come up with a whole number of metrics that can show whether children are better in a one or two-parent family. Health (measured by number of doctor visits, for example), educational success (current grades, attendance, level of education finally obtained), how happy the children rate themselves, incidences of abuse (physical, sexual, reported), levels of drug abuse, life expectancy, future professional success, etc, etc. It’s basic economics and, indeed, its whole purpose.

            In fact, I am hard pressed to think of anything that public policy touches that is not measurable.

            It may seem logical, but logic is only based on facts, or else it is not logic–it is intuition. It’s also the base upon which economics is based. Intuition is the antithesis of logic, for it is something felt for which there is not evidence (at least not evidence identifiable by the person). Intuition may in the end support a policy position, but public policy should never be passed or created upon intuition. Fire that legislator who formulates law that way, right now, because he (or she) is not doing their job (which is, quintessentially, fact finding, an explicitly legislative function as any opponent of judicial lawmaking will tell you). Save intuition for parenting and romance; it has no place in the formulation of public policy effecting hundreds, thousands, and millions of people with different needs, hopes, and desires.

            In fact, I think it may be the differences in those millions that the encourages the use of economics in developing public policy. People are different and they quantify their happiness differently. Economics allows the quantification and explanation of their desires. For example, if eating makes you happy, it is likely that food is where you will spend your money. Or perhaps your children’s happiness is more important to you–in other words, more important to your own happiness–so you will spend money on them, whether it is their education, their health, their food, or their entertainment. Money is a fungible and easy way to measure happiness because it usually flows to the things we want, the things that either make us happy or the things we think make us happy.

            Your initial post dealt with an anecdote about the economist Ropke. You will observe that he said nothing about the value of economics to describe where public policy should be made, but merely that efficiency and happiness are not necessarily part and partial of each other. Rather, they may be, as you conclude, mutually exclusive.

            In this conclusion, I agree–happiness is not always found in measurable things. However–this is not a discussion of happiness. It is a discussion of how public policy ought to be made. Public policy–the establishment by law how government will interact with and govern “we the people”–should never be based on soft and squishy things like “feelings” alone. The nature of law and government is that laws increase and government grows, perpetually and with only difficulty diminished or reformed.. Why would we allow a law to go on the books that was not backed up by solid reasoning, facts, and research? No law would pass any kind of standard if the rational was “it felt like the right law to pass.”

            If “this error often creeps into law and public policy, especially during times of economic decline and uncertainty[,]” then how do you recommend that we make law? By price controls where we force individuals to sell blenders at higher prices because it is more “fair” to them?

            On an individual level, how can you more descriptively determine value than, using your blender example, weighing how often you will use the blender against the cost? One use over its lifetime will cost you $5. Two uses $2.50, five $1 each…and so on. And the economist would tell you that your friend values giving a fair value for what he buys. That is what makes him happy. (An economist would also tell you that my wife would have negotiate it down to $1.50–because she values using the money for buying children’s clothes for my children, or perhaps buying some of the used books also being sold at the garage sale). In essence, money flows to where we believe our happiness will be found.

            As warm and fuzzy as your suggestion sounds, it belongs in a Sunday School lesson, a discussion on persuading individuals to be more charitable and giving, not in a discussion on the formation of public policy. After all, happiness is available to all people, but the purpose of the law is not to require it, but to allow it to be pursued. When we stop measuring the effect of the law (i.e. public policy) on the things people think make them happy, then we will begin to see laws that violate civil liberties, are formed in dark rooms, are anti-majoritarian, and, frankly, are hurtful to those not making the law.

          • Matthew Piccolo says:

            Wow, Daniel, you make a lot of good points, but I can’t respond to all of them here. I certainly agree that public policy should be based on facts and data as much as possible, although I think we’re getting off topic. The point of the post wasn’t to discuss whether economics can measure happiness or whatever else, the point is that often economics says that one outcome is the most efficient, and, therefore, the most appropriate outcome, whereas the most economically efficient outcome isn’t necessarily always the best one because economics aren’t everything. 

            As pertaining to public policy, economics might tell us, for example, that allowing pornography or prostitution or gambling or excessive drinking or whatever else to be legal might make economic sense, but that doesn’t necessarily mean they should be legal. Maybe loosening liquor laws in the state will attract more tourists and convention goers, which will increase economic activity here, but are economics the only consideration? I’d say not.  One more example: it might appear to make economic sense to offer special tax breaks to companies relocating to the state, but that doesn’t necessarily mean we should do it. In my view, fairness and maintaining a level playing field override the economics. 

          • Matthew: Maybe you’d better say what other assumptions your are operating on, then. Because if we’re talking about those issues, you’re not stating what else we ought to consider. You explicitly state that we often allow economic efficiency to be elevated over other considerations in public policy (but that we sometimes should not), you agree with me that public policy should be set only by facts and reason (as much as possible…what other fair way is there to do it under the rule of law?), but you don’t state what else can and should be a consideration.

            Pornography? Ill effects can, or cannot, be demonstrated by quantification. Alcohol? Also. And tax breaks? The argument against allowing tax breaks (which you do not state) is explicitly an economic argument, one that says free trade will result in the greatest economic good for the people and government subsidies is an interference in free trade…in other words, it is the very consideration against providing tax breaks for which you are saying economics ought not be the only consideration. 

            In other words, I think you are attacking, or cautioning against, the wrong boogeyman. It is not economics or economic quantification that is the problem in public policy–it’s the policies that are put into place. Economics is measurement. Whether you like it or not, you are subject to its laws, be it the regulation of pornography, alcohol, or business tax breaks.

            As it goes: “Indeed the world is ruled by little else. Practical men, who
            believe themselves to be quite exempt from any intellectual influence, are
            usually the slaves of some defunct economist.” 
            That’s John Maynard Keynes. His philosophical opposite agreed. Said Hayek “The curious task of economics is to demonstrate to men how
            little they really know about what they imagine they can design.”

             
            Whatever you imagine the effects or reason to limit pornography or alcohol, until you have demonstrated them, you are just shooting from the hip until quantification. So design away on soft assumptions but the effects must be measurable and are almost always not what you expect. Nothing in your original essay deals shows that there are other things that should affect public policy other than quantitative analysis. I agree with you that the  market is not everything–for the individual.  But, like I said, that should be left to Sunday School, not a discussion of public policy. I have no problem with your points about maximization of efficiency for the individual — and indeed, maybe we are just talking past one another — but the minute we cross over into public policy, then the soft has no place. 

            There, economics is everything for the country and the state, and public policy ought never be influenced solely by one persons or group’s religion or preference. If we are talking about public policy, it ought not be that policies should be set on anything other than that which maximizes freedom, diminishes tyranny (even by the majority), and maximizes benefit to all people. 

            As we’re sharing anecdotes, one from my own life might be appropriate. While sitting in Econ 110 (ostensibly at BYU, which matters in this story), we had come to the end of the lecture, something about supply and demand, poverty and wealth. Somewhere in there the discussion had ranged to how central planning really is  more efficient than the market if  planners have all the information. In other words, the antithesis of capitalism, which operates on a helter skelter basis. How, someone asked, do you reconcile the difference and the resulting poverty that results in capitalist societies, a student asked. How do you deal with that. 

            The teacher, a visiting grad student (from Yale or some other high faluting place back east), put down the chalk and sat on his desk. “First,” he said, “Central planning cannot work because of the law of unintended consequences. You just cannot know enough about human nature and what will happen. Getting out of the way is  the most efficient method of maximizing wealth.”

            Which was what we had been talking about. Then he went on.

            “The best thing that can be done,” he said, “is to preach the gospel of Jesus Christ.”  His point, and I think it applies whether you are Christian, Buddist, Judaic, or Muslim, is that government policies cannot control all the vices of a population nor can government end poverty. But you can teach individuals to be charitable, to give, to lift each other out of their circumstances. The government has no business taking one cent more from me than is my fair share, nor does it have a place in the redistribution of wealth in society. However, by persuasion all people can and ought to be persuaded that it is their duty as members of the human race to give and sacrifice to help those who are currently impoverished. 

            If your friend feels like $5 is more “right” than $3, that is what he should pay. But his considerations should have no place in the formation of public policy and, to use your words, “this error often creeps” into the realm of policy formation. Do gooders build welfare programs, health care entitlements, and tax breaks for business. And, in one year or fifty, we see effects that were unintended at the onset. It isn’t his business to make that same decision for me or for others.

          • Matthew: Maybe you’d better say what other assumptions your are operating on, then. Because if we’re talking about those issues, you’re not stating what else we ought to consider. You explicitly state that we often allow economic efficiency to be elevated over other considerations in public policy (but that we sometimes should not), you agree with me that public policy should be set only by facts and reason (as much as possible…what other fair way is there to do it under the rule of law?), but you don’t state what else can and should be a consideration.

            Pornography? Ill effects can, or cannot, be demonstrated by quantification. Alcohol? Also. And tax breaks? The argument against allowing tax breaks (which you do not state) is explicitly an economic argument, one that says free trade will result in the greatest economic good for the people and government subsidies is an interference in free trade…in other words, it is the very consideration against providing tax breaks for which you are saying economics ought not be the only consideration. 

            In other words, I think you are attacking, or cautioning against, the wrong boogeyman. It is not economics or economic quantification that is the problem in public policy–it’s the policies that are put into place. Economics is measurement. Whether you like it or not, you are subject to its laws, be it the regulation of pornography, alcohol, or business tax breaks.

            As it goes: “Indeed the world is ruled by little else. Practical men, who
            believe themselves to be quite exempt from any intellectual influence, are
            usually the slaves of some defunct economist.” 
            That’s John Maynard Keynes. His philosophical opposite agreed. Said Hayek “The curious task of economics is to demonstrate to men how
            little they really know about what they imagine they can design.”

             
            Whatever you imagine the effects or reason to limit pornography or alcohol, until you have demonstrated them, you are just shooting from the hip until quantification. So design away on soft assumptions but the effects must be measurable and are almost always not what you expect. Nothing in your original essay deals shows that there are other things that should affect public policy other than quantitative analysis. I agree with you that the  market is not everything–for the individual.  But, like I said, that should be left to Sunday School, not a discussion of public policy. I have no problem with your points about maximization of efficiency for the individual — and indeed, maybe we are just talking past one another — but the minute we cross over into public policy, then the soft has no place. 

            There, economics is everything for the country and the state, and public policy ought never be influenced solely by one persons or group’s religion or preference. If we are talking about public policy, it ought not be that policies should be set on anything other than that which maximizes freedom, diminishes tyranny (even by the majority), and maximizes benefit to all people. 

            As we’re sharing anecdotes, one from my own life might be appropriate. While sitting in Econ 110 (ostensibly at BYU, which matters in this story), we had come to the end of the lecture, something about supply and demand, poverty and wealth. Somewhere in there the discussion had ranged to how central planning really is  more efficient than the market if  planners have all the information. In other words, the antithesis of capitalism, which operates on a helter skelter basis. How, someone asked, do you reconcile the difference and the resulting poverty that results in capitalist societies, a student asked. How do you deal with that. 

            The teacher, a visiting grad student (from Yale or some other high faluting place back east), put down the chalk and sat on his desk. “First,” he said, “Central planning cannot work because of the law of unintended consequences. You just cannot know enough about human nature and what will happen. Getting out of the way is  the most efficient method of maximizing wealth.”

            Which was what we had been talking about. Then he went on.

            “The best thing that can be done,” he said, “is to preach the gospel of Jesus Christ.”  His point, and I think it applies whether you are Christian, Buddist, Judaic, or Muslim, is that government policies cannot control all the vices of a population nor can government end poverty. But you can teach individuals to be charitable, to give, to lift each other out of their circumstances. The government has no business taking one cent more from me than is my fair share, nor does it have a place in the redistribution of wealth in society. However, by persuasion all people can and ought to be persuaded that it is their duty as members of the human race to give and sacrifice to help those who are currently impoverished. 

            If your friend feels like $5 is more “right” than $3, that is what he should pay. But his considerations should have no place in the formation of public policy and, to use your words, “this error often creeps” into the realm of policy formation. Do gooders build welfare programs, health care entitlements, and tax breaks for business. And, in one year or fifty, we see effects that were unintended at the onset. It isn’t his business to make that same decision for me or for others.

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