(At long last…)
Outside of pragmatarian markets, willingness to accept (WTA) matters.
I agree with you, and maybe I got confused along the way, and slipped back into ordinary market mode. I’ll try to remember it henceforth!
Let me just confirm my understanding: prices are an effective signal between consumers and suppliers of goods in a market for private goods, but in a public goods market, such signals do not exist… until you start applying a pragmatarian approach. By enabling people to decide how their ‘generic’ contribution to the public goods is allocated, they can signal what they find more or less important, and thus influence the relative supply of these public goods. (This does not solve the question as to the total amount of resources that needs to be available to provide the public goods, though.)
What’s tricky though is to compare these two markets…
X. the regular market for private goods
Y. the pragmatarian market for public goods
In X, you shop around for the lowest prices because doing so will allow you to purchase a larger total amount of private goods. In Y though, how do you shop around for the lowest prices? You wouldn’t be able to because there aren’t any prices.
Arguably, because there are no prices, there is also no imperative to find the lowest price. In a public goods market you need to resort to an alternative way of signalling preferences.
The “pennies” in our hypothetical PragMedium market are symbolic, and do not represent a price in any meaningful way. Writers are supplying, rather than selling, their pieces, and they simply respond to signals as to what the readers prefer. They could be tokens (as we discussed somewhere parallel), and the effect would be exactly the same.
X is all about consumer surplus… which is the disparity between your payment and your valuation. Consumer surplus means that what you paid did not accurately communicate your valuation. Your payment was less than your valuation. So the more consumer surplus, the bigger a lie your payment was. Which is of course the same thing as the free-rider problem. The supply ends up being suboptimal because producers were given suboptimal incentives.
I don’t think I agree with this. X is about the overall surplus: the sum of the producer and the consumer surplus. How it is divided between the two is not relevant, but in most cases there will be both a consumer and a producer surplus, and neither of them are “lies” — they simply show that there is a range of prices where a transaction can successfully be completed. There is no reason I can see that one surplus should be zero and another maximum.
I also think it is wrong to say that the supply is suboptimal. Imagine I have a need for one car, and one car only. I buy one for $20,000, but I was prepared to pay $21,000 for it; at the same time, the supplier would have been happy to accept $19,000. If I had indeed paid $21,000 for the car, that would have been a simple transfer from me to the producer, without any improvement in the allocation of resources.
Well… “Mollar” (Medium + dollar) works ok for writing… but if you read this out loud I think people would hear “molar”… heh.
It’s a currency with teeth!
If you only have time to read one of my stories a week… then the logical conclusion is that there are lots of other things that provide you with more value.
Quite. But it may well be that your one story gives me much more utility than five stories by someone else. So I allocate all my pennies to you.
Should you interpret this as ‘write more stories for this guy’? Well clearly not, since I have stated I can only read one. Should I only give you one penny then? No, because the five pennies represent the utility I get from one story of yours. There is no linear correspondence between pennies sacrificed and utility obtained:
no story from you = 0 pennies
1 story from you = 5 pennies
>1 story from you = 5 pennies
What the total number of pennies tells you is how much overall utility they give your readers. Perhaps there are five people who each value your story to as much as they value the stories of four other writers, and they allocate a penny to each. This system would equate the amount of utility I get with that of your five other readers. And you would know you’ve written 10 units of utility worth.
How you’d use this signal is up to you, of course, but in all likelihood more tokens or pennies would encourage you to write more frequently perhaps, or to work harder on a single story to make it better (in your view, in the hope that it will be appreciated by your readership); few(er) pennies might discourage you, and perhaps eventually give up altogether if it turns out your writing for just one other dude.
As far as taking the right action is concerned, I’m pretty sure that chips will do a better job than prices. This is because chips will convey and communicate more accurate information about the changes occurring in the different little corners of the world. So the decisions that people make will be more accurately informed.
ISTM we can’t really compare chips or tokens in PragMedium with prices in the big bad private market out there. As you have eloquently demonstrated, there are no prices in PragMedium, just tokens (chips or pennies), to signal preferences. I would say chips work well in Pragmatariana, prices work well in PrivateGoodsMarketania.
You say that you’d be “economically” better off doing B… yet here you are doing A. I think what’s missing from the equations are the amount of value that you derive from writing stories and the amount of value that you would derive from stacking shelves. I’m guessing that you derive a lot more value from the former than you would from the latter.
Absolutely! I am often making this argument when people tell me that they would like more money. Most people could be working additional hours and earn more money — and still they don’t. This is presumably because they value their time more highly than any money they might get in return.
For sure you’d be “monetarily” better off doing B… but it doesn’t seem to be the case that you’d be “economically” better off. I’m taking “economically” to mean total value.
Well it’s a matter of terminology, but as the author of We Are All Economists in which I make exactly that point, I should have known better… :-)
I conveniently have a relevant illustration that I created a while back…
people’s payment should perfectly reflect/communicate their valuation. Then, and only then, will resources be efficiently allocated.
Mmm. I still don’t buy it. For one thing, it clashes with the profit motive. I think it’s much better (and more importantly, more realistic) to consider transactions taking place over a range that is the union of the prices below the WTP and the prices above the WTA, and not to favour any particular point on that interval.
There is nothing optimum about paying the very maximum you’d pay, any more as there is about selling at the very minimum price you’d accept. The surplus (in a non-pragmatarian market — we’re still discussing this, right?) then becomes a resource that can be allocated in addition to what was spent by the consumer (or what would have been obtained by the producer).
In particular: water is essential for me. If I had to spend all the money I had available on water, I would do so — if I spent some on an iPhone or on fuel for the car, I would die of dehydration. IOW, my WTP is very high. But thankfully water is very cheap, and I can buy all I need and more for pennies a day. Does the fact that I can spend 99.9% of what I’d be willing to pay for my water ration on other nice things (which, by definition, are less important to me than water) lead to a misallocation of resources?
We can tweak the scenario. You have more lemons than money. I have more money than lemons. We don’t value lemons or money equally. So we trade and we’re both better off. You end up with more money and I end up with more lemons.
This is precisely why zooming in on the WTP doesn’t really work for me. A trade is essentially symmetrical. The producer’s WTA is called that because it is expressed in the consumer’s currency, but you could just as well say that his currency is lemons, and that he is willing to “pay” a certain amount of lemons in return for $10.
Farmers use the subsidized water to transform desert into prime agricultural land. But turning a California desert into cropland makes about as much sense as building greenhouses in Alaska! America already has plenty of land on which cotton can be grown cheaply. Spending billions of dollars to dam rivers and transport water hundreds of miles to grow a crop which can be grown more cheaply in Georgia is a waste of resources, a deadweight loss. The water used to grow California cotton, for example, has much higher value producing silicon chips in San Jose or as drinking water in Los Angeles than it does as irrigation water. — Alex Tabarrok, Tyler Cowen, Modern Principles of Economics
Up to a point, lord copper… If I happen to live in California and I fancy growing my own produce, I can choose to allocate my resources to doing so, and still be ‘economically better off’ (in the full sense) than if I need to travel to a more fertile state to tend to my allotment. Dubai has an indoor real-snow ski piste — still cheaper (and less resource intensive) than taking a plane to Switzerland for an afternoon’s skiing.
This definitely does not accurately reflect my valuation of your response. The disparity between A. my payment ($0 dollars) and B. my perception of your response’s relative scarcity in my little corner of the world (> $0 dollars) violates a fundamental rule of economics. It’s a big problem. As far as I know, the best solution would be for Medium to create a pragmatarian market.
As I already said (and as you are picking up below): valuation does not have to be done in money (and the equivalence can be rather precarious with plenty of non-linearity, hysteresis, time-inconsistency and plain irrationality).
The problem is not the money, I think — it’s the lack of signalling. If I hadn’t told you I had been spending 30 minutes responding (doing the same again here! ;-)) you’d never have known. So if Medium can provide you with a signal — and that could be relative, i.e. what proportion of all my time on Medium do I spend reading and responding to your writings, or — well also relative, since even if it’s given as 38 minutes, that can automatically be related to the 24 hours in a day, or any assumption about how I spend my time. If you got that information without any monetary unit anywhere near, we would still get the right signals.
I think you naturally have a ballpark mental estimate of the value of your contribution. I don’t think it’s in dollar terms but more like, “Helping Xero move would be a BIG favor because it would sacrifice a considerable amount of my time and effort.”
Bingo! We value certain things in other ways, and connecting the two up (I think there are more domains than just market and social) leads to apparent anomalies.
If you’re going to have friends, then why not have friends who honestly and genuinely and truly value you?
This depends on what you mean by ‘truly value’. I don’t know whether you’re in a relationship, but imagining you are, would you pay your spouse to do the shopping, cook or take out the trash? Do you expect to be paid to put your dirty clothes in the laundry basket, do the dishes or fix the broken doorbell?
He cannot walk away from the taxing authority. — James Buchanan, Afraid to be free: Dependency as desideratum
This is a good point, but I think this is more by virtue of there being a monopoly situation. I cannot walk away from an incompetent municipality, train company or rubbish collection. The problem of signalling is exacerbated by a lack of competition. But that is a more general problem.
Knowing whether it’s worth it to exit from any relationship depends on knowing your trading partner’s true valuation of your contribution. This is why payment should accurately reflect valuation. Then, and only then, can you ensure that your relationships are optimally conducive to your personal growth and development.
Nope, I still don’t buy it.
I’d definitely be willing to spend money on my story in order to try and bring it to his attention… but… that’s the very idea that I’m trying to bring to his attention! Heh.
Irony always catches up with us.
Your $20,000 payment certainly helps to keep the light green. It says, “good job producing cars, please continue doing so.”
But it doesn’t say “make me another car, I want more!” I think you are mixing up aggregate scarcity, and individual scarcity. Once I have a car, it is no longer scarce for me — I have enough car to meet my needs. But my neighbour’s just crashed his, so he needs a new one, and my sister’s car is so old she needs a new one, so there is scarcity on the whole.
In the public sector, with the current system, it’s elected representatives making spending decisions for everybody.
Agreed — and they lack the signal, just like the Soviet factories churning out only left shoes.
Did you happen to see this list of economic books that James Kwak wants you to read? Sure, he values all those books. But does he value them equally? Nope. Of course I think it would be helpful if he sorted them from most valuable to least valuable. It would be even more helpful if I could see his actual valuation of each book.
Ah, this reminds me of another workshop exercise that you might like to hear about. I use this when teams need to prioritize things — this could be ethereal stuff like values but also projects. In other words: allocating scarce resources.
We start with all the options, which become a symbolic currency, and then go on an Imagery Trek — people imagine they’re a warrior who needs to leave his village to go to a distant place to obtain a gem vital to the existence of the tribe. Off he goes, and then he starts encountering all kinds of creatures that threaten him, unless he is willing to sacrifice some of the items so they let him go.
Initially this is quite a doddle — whatever you value only a little is easy to give up. But gradually it becomes more difficult, and when there are only a handful less, you can see people getting physically into a state of agony. And at the end you get what people really value most.
People’s feedback on this exercise is remarkable — supporting the idea that in normal life they never really have to make such tough trade-offs.
I think this would be hard for him to do. He’d have to really think about it. He’d have to engage in some serious cognitive lifting… considering and weighing and judging and comparing the relative merits of each book. He’d definitely break a cognitive sweat figuring out how much each book actually improved his little corner of the world.
Just like in my workshop exercise!
Economics is all about how we order things… so testing the different ways to order economics papers would provide super precious insight into the best way to order society.