Meet the Market

I have many heroes in economics, but John List is my latest hero. What has he done, other than publish dozens of articles in top journals? He's taken Behavioral Bullshitters head on. When pro-behavioral types scream that they have "empirical" evidence (based on handing out mugs to students or asking people how they feel after a colonoscopy) that people don't behave rationally*, List says, "Behavioralists, meet the market," and then goes on to show how people experienced in market settings, in the world, doing what they do to actually make a living, act as economists would predict. Inexperienced agents, and college students in behavioral lab experiments, make all kinds of goofy mistakes that get people worked up, but market interaction has a knack for washing away those kinds of "irrationality."

Here is the abstract of his latest paper, "The Behavioralist Meets the Market: Measuring Social Preferences and Reputation Effects in Actual Transactions," published this month in the Journal of Political Economy:

The role of the market in mitigating and mediating various forms of behavior is perhaps the central issue facing behavioral economics today. This study designs a field experiment that is explicitly linked to a controlled laboratory experiment to examine whether, and to what extent, social preferences influence outcomes in actual market transactions. While agents drawn from a well-functioning marketplace behave in accord with social preference models in tightly controlled laboratory experiments, when they are observed in their naturally occurring settings, their behavior approaches what is predicted by self-interest theory. In the limit, much of the observed behavior in the marketplace that is consistent with social preferences is due to reputational concerns: suppliers who expect to have future interactions with buyers provide higher product quality only when the buyer can verify quality via a third-party certifier. The data also speak to theories of how reputation effects enhance market performance. In particular, reputation and the monitoring of quality are found to be complements, and findings suggest that the private market can solve the lemons problem through third-party verification.

*Many behavioralists don't even recognize that most microeconomic theory hinges on procedural rationality rather than substantive rationality, and that making mistakes, succumbing to bias, etc. are generally examples that violate the latter and not the former.

U.S.A.! U.S.A.!

(No this isn't about the Olympics.)

Just a thought...

Maybe there's a reason why people in the U.S., even the "poor" here, enjoy historically unprecedented standards of living.

And maybe, just maybe, it's a reason that's compatible with the notions of comparative advantage and positive-sum exchange. Maybe all that prosperity isn't stolen, and doesn't all come at others' expense.

Other prosperous nations, Sweden, the U.K., and Canada, for example, have something in common with the U.S. It's not flag-waving ass-kicking at the Olympics, or carpet-bombing Iraq that I'm talking about. It's trade. A lot of trade. And not just exports, but the most prosperous nations in the world have high levels of imports(I'll look for a per-capita measure when I find time). What exactly is the reasoning behind a belief that imports are bad?

On a related point, Don Boudreaux argues that a trade deficit is a silly thing to worry about.

Six in one...

... a half dozen in the other. Tyler Cowen says that education isn't really signalling, so much as it is establishing a sense of self and then projecting that sense of self to others. I guess his point is that as you spend more years being formally educated, you don't just convince others that you can conform, or are smart, or conscientious -- you convince yourself, too.

He also says that this belief in your education, and this sense of self are what make you more productive. I think the self-convincing is little more than self-deception, though to succeed in school for a long time, it helps to be smart, conscientious, and conformist. If I had to guess what actually makes most people more productive, I'd have something like this: productivity = f(ability, conscientiousness, on-the-job-learning). Maybe education develops conscientiousness, or instills in some people the confidence to better tap into innate abilities, but the main point of a signalling theory remains intact: (for the most part) you aren't actually learning concrete things that help you do a job as an adult.

Wal-Mart: Low Prices vs. Low Wages

Most of the fuss about Wal-Mart in the media is over their "low" wages (I'm not sure anyone even checks to see how much Wal-Mart pays when they make this claim, but that can be another post). Sometimes, though, you'll see a report or hear a remark that their prices really aren't that low. Or you'll hear claims of predation, that they lower prices to put competitors out of business, after which they raise their prices.

Well two economists, Jerry Hauser at MIT and Ephraim Leibtag at the U.S. Dept. of Agriculture, have actually bothered to check. Using the AC Nielsen houshold UPC scanner data that comes from roughly 61,500 households, they find that Wal-Mart saves its shoppers 15-25% on identical food items. (pdf file) Various controls reduce the overall sample size, but it remains absolutely huge (a technical term).

Jason Furman, a visiting scholar in NYU's graduate school for public service, did a survey of studies (another pdf) where he compares the total savings realized by Wal-Mart shoppers (estimated at $263 billion in 2004 in the study he cites (which doesn't seem right -- more on that in a bit) against an earlier study's estimate that Wal-Mart reduced total wages by $4.7 billion in 2000. Now I'm not sure I believe either number -- they're both probably too high. For food alone (food brought home and prepared, not including food from restaurants), though, Americans spent roughly $470 billion (see the data on food expenditures here). That's almost half a trillion dollars. That's a lot of food. If Wal-Mart saves customers as much as Hauser and Leibtag say, then total savings from Wal-Mart could easily be tens of billions of savings in food alone. And if the savings on much of their other products are similarly large, then Wal-Mart saves consumers far more than it drives down wages by any estimate -- probably by an order of magnitude.

So, in summary, even if everything they say about Wal-Mart's low wages is true, that effect is tiny compared to the savings Wal-Mart delivers to its customers.